The energy sector performed well last year, thanks to high oil and natural gas prices arising from the war between Russia and Ukraine. Energy stocks are expected to gain momentum due to increased travel demand, supply constraints, production cuts, and an anticipated recovery in the Chinese economy.
Therefore, investing in fundamentally strong energy stocks could be prudent. Amid this backdrop, it could be wise to invest in energy stocks Graham Corporation (GHM), Geospace Technologies Corporation (GEOS), and Profire Energy, Inc. (PFIE).
Before diving deeper into the fundamentals of these stocks, let's discuss why the energy industry is expected to perform well.
Last year, the energy sector outperformed other sectors as high demand and tight oil and natural gas supplies pushed up the prices of these essential commodities. Oil prices have been rising lately amid output cuts by OPEC+ and increasing global demand. After beginning to limit supplies in late 2022, the OPEC+ in June this year extended supply cuts into 2022.
Energy prices have pulled back from last year's peak, but robust summer travel demand and limited supply due to production cuts by major exporters are helping boost oil and gas prices lately. This could be advantageous for energy companies and related businesses.
In its monthly oil market report, the IEA said, “Deepening OPEC+ supply cuts have collided with improved macroeconomic sentiment and all-time high world oil demand.” The IEA expects oil demand to expand by 2.2 million bpd this year to reach 102.2 mb/d, driven by summer air travel, enhanced Chinese petrochemical activity, and the growing use of oil to generate power.
The possibility of rate cuts by the Fed next year and a revival of the Chinese economy are some key triggers to look out for, which could further boost energy prices this year.
Considering these conducive trends, let’s analyze the fundamental aspects of the featured stocks within the Energy – Services industry, starting with number 3.
Stock #3: Graham Corporation (GHM)
GHM and its subsidiaries design and manufacture fluid, power, heat transfer, and vacuum equipment for chemical and petrochemical processing, defence, space, petroleum refining, cryogenic, energy, and other industries.
On August 7, 2023, GHM announced that it was awarded a $13.50 million strategic investment from a customer to enhance Batavia production capabilities for complex components. This investment will help aid the timely delivery of an $8.5 million order and support future opportunities involving multi-year orders with potential revenue expected to begin in 2026.
In terms of the trailing-12-month levered FCF margin, GHM’s 10.46% is 91.5% higher than the 5.46% industry average. Likewise, its 0.86x trailing-12-month asset turnover ratio is 6.1% higher than the 0.81x industry average. Additionally, its 2.94% trailing-12-month Capex/Sales is marginally higher than the industry average of 2.94%.
GHM’s net sales for the fiscal first quarter ended June 30, 2023, increased 31.9% year-over-year to $47.57 million. The company’s gross profit rose 62.8% year-over-year to $10.98 million. Also, its operating profit increased 274% year-over-year to $3.68 million.
Moreover, its adjusted net income rose 168.9% year-over-year to $3.57 million. In addition, its non-GAAP EPS increased 175% year-over-year to $0.33. Also, its adjusted EBITDA came in at $5.60 million, representing an increase of 105% year-over-year.
For the quarter ending September 30, 2023, GHM’s revenue is expected to increase 9.9% year-over-year to $41.93 million. Its EPS for fiscal 2024 is expected to increase 533.3% year-over-year to $0.19. The stock has gained 69.8% year-to-date to close the last trading session at $15.95.
GHM’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #3 out of 48 stocks in the Energy - Services industry. It has an A grade for Sentiment and a B for Value and Momentum. Click here to see GHM’s Growth, Stability, and Quality ratings.
Stock #2: Geospace Technologies Corporation (GEOS)
GEOS designs and manufactures instruments and equipment used in the oil and gas industry to acquire seismic data to locate, characterize, and monitor hydrocarbon-producing reservoirs. The company operates through three segments: Oil and Gas Markets, Adjacent Markets, and Emerging Markets.
On August 15, 2023, GEOS announced a rental contract with Walker Marine Geophysical to provide 3,000 Mariner wireless seismic data acquisition nodes for shallow water seabed surveys. The agreement is valued at a minimum of $3.2 million, with delivery scheduled for GEOS’ third quarter of fiscal 2024. The device has a slim profile, allowing for greater node density on survey vessels.
Walter R. Wheeler, CEO at GEOS, said, "By including valuable features such as our internal heading sensor and built-in full-resolution test generator, we ensure our customers deliver high-quality results to their customers."
In terms of the trailing-12-month asset turnover ratio, GEOS’s 0.84x is 37.7% higher than the 0.61x industry average. Likewise, its 11.37% trailing-12-month levered FCF margin is 82.6% higher than the 6.23% industry average.
For the fiscal third quarter ended June 30, 2023, GEOS’s total revenue increased 58.1% year-over-year to $32.72 million. Its gross profit rose 282.9% year-over-year to $13.98 million. Its income from operations came in at $3.15 million, compared to a loss from operations of $6.53 million in the year-ago quarter.
Also, its net income came in at $3.23 million, compared to a net loss of $6.57 million in the year-ago quarter. The company’s income per share came in at $0.24, compared to a loss per share of $0.51 in the year-ago quarter.
Over the past year, the stock has gained 78.4% to close the last trading session at $9.23.
GEOS’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Growth, Sentiment, and Quality. It is ranked #2 in the same industry. To see GEOS’ Value and Stability ratings, click here.
Stock #1: Profire Energy, Inc. (PFIE)
PFIE provides burner and combustion management systems and solutions for natural and forced draft applications in the United States and Canada.
In terms of the trailing-12-month net income margin, PFIE’s 15.20% is 7.6% higher than the 14.13% industry average. Likewise, its 50.07% trailing-12-month gross profit margin is 4.1% higher than the 48.09% industry average. Additionally, its 1.01x trailing-12-month asset turnover ratio is 65.1% higher than the industry average of 0.61x.
PFIE’s total revenues for the second quarter ended June 30, 2023, increased 49.9% year-over-year to $14.44 million. Its gross profit rose 68.4% over the prior-year quarter to $7.41 million. Its income from operations rose significantly year-over-year to $3.22 million.
The company’s net income increased 903.1% year-over-year to $2.86 million. In addition, its EPS came in at $0.06, representing an increase of 500% year-over-year.
Street expects PFIE’s EPS and revenue for the quarter ending September 30, 2023, to increase 100% and 11.9% year-over-year to $0.04 and $14.35 million, respectively. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past nine months, the stock has gained 139.5% to close the last trading session at $2.33.
PFIE’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Momentum and Quality. Within the same industry, it is ranked first. In total, we rate PFIE on eight different levels. Beyond what we stated above, we also have given PFIE grades for Growth, Value, and Stability. Get all the PFIE ratings here.
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GHM shares were trading at $16.03 per share on Tuesday afternoon, up $0.08 (+0.50%). Year-to-date, GHM has gained 66.63%, versus a 18.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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