Morningstar | Frank's Reports Okay Fourth-Quarter Results; Lowering FVE on Disappointing Profitability Trend. See Updated Analyst Note from 27 Feb 2019
Frank's reported decent fourth-quarter results. Although revenue grew a very strong 13% sequentially, the bottom-line results were more lackluster with adjusted EBITDA margins slipping to 8.8% from 9% previously. Whereas International Services segment growth was accompanied by an improvement in profitability, in the other segments EBITDA stalled or declined slightly. We had been hoping, in particular, that the company would be able to translate its recent share gains and a tight overall market in U.S. onshore into further pricing gains--however, this didn't materialize.Since the third quarter of 2017, when the company's revenue hit a nadir, Frank's has boosted revenue a cumulative 35% on the back of market share and pricing gains in both U.S. and international markets. Disappointingly, however, it has achieved just 28% EBITDA incrementals on this revenue increase (compared with over 60% decrementals during the 2015 to 2016 downturn). This is in spite of an aggressive cost-cutting campaign announced at the beginning of 2018 that had targeted up to $30 million in annualized cost reductions by year-end 2018 (instead EBITDA improved just $15 million from fourth-quarter 2017 to fourth-quarter 2018).
As such, we are adopting a more cautious outlook on Frank's profitability going forward, lowering our long-term profitability forecasts for the company across its segments. This results in a lowering of our fair value to $6.50 per share from $7. Our narrow moat rating is unchanged.
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