Cactus, Inc

WHD Details

Cactus, Inc. (NYSE: WHD) is engaged in manufacturing, designing, and promoting wellhead and stress-controlling equipment. The company also offers short-time period renting of frac valves and ancillary equipment and is also concerned with restoring its offerings. WHD has 15 service center facilities inside the US, one service center in Eastern Australia, and one manufacturing facility in China. It operates in 3 segments, viz. 1) Product revenue, generally derived from the sale of wellhead and manufacturing tress, 2) Rental Revenue, derived from the rental of drilling equipment and associated restore of equipment used for suitable control processes, 3) Field service and other revenue, primarily earned when the company provides installation and other field services on the customer's well site. As of May 20, 2021, the company’s market capitalization stood at USD 2.56 billion.

WHD Market Share Growth (Source: Investor Presentation, March 2021)

Q1FY21 Results: The company reported a 23.97% increase in total revenues to USD 84.41 million in Q1FY21 (ending March 31, 2021) compared to USD 68.09 million in Q4FY20 (ending December 31, 2020), primarily due to a 45.40% increase in rental revenue. The company’s Product revenue contributes 61%, Rental revenue contributes 15%, and Field service and other revenues contribute 24% of the total revenues in Q1FY21. The income from operations increased to USD 11.63 million in Q1FY21 from USD 8.42 million in Q4FY20. The company reported an increase in net income to USD 15.13 million in Q1FY21 compared to USD 6.13 million in Q4FY20.

Key Risks: The requirement for the company’s equipment depends on the overall degree of activity withinside the oil and gas industry. A decline or the predicted decline in the oil and gas prices could negatively affect the operational activity of the oil and gas companies, in turn affecting the demand for the company’s products and services. These factors could hurt the company’s financial condition.

Outlook: For Q2FY21, the company expects revenue to be up more than 20% sequentially, primarily led by the Product Business. The company expects the capital expenditure for FY21 to be in the range of USD 10 million to USD 15 million. It would be driven by environmental-related enhancements of equipment, expansion in the manufacturing facility at Bossier City, China, and general maintenance. 

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

WHD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: WHD has increased by 46.71% in the past nine months, and it is currently leaning towards the higher band of the 52-week range of USD 16.11 to USD 38.07. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 36.28. Considering the significant rise in the stock price in the past nine months, growth potential, and balance sheet strength, we recommend a “HOLD” rating on the stock at the closing price of USD 34.20, up by 0.91% as of May 20, 2021.