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We reaffirmed our Neutral recommendation on Dril-Quip Inc. (DRQ - Analyst Report) on Jun 18, 2013. The reiteration reflects its advantageous position from increased deepwater activity in the near term, recent capacity additions and a solid backlog. The company holds a Zacks Rank #2, which is equivalent to a short-term Buy rating.

Why Maintained?

The offshore drilling equipment maker – Dril-Quip – is likely to benefit from increased deepwater activity over the near term, recent capacity additions in Brazil and Singapore, as well as ongoing capacity expansions, over the coming years.

Dril-Quip’s first quarter backlog witnessed a 16% sequential as well as 45.8% year-over-year improvement. We also expect large orders in 2013 from the Gulf of Mexico (GoM) and Brazil, with growing demand and activity level in these regions. This gives it the financial flexibility to take advantage of new growth opportunities while returning capital to shareholders.

Dril-Quip registered an impressive gross margin increment both for its product and services divisions. Installation and maintenance work on subsea projects drove margins. Again, Dril-Quip boasts an impressive balance sheet with effectively no debt and ample free cash flow to fund capital spending.

The company results are heavily levered with continued strength in global deepwater drilling markets, especially in South America and the Asia-Pacific region. Given the operators’ long-term outlook on these projects, deepwater drilling and other related services will remain relatively stable through the usual fluctuations in commodity prices.

For the second quarter of 2013, the offshore drilling equipment maker expects earnings between 80 cents and 90 cents per diluted share, excluding any unusual or special charges. Currently, the Zacks Consensus Estimates for the second quarter is projected at 88 cents per share, representing year-over-year growth of 19.5%. Over the last 60 days, the stock has witnessed a positive earnings momentum of 2 cents for the second quarter of 2013.

Additionally, based on improving market conditions, Dril-Quip anticipates full-year adjusted earnings per share between $3.40 and $3.60, higher than its 2012 earnings per share of $2.94.

Other Stocks to Consider

While we remain mildly bullish over Dril-Quip, there are other stocks in the sector that appear more rewarding. These include Enerplus Corporation (ERF - Snapshot Report), Hornbeck Offshore Services, Inc. (HOS - Snapshot Report), and Ferrellgas Partners LP (FGP - Analyst Report).
 

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