Investment In Terminal Infrastructure And Increased Market Focus Drive Revenue Growth And Margin Expansion

Key Takeaways

• Investments in terminals and focus on North American natural gas and oil markets can boost sales volumes, reduce logistics costs, and increase revenue.
  
• Strategic reserves and industrial products could improve margins, diversify revenue, and capitalize on increased fine mesh sand demand and constrained supply.
  
• Decreased sales and operational disruptions alongside regional market risks and pricing challenges suggest potential difficulties in maintaining revenue and earnings growth.

Catalysts

An integrated frac and industrial sand supply and services company, engages in the excavation, processing, and sale of sands or proppant for use in hydraulic fracturing operations in the oil and gas industry in the United States.

• Smart Sand's investment in new terminals in Denison and Minerva, Ohio, opening access to the Utica Shale basin, can reduce logistics costs and enhance sales volumes, consequently boosting revenue in the future.
  
• The company's focus on the growing demand for natural gas in the U.S. and Canadian markets, coupled with increased activity in the Utica and Bakken oil markets, could lead to higher sales volumes and revenue growth.
  
• Smart Sand's reserves, being predominantly fine mesh sand, position it to capitalize on increasing demand for fine mesh sands in the Northern White sand market, potentially improving pricing and net margins.
  
• The expected pricing improvement in 2025 due to the constrained Northern White sand supply could enhance contribution margins and earnings.
  
• Growing the industrial product solutions franchise, notably in the glass and foundry sectors, could double its revenue contribution from under 5% to around 10%, positively impacting overall revenue diversification and growth.

Smart Sand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smart Sand's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.0% today to 14.0% in 3 years time.
• Analysts expect earnings to reach $45.2 million (and earnings per share of $1.14) by about November 2027, up from $-5.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.3x on those 2027 earnings, up from -17.8x today. This future PE is lower than the current PE for the US Energy Services industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 2.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.76%, as per the Simply Wall St company report.

Smart Sand Future Earnings Per Share Growth

Risks

• The decrease in third-quarter sales volumes and revenues, primarily due to reduced sand sales volumes and lower average sales prices, suggests challenges in maintaining or growing revenue if such trends continue.
  
• Challenges in the pricing dynamics and contribution margins, as evidenced by flat pricing in recent quarters and a drop in adjusted EBITDA, may indicate difficulties in achieving desired earnings growth.
  
• Closure of the Canadian fabrication facility and $1.3 million expenses related to refinancing activities point to potential operational disruptions and increased short-term costs, impacting net margins.
  
• The market dynamics, such as variability in demand and pricing due to external factors like commodity price changes and political uncertainties, could significantly affect revenue and profitability.
  
• Relying on specific geographic markets for growth, such as Canada and certain U.S. basins, exposes the company to regional market risks that could affect sales volumes and financial performance.

Valuation

• The analysts have a consensus price target of $3.0 for Smart Sand based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $323.4 million, earnings will come to $45.2 million, and it would be trading on a PE ratio of 3.3x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $2.29, the analyst's price target of $3.0 is 23.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.