Companies involved in hydraulic fracturing — a process that cracks rock in order to get at previously-inaccessible oil and gas deposits — are seeing an earnings boost as the process becomes widespread. That doesn’t seem to be the case for Carbo Ceramics (CRR.N), a leading maker of proppant, a solid material (usually sand or ceramic) that is used to keep open a fracture. The issue seems to be an oversupply of sands and ceramics.
Carbo Ceramics has seen the I/B/E/S consensus earnings estimates for the quarter ending June 2013 sink to 73 cents a share, from over $1 per share just 90 days ago (gold line on the chart below). The SmartEstimate (blue line) is even lower at 64 cents a share, for a Predicted Surprise of -13%, which indicates that estimates may fall even more before the report date, or that the company may miss earnings estimates when it reports second quarter results on July 22.
Source: Datastream Professional/StarMine
Falling prices
The oversupply of proppant is mainly because of large exports from China. That oversupply has caused prices to fall significantly, and that’s been a trend for the last four quarters. Carbo reported that in the first quarter, the average selling price of proppant was $0.302 per pound compared to $0.372 just a year ago. That represents a decline of almost 20%. Asseen in the chart below, trailing four-quarter operating profit margin has been on the decline for the last five quarters, and is now at 22%, after falling more than 10 percentage points. Falling prices have had an effect on revenue, too, which fell by 10% from a year ago. Further, in seven of the last eight quarters, the company has seen inventory days increase from a year ago, and that inventory buildup is likely to keep the pressure on prices and could be a sign of poor inventory management.
Source: Datastream Professional/Starmine
Difficult outlook
On the first quarter earnings filings, Carbo Ceramics did not give a rosy picture of the rest of the year. It pointed to continued over supply and pricing pressure from competitors. It also expects the operating environment to remain “variable” as operations in Canada suffer from the annual spring thaw. That could mean weaker earnings for the second quarter and the rest of the year. In fact, analysts have lowered revenue estimates for the full year and for next year by 6% in the last 90 days. EPS estimates for this year and next year have been come down by 24% and 20% respectively. Those lowered estimates contribute to the low Analyst Revisions Model (ARM) score of 9 for the company. That low score indicates that analysts may not be done cutting their estimates.
Carbo Ceramics missed earnings estimates in the previous two quarters, and in the last 90 days the stock price has fallen by more than 30%. Short sellers are piling into the stock. According to the StarMine Short Interest (SI) model score of 3, it’s likely the shorts will continue to flock to Carbo Ceramics. Based on the StarMine SmartEstimate and the negative Predicted Surprise, it looks like the company may miss estimates again this quarter. This is the first in a series of 10 companies the StarMine research team will pick to either beat or miss estimates when quarterly earnings are reported in the next couple of months.
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