Buyback Plan's Positive
Thursday night, Grey Wolf GW announced plans to buy back up to $100 million in stock. We aren't taking action in this note.
Grey Wolf's decision to repurchase its common stock from time to time in open market transactions or block trades is a positive for shareholders, in our view. At a recent price of $7.46 a share, the company could buy back 13.4 million shares, or nearly 7% of its shares outstanding. Grey Wolf finished the first quarter with $215 million in cash on hand, convertible debt of $275 million, and has generated a total of $100 million in free cash flow over the past 12 months.
We believe Grey Wolf's recent price action -- the stock has fallen some 15% since May 11 -- is out of sync with the company's value and the fundamental drivers that have led to several solid quarters of revenue growth and earnings leverage. For instance, Grey Wolf is trading at 7.5 times analyst earnings estimates for 2006, or about 15% below its peers, despite strong earnings leverage because of the current up-cycle in day rates and above-industry average cash-flow margins.
Additionally, oil and gas prices remain well above historical averages, which should continue to drive spending to find for new sources of oil and gas to meet demand. Such strong demand has created a supply/demand imbalance for drilling rigs, giving Grey Wolf room to raise its rates without suffering any loss in market share. Thus far, more than half of Grey Wolf's rigs have been up for contract renewals in 2006, enabling the company to secure near-record day rates for a good portion of its fleet.
While we maintain our Two rating to reflect our 5.25% position in the model portfolio, we believe the stock could reach $10 a share in 2006 and view the current quote as an attractive entry point.
William Gabrielski is a research analyst at TheStreet.com.
TheStreet.com is a publisher and a registered investment adviser. TheStreet.com Stocks Under $10 contains the author's own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You further understand that Gabrielski will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in TheStreet.com Stocks Under $10 may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
Past results are not necessarily indicative of futureperformance. Investing in the stocks chosen forTheStreet.com Stocks Under $10 model portfolio is riskyand speculative. The companies may have limited operatinghistories and little available public information, and thestocks they issue may be volatile and illiquid. Trading insuch securities can result in immediate and substantial losses of the capital invested. You should use only risk capital, and not capital required for other purposes, such as retirement savings, student loans, mortgages or education. As an editorial employee of TheStreet.com, Gabrielski is restricted from owning individual securities other than stock or options in TheStreet.com, Inc.
-----------------------------------------------------------Visit the TheStreet.com Stocks Under $10 site (available to subscribers ONLY) by clicking here: http://www.thestreet.com/k/su/index.html
To view TheStreet.com Stocks Under $10 portfolio on theWeb, click here:http://www.thestreet.com/k/su/portfolio.html
For customer service on your account please visit:https://secure2.thestreet.com/cap/selfserve/
-----------------------------------------------------------
(c) 2006 TheStreet.com, Inc., 14 Wall Street, 15th Floor,New York, NY 10005, Attention: Customer Service Department