NR

[David Randolph]

When insiders buy I also like to buy. NR presents a medium term profit opportunity (say, I'll hold it for 2 or 3 months).

There's not all that much liquidity, the stock traded $9.7 M on Friday and it closed at the high of the session, so I don't want to create any imbalance at the open that makes a gap up on the chart and possibly ruin short term momentum.

But I do want to buy, nevermind the short term price. So the plan is to buy NR shares, 6.66% of capital as usual, around $7.20 - $7.30. Please try not to put buying orders at the pre-market.

Here's the analysis that justifies this recommendation:

«1. Introduction

NR appeared on my Metastock technical explorer yesterday. I usually get about 2% of stocks on this filter and then I try to eliminate the charts that aren't so compelling and stay with about 20 or 30 stocks to consider. Then I make a few quick fundamental tests and NR looked very interesting not only from a technical standpoint, but also from a fundamental one. Let's see if this analysis confirms my initial thoughts.

2. Profile

Newpark Resources, Inc. (NR) provides fluids management, environmental, and oilfield services to the oil and gas exploration and production industry. (complete profile here)

3. Technical Analysis
3.1. All History Chart



NR had a bullish trend until 1998 when it collapsed to a low of $2.88 in October 2002. It's strange it didn't participate more in the oil industry surge over the last couple of years.

3.2. Medium Term Chart



NR's medium term trend is ... there's no medium term trend, the chart is range bound.

3.3. Short Term Chart



The short term chart looks bullish, with nice volume kicking in over the last couple of weeks. The stock is about to have a golden cross (it means the 50 days simple moving average is crossing the 200 days simple moving average on the upside).

4. Fundamental Analysis
4.1. Number of Shares Outstanding



I see moderate dilution over the years at an annual pace of 6.73% and none in 2006. The current market cap is 89,432,473*$7.26 = $649.28 M.

4.2. Liquidity



Despite the attractive current ratio of 3, most of the total current assets ($315 M) are receivables ($164 M) and inventories ($113 M) and just $6 M in cash, so not as good as it looks, in fact, NR has a weak balance sheet.

4.3. Revenues



Revenue growth between 2002 and 2006 has averaged:

321*(X^4) = 669.55 <=> X^4 = 2.0857 <=> X = 20.17%

Analysts are estimating just 10.1% revenue growth for 2007, perhaps they're being too conservative here. The revenue multiple is ($649.28 M/$669.55 M) = 0.97. The Oil & Gas Equipment & Services industry average sales multiple is 2.39, so NR looks cheap, exclusively considering the revenue multiple.

But this apparent undervaluation has an explanation. As we've seen NR has been growing about 20% a year, and its industry has been growing 33% a year on average.

4.4. Profits



Analysts expect EPS of $0.35 for 2006, but I see conflicting information here and I need to study this carefully. I see that EPS is coming back due to the ending of a big payment of preferred dividends. Let's study this quarter by quarter.

I see they delayed Q1 and Q2 results due to this:

«As previously disclosed by Newpark Resources, Inc. (the "Company") in its Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2006, based on information that had come to its attention, on April 12, 2006, the Audit Committee of the Company's Board of Directors commissioned an internal investigation regarding potential irregularities involving the processing and payment of invoices by Soloco Texas, LP, one of the Company's smaller subsidiaries, and other possible violations.»

On April 17, 2006, the stock fell 17% due to this announcement, to $6.14. On May 10 the company said it was hopeful it would take no more than 60 days to file the 10 forms, it took them six months instead.

Finally, let's see what those forms say for Q1, Q2 and Q3 for EPS.

Q1) EPS of $0.07 already without any preferred dividends;
Q2) EPS of $0.07 again;
Q3) EPS of ($0.03), but here's the interesting part:

«Newpark reported a net loss of $2.3 million, or $0.03 per share, in the third quarter of 2006, which included unusual pre-tax items totaling $16.8 million. The largest of these items was an impairment charge of $17.8 million related to the shut down of the Newpark Environmental Water Solutions (NEWS) business.»

