Foraco (FAR.to $4.00) reported excellent on target Q2 results. Bolstered by an acquisition (51% of Brazil based Servitec) revenues improved 36% to $106.6 million. Organic growth was 19%. Non-GAAP income widened 33% to $.12 a share. That improvement was impacted a higher tax rate, which is likely to persist in upcoming periods. More work is being performed in higher tax countries. Foraco maintained its operating rate at 76% in the quarter. The rig count increased by six to 290 altogether. Pricing was little affected because most work was performed under long term contracts. Some activity was delayed, however, due to weak economic conditions. The next round of bidding is slated for the fall. Preliminary indications suggest order rates will moderate, although growth is likely to be sustained in most key mining regions. Price hikes probably are a lost cause but significant discounting isn't anticipated. Foraco remains the industry's high end leader.
We are lowering our 2012 earnings estimate by a nickel to $.50 a share. Higher taxes and slightly reduced margins likely will prevent income from accelerating sequentially over the rest of the year. The new unit in Brazil could deliver some countervailing impetus, though. We've reduced our 2013 estimate by the same amount to $.60 a share, reflecting the muted outlook. Foraco is poised to benefit no matter which way the industry turns. If China and other emerging nations lift commodity demand, earnings should improve directly. And if conditions stay depressed, attractive acquisition opportunities could emerge.
In 2-3 years income could reach $.75-$.95 a share. Applying a P/E multiple of 12x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 150% from the current quote.
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