Core Laboratories (CLB) can be a difficult company to evaluate and understand. However, put simply, Core Laboratories' business is helping oil companies better understand their reservoirs, which enables their clients to produce more, thus squeezing as much out of their top and bottom line performances as possible. As oil reserves become more difficult to find, and more costly to extract oil from, big oil companies are paying Core Laboratories more for their services.
Core Laboratories' deep understanding and knowledge of the industry provides the company with a strong economic moat that should comfort investors weary of this year's 22% drop in stock price. Let's take a look at the factors behind the stock's decline in price, and what investors should focus on going forward.
What's the big deal?
The first two substantial drops in Core Laboratories' stock price were a result of two separate announcements. First, adverse weather and the resulting weaker drilling demand made it difficult for Core Laboratories to grow its top line in the first quarter with sales up only 1%. Despite the sluggish top line, the company's first quarter remained impressive. Core Laboratories posted its most profitable first quarter in company history and all three of its business segments' earnings improved year over year. However, the market wasn't impressed and quickly sent the stock spiraling lower.
Despite falling out of favor with the market after its first quarter results, management remained confident about the remainder of the year. Unfortunately, that's the cause of Core Laboratories' second significant drop in stock price this year.
Roughly three weeks later, after delivering first quarter results, management announced a weaker than desired April would cause second quarter results to come in lower. Whatever caused management to slightly reverse their optimism a mere three weeks later spooked the markets, and caused an even steeper drop in stock price. However, when you look into its medium- to long-term potential, this appears to be a drastic overreaction. Here are a couple of things for long-term investors to keep in mind.
Still a buy?
One of the best aspects of owning shares of Core Laboratories is its ability to churn out free cash flow like few companies can. Even with a slower than anticipated first half of 2014, Core Laboratories churned out more than $131 million in free cash flow. Put another way, it converted over $0.20 of every revenue dollar into free cash flow, an impressive conversion rate in the oilfield services sector.
Here's the impressive and consistent uptrend of Core Laboratories' free cash flow over the last 10 years.
CLB Free Cash Flow (Quarterly) data by YCharts
Over the last 10 years the company has grown its free cash flow 475% and, as long as the company continues to develop leading products and services for its clients in the oilfield, investors can expect this trend to continue. To drive that point home, in the first quarter management noted that 70% of revenues are from products introduced within the last three years and 90% from products introduced in within the last five years -- thus, ensuring that near-term revenue and cash flow will continue to improve.
In addition to strong free cash flow, Core Laboratories also has a history of returning significant value to shareholders through dividends and share repurchase programs. In fact, the company's strong cash flow enabled it to pay more than $22 million in cash dividends and to repurchase roughly 455,000 shares in the most recent quarter alone -- its share count is at its lowest level in more than a decade and a half.
In the grand scheme of things, the pain investors have felt this year as Core Laboratories dropped 22% should be reversed in the years ahead. When drilling activity slows it certainly throws in a short-term speed bump for the company, but investors should feel confident that market share, margins, cash flows, and value returned to shareholders remain strong. Core Laboratories is a great company to hold long term, and it isn't very often investors get a chance to grab shares at a reduced price.
