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Barclays Downgrades Dril-Quip, Says Weak Quarter Is Just The Beginning

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Barclays Downgrades Dril-Quip, Says Weak Quarter Is Just The Beginning
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Dril-Quip, Inc. (NYSE: DRQ), a manufacturer of engineered drilling and production equipment, delivered a weak earnings report Thursday that reflects a concerning new reality for the stock, according to Barclays.

The Analyst

Barclays' J. David Anderson downgraded Dril-Quip from Equal-Weight to Underweight with an unchanged $41 price target.

The Thesis

Dril-Quip's poor performance in Q2 is notable for a "plunge" in gross margins as the company recalibrates its business amid a slowdown in growth among offshore drilling clients, Anderson said in the downgrade note.

While the company deserves credit for sustaining its gross product margins "remarkably well" throughout the offshore downturn, the fact is the company is sized today to address peak market levels seen in 2014, the analyst said. 

Dril-Quip, the only vertically integrated capital equipment company in the oilfield sector, has reached a "breaking point," with margins dipping below 20 percent and poised to move even lower, Anderson said.

While there have been some upticks in offshore-related data over the past few weeks, Dril-Quip's focus is on lowering its annualized cost out by $40 million to $50 million before the end of 2019, according to Barclays. 

A focus on structural cost initiatives can be seen as confirmation the offshore market is smaller and more competitive, the analyst said. Unfortunately, this also calls into question what role smaller offshore companies like Dril-Quip will play moving forward, he said. 

A downgrade of Dril-Quip is justified amid expectations for the following, Anderson said:

  • An earnings trough through at least 2021.
  • Minimal free cash flow growth.
  • A slower offshore recovery for Dril-Quip's business.

Price Action

Shares of Dril-Quip were trading down 0.76 percent to $52.50 at the time of publication Tuesday afternoon. 

Related Links:

Benzinga's Top Upgrades, Downgrades For July 31, 2018

JPMorgan Starts Dril-Quip, Frank's At Neutral; Oceaneering At Underweight

Latest Ratings for DRQ

DateFirmActionFromTo
Oct 2018BarclaysMaintainsUnderweightUnderweight
Sep 2018Morgan StanleyInitiates Coverage OnUnderweight
Jul 2018BarclaysDowngradesEqual-WeightUnderweight

View More Analyst Ratings for DRQ
View the Latest Analyst Ratings

Posted-In: Barclays J David Anderson Offshore OilAnalyst Color Downgrades Price Target Analyst Ratings Best of Benzinga

 

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StockFirmActionPT
AMTDMorgan StanleyUpgrades65.0
APOMorgan StanleyDowngrades34.0
ARMKBairdUpgrades44.0
CGMorgan StanleyDowngrades23.0
EIXEdward JonesDowngrades0.0
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