Optimizing Fleet And Expanding Electric Compression Units Will Drive Future Success

Key Takeaways

• Optimizing the fleet and asset utilization will boost rental revenue, cash flow, and earnings growth.
  
• Diversifying with electric motor-driven compression units and converting noncash assets aims to enhance revenue and margins.
  
• Weak natural gas market demand, required investments, and potential macroeconomic shifts may negatively impact revenue, earnings, and investor confidence.

Catalysts

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

• The strategic shift towards optimizing the fleet and improving asset utilization is expected to drive increased rental revenue and cash flow, positively impacting earnings.
  
• New contracts for large horsepower compression units, particularly those focusing on electric motor-driven units, are anticipated to diversify the customer base and enhance rental revenue and earnings growth.
  
• The focus on converting noncash assets to cash, including reductions in accounts receivable and potential conversion of inventory and real estate, aims to increase cash flow and improve net margins.
  
• Planned growth capital expenditures of $65 million to $75 million in 2024 and $90 million to $110 million in 2025 are targeted at new unit growth, primarily large horsepower compression, suggesting an increase in revenue and earnings generation capacity.
  
• The potential for accretive M&A activities that align with strategic priorities could enhance shareholder value, contributing to future growth in revenue and earnings.

Natural Gas Services Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Natural Gas Services Group's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $25.2 million (and earnings per share of $1.9) by about March 2028, up from $16.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $34.6 million in earnings, and the most bearish expecting $20.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, up from 16.9x today. This future PE is greater than the current PE for the US Energy Services industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.66%, as per the Simply Wall St company report.

Natural Gas Services Group Future Earnings Per Share Growth

Risks

• The reliance on forward-looking statements and the caution that actual results may differ materially from projections can impact investor confidence and expectations for future revenue and earnings growth.
  
• The natural gas market's ongoing weakness and muted activity, particularly affecting small compression fleet demand, could negatively impact revenue streams and overall earnings.
  
• The need for incremental investments to improve operational scalability and efficiency, alongside anticipated one-time costs related to new personnel and labor expenses, might pressure net margins.
  
• The requirement for further investment in upgrading systems to improve accounts receivable turnover and cash flow signals potential challenges in maintaining liquidity and cash efficiency.
  
• Potential macroeconomic factors, such as changes in oil and natural gas prices, or significant shifts in regulatory environments, could influence market dynamics and affect revenue and profitability outlooks.

Valuation

• The analysts have a consensus price target of $36.25 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 $45.0, and the most bearish reporting a price target of just $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $203.0 million, earnings will come to $25.2 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 9.7%.
• Given the current share price of $21.78, the analyst price target of $36.25 is 39.9% 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.