Investments In Water And Chemical Technologies Will Drive Future Operational Efficiency

Key Takeaways

• Strategic investments in Water Infrastructure and Chemical Technologies are expected to drive revenue and enhance margins through operational efficiency and new product development.
  
• A focus on long-term contracts and infrastructure investment over share repurchases aims for predictable, high-margin growth and sustained earnings.
  
• Seasonal slowdowns, competition, and operational disruptions may challenge Select Water Solutions' revenue, growth, and cash flow while facility upgrades result in short-term financial impacts.

Catalysts

Provides water management and chemical solutions to the energy industry in the United States.

• The strategic expansion and investments in the Water Infrastructure segment, including new long-term contracts and pipeline connections, are expected to boost Select’s revenue and profitability in 2025 and beyond, enhancing its margin potential through economies of scale and interconnected systems. This will primarily drive revenue growth and margin expansion.
  
• The ongoing capital projects, such as the conversion of existing large diameter pipelines to treated produced water lines, are positioned to increase operational efficiency and geographic reach, thereby enhancing revenue potential and operating margins once online in early 2025.
  
• Select's shift towards more long-term contracted revenue streams supports predictable, high-margin streams that could advance Select’s profitability, aligning future earnings growth with stable industry trends for water management solutions.
  
• Targeted efforts to improve base utilization and capture new business within the Chemical Technologies segment, including new product development and market share wins, are anticipated to drive revenue growth and enhance gross margins in 2025.
  
• The strategic redeployment of free cash flow towards infrastructure investments instead of share repurchases is aimed at compounding growth through new project developments, which are expected to support sustained earnings growth and margin expansion in the longer term.

Select Water Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Select Water Solutions's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 9.9% in 3 years time.
• Analysts expect earnings to reach $177.7 million (and earnings per share of $1.58) by about December 2027, up from $59.9 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 13.1x on those 2027 earnings, down from 23.3x today. This future PE is lower than the current PE for the US Energy Services industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 1.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Select Water Solutions Future Earnings Per Share Growth

Risks

• The company anticipates a seasonal activity slowdown in the fourth quarter, which could negatively impact revenue and margins temporarily despite a rebound expected in early 2025. This could affect overall quarterly earnings performance.
  
• The Water Services and Chemical segments are experiencing challenging activity outlooks due to decreased demand and competition, impacting their revenue and gross margins in the near term. This could pose risks to consolidated revenue growth.
  
• Planned operational downtime for facility upgrades in the Northern Delaware Basin will result in short-term financial impacts to their Water Services and Water Infrastructure segments, potentially affecting quarterly net income.
  
• The business faces risks associated with customer-specific operational disruptions and competition, including potential delays in contract finalizations or changes in the market landscape, which could impact revenue from long-term contracts.
  
• The reliance on high-margin infrastructure investments and the need for continued capital expenditure to maintain growth momentum may pressure free cash flow and leverage conditions if capital deployment does not yield expected returns, impacting cash flow conversion rates.

Valuation

• The analysts have a consensus price target of $16.6 for Select Water Solutions 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 $19.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $177.7 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 7.9%.
• Given the current share price of $13.54, the analyst's price target of $16.6 is 18.4% 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.