Cactus (NYSE: WHD) anticipated the acquisition of Flexsteel to be accretive within the first yr, and the execs have been greater than proper. The Q1 outcomes have been ok however got here with stable steering for Q2, which is now improved. The corporate issued a brand new investor presentation outlining the corporate’s progress, and the progress is sweet.
The takeaway from the report is that extra alternatives are current than beforehand thought, business tendencies help the enterprise outlook and money circulation is bettering. That is excellent news for traders as a result of it will increase dividend security and paves a path for debt discount, which the corporate has already flagged as a precedence.
Cactus Raises Steerage And Pronounces Repurchase Program
Cactus is benefiting from a shift within the oilfield that’s driving and supporting a world growth in oilfield companies. That shift is towards lower-cost, higher-efficiency expertise spurred by the inexperienced revolution. The power corporations know they should do no matter it takes to maintain folks blissful to stay viable, together with investments in expertise. What meaning for Cactus is regular demand for core companies within the new Stress Management (legacy Cactus) section and a surge in demand for the brand new Spoolable Applied sciences section, the legacy Flexsteel enterprise.
The corporate issued favorable steering for Q2 with the Q1 report and raised it only a month later. A surge in demand for each segments led administration to extend the outlook for Stress Management to flat to barely up from down single digits and for Spoolable Applied sciences income of no less than $105 million. That’s in comparison with the prior outlook of as much as $105 million and 3X higher than Q1. Extra importantly, the corporate expects a big and sustained enchancment in money circulation and initiated a repurchase program to show its confidence.
Cactus’ board of administrators licensed repurchases of as much as $150 million. That’s price 4.7% of the market cap and might be anticipated to extend over time. The rise in money circulation additionally permits the reimbursement of the debt, which frees up money circulation which might be used for dividend will increase or extra repurchases. Added to an energetic institutional base, that’s a powerful tailwind for share costs. The establishments personal about 83% of the inventory and have been shopping for on steadiness for the final yr. Notably, their exercise picked up in Q1 and accelerated in Q2, in line with a backside fashioned on the chart.
The Cactus Dividend Will Drive Worth
Cactus’ dividend isn’t all that spectacular at face worth, about 1.1%, however it’s a potential driver of shareholder worth in comparison with its friends. The inventory trades at roughly 14X its earnings towards the low finish of a variety. Friends like Halliburton (NYSE: HAL), Schlumberger (NYSE: SLB), and Baker Hughes (NYSE: BKR) commerce within the vary of 10X to 20X whereas paying larger yields that vary from 2.0% to 2.5% in comparison with Cactus’ 1.1%. The massive distinction is within the quantity of earnings being paid; the lightest valued shares pay the bottom quantity on a proportion foundation. Which means Cactus can improve its dividend and keep its present payout ratio of 20% or make substantial will increase and lift the payout ratio to match SLB’s 30% or BKR 70% and spark a a number of enlargement.
The chart is attention-grabbing as a result of it reveals a stable backside at $35. That backside produced a strong rebound, with the inventory buying and selling in a spread, if nothing else. The bias is upward; it may simply take the market to the $50 to $55 stage. That’s in line with the analysts’ consensus and should cap beneficial properties till one other catalyst emerges.
