Electric Fleet Expansion And Strategic Acquisitions Power Sustainable Growth And Profitability

Key Takeaways

• Expansion of rental fleet and signing new long-term contracts suggest growth in revenue from increased utilization and potentially higher rental rates.
  
• Focus on emissions reduction and efficiency through technological innovation aims to attract new customers and retain existing ones, boosting market share and earnings.
  
• Relying on long procurement times and transitioning to electric units introduces risks that may affect delivery, revenue growth, and operational margins.

Catalysts

Provides natural gas compression equipment and services to the energy industry in the United States.

• The company is expanding its rental fleet, signing new long-term contracts with premier customers, indicating a growth in revenue due to increased fleet utilization and potentially higher rental rates.
  
• Approximately 40% of the new horsepower added will be electric motor-driven units, diversifying the fleet and likely appealing to a broader customer base interested in reducing emissions, impacting both revenue and net margins positively.
  
• Significant investments in growth CapEx for 2024 and higher in 2025 to support new contracts point towards an increasing operational scale, aiming for improved revenue, utilization, profitability, and cash flow.
  
• Improvement in asset utilization, including reducing accounts receivable and converting non-cash assets into cash, is expected to enhance net margins through better cash management and operational efficiency.
  
• The company's focus on technological innovation, particularly in emissions reduction and efficiency, provides a competitive advantage that can attract new customers and retain existing ones, potentially leading to increased market share and higher earnings.

Assumptions

• Analysts are assuming Natural Gas Services Group's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $22.5 million (and earnings per share of $1.59) by about September 2027, up from $13.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $31.9 million in earnings, and the most bearish expecting $17.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2027 earnings, up from 18.2x today. This future PE is greater than the current PE for the US Energy Services industry at 17.9x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.52%, as per the Simply Wall St company report.

Risks

• The reliance on long lead times for procurement of engines, compressors, and fabrication space could delay delivery of services and impact the company's ability to meet new contract deadlines, potentially affecting revenue growth and customer relationships.
  
• Acquiring electric motor-driven units and transitioning into the electric compression space may require significant capital expenditures and could introduce risks associated with new technology adoption and reliance on the availability of power at sites, potentially affecting capital expenditure ROI and operational margins.
  
• The possibility of fluctuating natural gas and crude oil prices, as mentioned, could indirectly impact demand for compression services, especially if lower energy prices lead to reduced exploration and production activities, thereby impacting revenue.
  
• Challenges in fully reducing accounts receivable to normal and expected levels could affect cash flow, especially if there are delays beyond 2024 in achieving sustainable levels, impacting the company’s liquidity.
  
• The strategy to grow through acquisitions could pose risks if the acquired assets or companies do not perform as expected or integration challenges arise, potentially affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $33.0 for Natural Gas Services Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $186.3 million, earnings will come to $22.5 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $19.35, the analyst's price target of $33.0 is 41.4% 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.