Lufkin Industries Inc.

Lufkin Industries Inc. (LUFK - Snapshot Report) saw third quarter revenues jump 42% on strong demand for its pumping units from the energy sector. The 106-year old company has no debt and $110 million in cash. It's also cheap. LUFK trades at just 6.7x forward earnings.

Company Description

Lufkin has been designing and manufacturing oil field equipment and power transmission products around the world since 1902.

The company, a Zacks #1 Rank (strong buy), has two segments: the Oilfield Division and the Power Transmission Division.

The Oilfield Division manufactures rod lift pumping units used to lift oil from wells and also services pumping units, including repairing and field service.

Additionally, it operates a gray and ductile iron foundry that produces captive and commercial castings for the heavy equipment, valve and machine tool markets.

The Power Transmission Division makes precision-made gears that are used in a variety of industries, such as oil and gas, steel, plastics, sugar, rubber and power generation.

The company's Gear Repair operation repairs any manufacturer's gears and offers 24-hour emergency onsite service to minimize disruptions to a customer's operations.

Third Quarter Revenues Soar 42%

On Oct 15, Lufkin reported third-quarter earnings that beat Wall Street estimates by 5.06%, or 8 cents per share. Earnings per share jumped 37% to $1.66 from $1.21 in the third quarter of 2007. Analysts expected $1.58 per share.

LUFK has now surprised on estimates 4 consecutive quarters by an average of 4.16%.

Revenues grew 42% to $195.1 million from $137.5 million in the year ago period. For the first 9-months, revenues rose 26% over 2007.

The third quarter was propelled by strong demand for power transmission products and oilfield pumping units, automation products and field services. Oilfield sales rose 52% to $147.1 million from $96.6 million a year ago. There was strong demand in both North America and internationally, specifically in Latin America.

Lufkin cited strong international demand as the reason the backlog jumped by 64% from the second quarter of 2008.

Sales of power transmission products rose 17% compared to a year ago due to strong demand from the energy sector but was basically flat compared to the quarter before. Shipments were delayed late in the third quarter due to Hurricane Ike.

The backlog increased 12% from the prior year but was also flat compared with the prior quarter.

2008 Guidance Raised

Lufkin is cautiously optimistic about the rest of 2008. It raised its EPS forecast to a range of $5.65 - $5.85 from $5.50 - $5.70. The company based the increase on the 34% sequential increase in the backlog, year to date performance and the demand outlook for its major markets.

Fourth-quarter guidance was given in the range of $1.51 to $1.71.

Lufkin is being cautious given the sudden decline in energy prices and the credit crisis, both of which will affect its customers. Lufkin itself, however, is not feeling the credit squeeze, as the company has no debt and ended the third quarter with $110 million in cash.

Consensus Estimates Rise

Given the company's strong third quarter and guidance, covering analysts have been raising estimates. Fourth-quarter estimates are up 2 cents to $1.70 in the last 30 days, which is on the high end of the company's forecast.

For the full year, consensus estimates jumped 10 cents to $5.85, also at the high end of the company's guidance range.

Value Fundamentals

Lufkin is cheap. It's trading at only 6.7x forward earnings. Its price-to-book is 1.53. The company has a solid 5-year average return on equity of 15.97%.

As an added bonus, LUFK also pays a dividend with a current yield of 2.50%.