Dril-Quip Lags EPS, Beats Rev

Dril-Quip Inc. (DRQ - Analyst Report) has reported third-quarter 2012 earnings of 73 cents per share, missing the Zacks Consensus Estimate by a penny. However, the quarterly earnings increased almost 26% from the year-ago profit level of 58 cents. The increase was mainly backed by growth in product and service revenues as demand for offshore equipment climbed.

The company registered total revenue of $190.9 million in the quarter, up 23.2% from the year-ago level of $155.0 million. The reported figure surpassed the Zacks Consensus Estimate of $178.0 million.

Operating income expanded 21.9% to $38.7 million from the year-earlier level of $31.8 million. On the cost front, on an annualized basis, selling, general and administrative expenses rose 13.7% to $20.8 million from the year-earlier level of $18.3 million, while its engineering and product development costs rose 12.9%. Notably, depreciation and amortization expenses increased 9.4% to $7.0 million.

Backlog

As of September 30, 2012, the company had a backlog of $747 million, compared with $730 million in the prior-year quarter.

Capex

Capital expenditures in the quarter were $12.9 million, compared with $12.3 million in the year-earlier quarter.

Guidance

For the fourth quarter of 2012, the offshore drilling equipment maker − Dril-Quip − expects earnings between 65 cents and 75 cents per diluted share, excluding any unusual or special charges. Additionally, based on improving market conditions, Dril-Quip expects its full-year adjusted earnings per share expectation to range between $2.83–$2.93.

Our Take

We are maintaining our long-term Neutral recommendation on Dril-Quip, supported by a Zacks #3 Rank (short-term Hold rating). The cautious stance reflects the company’s exposure to the highly volatile oil and gas sector fundamentals.

The company reported impressive third quarter results fueled by growth in demand for offshore equipment.

The planned investment of Brazil's state-run energy giant Petroleo Brasileiro S.A., or Petrobras (PBR - Analyst Report) in the country’s offshore market over the next five years will also likely prove beneficial for Dril-Quip. The company is well positioned to take advantage of the project. Hence, beyond 2012, the company is geared towards Petrobras' planned newbuilds and general secular growth.

We nonetheless remain concerned about company-specific risks, which include new product growth challenges, manufacturing difficulties and potential backlog losses. Additionally, delays in deepwater infrastructure contracts may also hinder the growth prospect of Dril-Quip.