Cactus Inc (WHD), a strong energy services name

About the company

Cactus Inc. (WHD) makes and sells wellheads and pressure control equipment to the oil and gas industry. It also sells flexible piping through its FlexSteel unit. The company was founded in 2011. It currently has a market cap of $4.11 billion and pays a 0.85% dividend.

Management

The CEO, Scott Bender, is a co-founder of the company and has been CEO for its entire existence. His brother Joel is also an executive and has been with the company sincere co-founded it. Management owns about 20% of the company, so they are aligned with shareholder interests.

Segments and growth

Cactus is a critical supplier for oilfield operations. They make and install well heads for new oil wells. Their technology makes the process safer and more efficient than the competition. Once cactus installs their pressure systems they collect servicing fees for the life of the well. They also rent equipment to the E&P companies. About 33% of their legacy business comes from these recurring sources and 66% from the wellhead installations.

Earlier this year, Cactus acquired Flexsteel, a maker of flexible pipe. This allows them access to a tangential market and has been immediately accretive to free cash flow.

Cactus has several growth tailwinds. The flex steel acquisition is still being integrated into the company. This will continue to add free cash flow to the balance sheet. US oil drillers are going strong and Cactus will keep getting revenue from their operations. Also, Cactus is developing products for new markets. They are branching into carbon sequestration too. They opened their first sequestration project in 2022 and have several more in the works. They are also making efforts to leverage Flex steel to get into the midstream market and, more importantly, into offshore drilling. The offshore drilling market is projected to grow at a 7-8% CAGR for the next decade plus, so this is a big growth opportunity for the company. They currently have limited offshore offerings.

Lastly, the company authorized a $100 million buyback plan. This will benefit investors if they can continue it longer term, and based on their cash flows, this is likely.

Performance and balance sheet

WHD currently has a ROE of 21% with a five year average of 34%. Its current ROIC is 18% with a five year average of 22%. Both those averages are skewed by huge numbers in 2018 and low figures in 2020. This is reflective of the cyclical nature of the energy sector. Their 2020 ROE was around 10%, which isn’t too bad for an oil services company in a pandemic. I’d consider the company to be a good allocator of capital.

The company has a solid balance sheet. Total debt is $189.81 million, which is less than 1 year of free cash flow. This level of debt is easily manageable, even in a downturn. Much of the debt was due to their Flex steel acquisition and will be paid down.

Risks

Like most energy related businesses, Cactus is at the risk of the commodity cycles. If oil prices decline there will likely be less investment into wells and Cactus will see its business shrink. The fact that they stayed profitable in 2020 does illustrate the durability of the business though.

Valuation

WHD is trading at around 23x current earnings and 15x forward earnings. It has been seeing its earnings rebound consistently since the 2020 lows. Its 5 year p/e range is 6-60 (energy has been volatile). Analysts are forecasting double digit EPS growth going forward, but this is subject to energy prices. It has a PEG of 0.97. A deep recession or a decline in oil prices would definitely be bad for Cactus’ business.

Morningstar has fair value at $59.15 and it has been climbing, making the stock slightly undervalued even after its recent run. I have a fair value in the mid $50s. I don't generally share my fair value assumptions since they are, well, assumptions and I'd urge anyone interested to use their own numbers as well. The stock has been on a run recently too, so there is a risk of a pullback soon. The company will also be releasing earnings on August 7th which could cause additional volitility.

If you believe that oil will be a booming market for the foreseeable future, I think that shares are well priced. Cactus is a company that is founder led and management has a large stake in its success. With high ROE and new products coming to market, I think Cactus can continue to grow.

I currently have no stake in WHD.