Without these special items, Net Income would have been $15 M, which translates to $0.17 EPS. So, for the 9 months so far in 2006, normalized EPS was $0.31. Remember, analyst estimates are for $0.35 only, but it is entirely possible that the company reports $0.17 or so EPS for the 4th quarter, which would put 2006 full year EPS at $0.48 (without special charges).

If this is right, the earnings multiple would be $7.26/$0.48 = 15. The industry average is 19.

5. General Overview

Wow, I just saw there's very strong insider buying of shares in the open market. There are several insiders bidding up shares from the low $6 to the low $7. Insiders don't buy this way unless they're sure they will positively surprise the markets.

Overall, I see five issues pushing the stock higher:

1) The stock was partially depressed because of reporting delays. This is past now;
2) EPS estimates for full year fiscal 2006 are too low. The company will easily beat those;
3) Revenue estimates for 2007 are half the last four year's average. Probably those estimates are also too low and need to be revised up;
4) Insiders have been actively buying shares in the open market;
5) The short term trend is bullish.

NR shares are attractive.»

6. Trading Plan

Buy NR between $7.20 and $7.30, 6.66% of capital as usual.

[puenthouse]

Hey there strangers!!! well looks like people around the interent heard of your buying and along with a good day i got in a little higher then you. but i expect a small profit taking drop this week possibly that will allow me to buy a little more.  I sure have made alot more money when i dont sit near a computer all day and can go out and forget about a bad market day or month!!!

[David Randolph]

Hey there strangers!!! well looks like people around the internet heard of your buying and along with a good day i got in a little higher then you. but i expect a small profit taking drop this week possibly that will allow me to buy a little more.  I sure have made alot more money when i dont sit near a computer all day and can go out and forget about a bad market day or month!!!

Wow, puenthouse is back, great !

So you'll wait for a pullback? I see the CEO and several directors buying on the way up ... yesterday NR had another white candle with even higher volume. This on a down market.

I hope the stock has a pullback so puenthouse gets his full line, but I know I'll keep on holding this stock, because something positive is about to come out from the company, hence the strong insider buying.

I don't have much more time to elaborate on this, probably on the next update.

[David Randolph]

NR had a minor consolidation day yesterday, which I welcome. Someone posted on the Y! board that I did buy NR ... and someone said I was no rocket scientist LOL

And he's right, I didn't consider taxes in my estimates. Perhaps that's because I live in Portugal and we're not all that used to taxes.

Ok, he says that if NR hadn't that special charge, it would have made $0.17 EPS, but after taxes, that would be only $0.11. Let's accept that.

But since there's so much controversy on EPS, I want to focus on something else, perhaps even more important, which is gross margin. In Q1 it was 13.86%, in Q2 it was 15.24% and in Q3 gross margin was 18.82%.

So, sales are growing and cost of sales is diminishing. It means the company's internal productivity is rising. Insiders know it, and they're buying shares in the open market. I don't mean options being converted, no, they're actually buying the same shares you and I buy.

No reason to sell NR, a lot of reasons to buy/hold. That's what I'll do.

[soman]

Hi, this article was posted today regarding Newpark Resources, what are your thoughts?

http://biz.yahoo.com/seekingalpha/061220/22737_id.html?.v=1

[yukiii]

I see a sale on the 13th 45,000 shares.

12/13/2006           S          45000      D    $7.0114     

[David Randolph]

Hi, this article was posted today regarding Newpark Resources, what are your thoughts?

http://biz.yahoo.com/seekingalpha/061220/22737_id.html?.v=1

Thanks for the link soman, I'll study the article carefully.

I see a sale on the 13th 45,000 shares.

12/13/2006           S          45000      D    $7.0114     

I confirm that iukiii, don't know how that has escaped me the first time. I see several insiders buying 75,000 shares since October and one insider selling 45,000. I believe there are many reasons an insider would sell a small part of his holdings (in this case, those 45,000 were just 4.74% of that particular insider's holdings). Maybe he wanted to buy an apartment as a gift for his son's marriage. Maybe he wanted a new yacht. But when insiders buy their company's shares in the open market ... that's usually because there are positive news pending.

