UPDATE: Goldman Sachs Downgrades Hornbeck, Frank's International To Sell

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In a report published Monday, Goldman Sachs analyst Waqar Syed downgraded Hornbeck Offshore Services from a Neutral rating to a Sell rating and lowered the price target from $66.00 to $53.00, and downgraded Frank's International from a Neutral rating to a Sell rating and lowered the price target from $29.00 to $25.00. In the report, Goldman Sachs said about Hornbeck: "We downgrade HOS to Sell from Neutral and lower its EV/EBITDA based target price by 20% to $53 (prior: $66) and see 2% downside to our target price (vs. +12% for our coverage). The primary drivers for the downgrade is (1) our view that the USGOM rig count will rise more slowly than Street expectations in 2014, and (2) HOS' capacity growth is mostly known, leaving further stock price appreciation largely dependent on further increases to vessel dayrates." Goldman Sachs said about Frank's International: "We downgrade FI from Neutral to Sell as our $25 12-month target price implies 2% downside from the current stock price, versus an average 12% upside for our coverage universe (which has an Attractive coverage view). (1) FI trades at one of the highest trading multiples within the services sector, a premium we believe is driven by its high ROCE; (2) Within the service universe, FI has one of the lowest 2014 EBITDA growth rates. We believe that for the stock to outperform its multiples would need to expand further, which given its already high premium seems unlikely; (3) Making a move higher more challenging is that FI is already experiencing increasing competitive pressure in its US land business, where there are low entry barriers. Although barriers are relatively higher for FI in the USGOM deepwater, we see slowing rig activity in 2014 weighing on performance. Moreover, Shell – one of FI's major customers in the USGOM – decided last week not to renew its contract on a high-spec rig (Noble Danny Adkins). We also believe Shell will release a 4th generation floater, Noble Driller, in 2014, which may also impact FI. We recognize some of this will be offset by a pick-up in work from newbuilds rigs entering the market, but believe FI stock price already embeds this expectation; (4) At current valuation we believe the stock assumes FI can maintain its above peer group 21% ROCE and 41% EBITDA margins. We are modeling ROCE/margins hold up during 2014, but see downside risk to these estimates given no other service company generate such high margins, and intensifying competitive pressure in US land that will likely permeate the deepwater market in the medium-to-long term." Hornbeck closed on Friday at $53.84, and Frank's International closed on Friday at $25.61.
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Posted In: Analyst ColorDowngradesAnalyst RatingsGoldman SachsWaqar Syed
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