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Is Core Laboratories Overvalued at Current Levels?

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Core Laboratories’ PE trend

Core Laboratories’ (CLB) PE (price-to-earnings) multiple in 2Q16 was higher than its historical average. Core Laboratories’ PE multiple increased sharply in 2Q16 as compared to fiscal 2015. CLB’s adjusted earnings decreased by ~46% as compared to 4Q15. Its share price increased by ~14% from December 31, 2015, to June 30, 2016. Its earnings fall coupled with this share price rise caused significant PE multiple expansion in 2Q16.

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Remember, forward PE considers the sell-side analysts’ consensus estimate of earnings for the next four quarters. Core Laboratories’ forward PE is higher than its current price-to-earnings ratio, indicating an expected fall in earnings over the next four quarters. This should typically reflect in lower current PE multiple compared to the historical average. CLB could be overvalued at its current level.

Price-to-cash-flow multiple

Analysts do not expect a meaningful forward PCF (price-to-cash-flow) for Core Laboratories, which reflects the analyst expectation of negative cash flow for the next four quarters. Core Laboratories’ price-to-cash-flow has been fluctuating over the past seven years as of 2Q16.

Core Laboratories’ EV-to-EBITDA trend

Core Laboratories’ historical valuation expressed as EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation) multiple, increased in 2Q16 over 2015. From 4Q15 to 2Q16, CLB’s net debt decreased while its share price increased.

In effect, CLB’s EV, which is approximately the summation of its equity value and net debt, increased in 2Q16. CLB’s EBITDA decreased in 2Q16 over 1Q16, so its EV-to-EBITDA ratio increased.

By comparison, Oceaneering International’s (OII) EV-to-EBITDA stood at 6.9x by the end of 2Q16—much lower than Core Laboratories’ ~40x. Notably, Core Laboratories makes up only 0.02% of the iShares Dow Jones US ETF (IYY), but the energy sector makes up 6.5%.

Remember, forward EV-to-EBITDA considers the sell-side analyst consensus estimate of EBITDA for the fiscal year. Core Laboratories’ forward EV-to-EBITDA multiple for fiscal 2016 is lower than its current EV-to-EBITDA multiple, which implies an expectation of an increase in CLB’s EBITDA in 2016.

Now let’s discuss Core Laboratories’ valuation compared to industry peers.

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