|Market Growth LT||B-|
|Market Growth ST||F|
Investors Betting on a Turnaround Must Be Cautious as Company's Growth Record is Still Very Weak
High Arctic Energy Services,'s latest financial report wasn't very encouraging from a revenue growth perspective, extending an anemic growth record also evident from a long term view. The company's total revenue last quarter was $38.60 million, only 4.04% higher than the year earlier period's revenue of $37.10 million. In the 12 months ended also last quarter, High Arctic Energy Services,'s total sales were $146.20 million, a 19.25% rise from the $122.60 million in revenue booked in the equivalent period ended three years ago, a poor showing over such a long period of time. As such, any boost to the company's bottom line will have to come from cutting costs, suggesting it will be important for investors to watch closely the company's margins in the next couple of quarters. It also reported a yearly drop in profit during the last quarter from the year earlier period, a sudden reversal from the strong profit growth the company has been posting on a long term basis. MarketGrader measures long term profit growth by comparing the latest full year profit (12-month trailing) to the equivalent period's results three years earlier. Despite a year-over-year decline in quarterly profit posted by High Arctic Energy Services, last quarter, its results were enough to reverse a yearly loss from three years ago. The company reported that Fourth quarter profit fell to $5.90 million from $7.80 million (excluding extraordinary items) reported in the year earlier period, a 24.36% drop, while its 12-month trailing profit of $28.80 million for the period also ended December 31, 2012 reversed a loss of $13.30 million in the 12 months ended three years before. The company reported strong margin growth during its latest quarter, extending its recent expansion, albeit at a slower pace from the two preceding periods; its EBITDA, operating and net margins grew by an average of 18.48% compared to the same quarter a year before.
The company's positive earnings surprise on May 14, 2013, 13.33% above the consensus view, failed to excite investors as the stock fell 5.96% following the announcement, suggesting the report offered poor guidance for future quarters. Despite investors' adverse reaction to this report, it continued a trend of beating earnings estimates, with an average 11.67% positive surprise over the last six quarters, which puts the stock's decline following this latest announcement in perspective given such strong record.
|Price/Cash Flow Ratio||A+|
The Stock's Valuation is Attractive Based on the Company's Overall Financial Strength
High Arctic Energy Services,'s stock is trading presently at 3.62 times trailing 12-month earnings per share, which represents a 54.79% discount to the company's "optimum" P/E ratio of 15.00; this ratio is calculated by MarketGrader based on the company's two-year EPS growth rate, which in turn is computed by looking at the rolling 12-month periods ended in each quarter within the two years and measuring their growth. By this measure, High Arctic Energy Services,'s earnings per share have grown at an annualized rate of 0.00% in the last two years. ** Currently the stock also has a forward P/E of 6.78, which interestingly enough is higher than its trailing P/E but lower than the S&P 500's forward P/E of 15.20. Investors therefore see more value in the company's future earnings but not as much as they see in the market in general; coupled with the company's strong fundamentals, this situation could represent an interesting but risky opportunity, meaning short term volatility with the possibility of handsome returns in the long term.
High Arctic Energy Services,'s current market value is only 1.24 times its total book value per share, which suggests investors are currently assigning very little value to the company's ongoing business and its future earnings growth. We normally look at the company's price to tangible book value (which includes intangible assets such as goodwill), but in this case High Arctic Energy Services, didn't report any intangible assets in its most recent balance sheet. At the current price of $2.25 the stock is valued at 2.89 times the cash flow generated by the company in the last four quarters, or $0.78 per share; this values the company's ongoing business very favorably considering the strength of its overall fundamentals. Its shares also trade at 0.77 times its trailing 12-month sales, a small 76.00% discount to the Oilfield Services/Equipment industry average price to sales ratio of 3.19. Finally, from a value perspective, we look at how much bigger the company's market capitalization is than its latest operating profits after subtracting taxes. From this perspective High Arctic Energy Services,'s market cap of $112.10 million , which is only 13.04 times larger than its latest quarterly net income (plus depreciation), seems like an attractive valuation.
|Return on Equity||A|
|Quality of Revenues||A+|
Profitability Record Is Excellent Across the Board Suggesting a Very Well Managed Operation
High Arctic Energy Services, is very profitable and this is reflected across the board in this category's indicators, with operating margins that exceed its peer group average and a very solid return on shareholder equity, all based on 12-month trailing data. The $28.80 million in net profit it earned during the same period accounted for 19.70% of total revenue, a healthy net profit margin. The average operating margin for the Oilfield Services/Equipment industry was 12.93% during the same period, 37.81% below the company's 19.49%. High Arctic Energy Services,'s return on equity, based on trailing 12-month earnings, is not only outstanding at 32.51%, but it's higher than the 28.30% return on equity from the year earlier period. This is an important metric of management efficiency in our grading system, as it measures the amount earned on an investment in the company's common stock.
Given such strong returns the company's capital structure seems to conservative, especially assuming it could raise debt capital to invest into what is a steady and profitable business. High Arctic Energy Services,'s long term debt accounts for only 13.39% of total capital. High Arctic Energy Services,'s core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $38.20 million, or 19.00% above the $32.10 million earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.
|Cash Flow Growth||F|
|Debt/Cash Flow Ratio||A+|
|Interest Cov. Capacity||B|
Company's Management of its Cash Flow Appears Very Sound but Could Improve in a Few Areas
High Arctic Energy Services,'s cash flow fell slightly during the last quarter to $10.20 million from $10.80 million a year earlier, a 5.56% decline. What's more important and worth highlighting is the fact that up to the most recent quarter the company's twelve month trailing cash flow was growing very healthily, up 50.79% compared to the same period ended a year before. This marks a sharp slowdown in the company's business environment and is likely to put considerable pressure on its margins. Even though the company has $13.70 million in total debt, its net debt is virtually zero since it has $27.40 million in cash on hand; and since it generated $9.80 million in earnings before interest, taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. Even more positive is the fact that during the last 12 months while the company's cash on hand increased 66.06% from last year's $16.50 million, its leverage actually fell, with total debt as a percentage of total capital now at 13.39% compared to 21.29% a year ago.
Our Economic Value indicator is another gauge used by MarketGrader to measure how efficiently management employs the capital invested in the business. As of last quarter, High Arctic Energy Services,'s had $102.30 million in total invested capital, which included all common and preferred equity as well as long term debt. The weighted after tax cost of each part of the capital structure was roughly the same, with a 0.86% total cost of equity and 1.02% cost of debt, both adding up to a total 1.88% after tax cost of capital. The company's return on invested capital, based on its 12-month trailing operating income was 27.86% following the latest quarterly report, which means that after subtracting the total cost of capital mentioned above, High Arctic Energy Services,'s generated 25.97% in economic value added during the same period, a very strong return. This could be considered as the company's true economic profit in the last year since it accounts not only for the costs of running the business (operating) but also the cost of the capital it employed. The company announced on December 31, 2006 that it was cutting its quarterly common dividend 89.74% to 1.00 cents a share from 9.75 cents. High Arctic Energy Services, has been paying a dividend regularly to its common shareholders since June 30, 2006. Including the latest payout, the stock is currently yielding 17.56%. The $1.87 million High Arctic Energy Services, paid out in dividends during the last twelve months represents 6.92% of its after-tax earnings, a relatively small amount, yet a significant increase from the 4.86% payout in the 12 months ended just a quarter earlier. Total dividends paid in the last year also represent 4.92% of the company's total cash flow. The large payout increase doesn't raise any concerns about the company's liquidity since the overall payout level is still low and its fundamentals are generally healthy.