Now let's study soman's link in detail.

We first mentioned Newpark Resources (NYSE: NR - News) on 11/17/06 in a comment posted on this article. SA requires us disclose any possible conflict of interest, so we posted an additional comment when we covered the short for a one day 4.9% profit.

This is strange. Why cover for a 1 day profit if you're bearish on a stock? I could understand if it were for a 1 day loss (on short covering, looking to sell short at an higher price). But of course, they wouldn't say they lost money in one trade, nobody loses money in this market hahaha

The second brief article on Newpark Resources (NYSE: NR - News) was syndicated on 12/15/06. Anyone reading the text of the Motley Fool article should have picked up on the numerous discrepancies regarding the published information regarding NR. For instance in the table included in the Fool article the one year return is stated to be 23%. However in the chart depicted at the bottom of the SA article you can see that this is totally incorrect.

I don't see what's the relevancy of this, but they're right, on my chart NR is down 2.49% year to date.

Likewise a quick check yesterday on the SA data provider "quotemedia.com" lists the PE for NR as 9.20. This too is obviously incorrect. Likewise EPS is not 0.82 as trailing 12 months EPS is 0.18.

Again, they're right, I have trailing 12 months EPS of 0.19. The trailing earnings multiple is 39. (ouch).

The bottom line is that Newpark Resources (NYSE: NR - News) has disappointed investors for the past five years. One scandal after another has fraught this company. Knowing this to be the case, CEO Paul Howes declares that NR is now concentrating on 'enhancing shareholder value'.

Doesn't matter much, what matters most is the future.

After shutting down the Newpark Environmental Water Solutions division [couldn't sell it] and assessing the competition in its primary business, NR hired CRA international to 'evaluate future strategies'. The street interprets this as a 'for sale' sign. The recent increase in volume is hype related to this possibility.

This is interesting. I confirm what they say.

The first step taken by NR was to clean up the books. The result was that NR fell behind in its filings and finally on 10/10/06 restated earnings and balance sheet effecting previous statements all the way back to 1998! The net result was; reduction of income by $13.1M for 1998 – 2003 and increase of $1.2M for 2004 – 2005, reduction of assets by $6.6M and stockholders equity by $3.7M for 2005. Now supposedly, the books are clean enough to solicit offers.

Confirmed.

Another item noticed by analysts is that CEO Howes purchased 20,000 shares on 12/14/06 at $7.11 per share. Normally insider buying is taken as a signal that shares are undervalued. In this case, insider purchases actually offset insider selling. Director Alan Kaufman sold 45,000 shares at $7.01. CEO Howes received 200,000 shares in March this year at $0 and has now effectively paid 10% of market value for 220,000 shares so we wouldn't take this window dressing too seriously.

This is correct, although there's no emphasis on the 75,000 shares bought by several insiders.

Disclosure: In our previous disclosure from 12/15/06 we stated that we may open for our associates new short positions. We did not. We unsuccessfully attempted to open short positions Monday at $7.74. The high for the day was $7.68. We will try again today, perhaps lowering our entry point.

This is extremely odd, why would they say they are going to sell short before they do it? Nobody does that ... lol, not nobody, I do that too, I always say to the 3 SOF subscribers what I'm about to buy or sell in advance. But not for the wider public, of course.

There are some strange issues on the article, but overall I believe it is accurate. I always think short sellers do their homework better than bulls (although they probably lose money).

On my initial article I was worried about the balance sheet. The company has no cash at all, just $6 M for a $665 M market cap company? Someone once said that cash doesn't lie.

I want to thank soman and yukiii for the heads up on NR, this is one of the reasons why I love doing this job, because I can pick information from members also. It's like we're a big team of researchers

But the responsibility for the decisions on the 3 Stocks on Fire Portfolio is solely mine. I have a slim 2.2% profit on NR, but feeling there isn't much more to take, I'll take these 2.2%. I must be willing to accept what the market is willing to give me, not what I expect or would like to win.

The trading plan for NR is SELL.

[setravis]

another fine looking chart  

The 1 year chart below...