Carbo Ceramics : Zacks’ Bear of the Day Play

The big news of the day in the Energy sector is the potential marriage of oilfield service giants Halliburton (HALAnalyst Report) and Baker Hughes (BHIAnalyst Report). Shares of both companies were up sharply late Thursday on word of the M&A talks.

And this is probably a welcome relief for investors who have watched their shares plummet as the price of crude oil entered a bear market. The oilfield services names have been as vulnerable as the Exploration & Production (E&P) companies because so much of their work revolves around “fracking” which requires a relatively high oil price to be economically viable.

Maybe it will also become welcome news for one their specialty suppliers in the fracking of oil and gas, Carbo Ceramics (CRRSnapshot Report), whose shares have nose dived over 2/3 since their summer highs above $150.

Carbo Ceramics hit a trailing 12-month revenue peak of nearly $700 million last summer, but recorded only $155.4 million in the third quarter reported two weeks ago. The lower-than-expected sales were warned about in a pre-announcement September 22.

That day, the company provided an update related to marketplace conditions and resulting impact on sales volumes. The company disclosed that its third-quarter top line was affected by customers moving toward raw sand from ceramic. This, along with increased price competition on ceramic proppant sales from both domestic and international manufacturers would greatly affect the company’s numbers in the third quarter.

Added to this, delay in well completion for a number of the company’s customers would keep its performance muted. Management expected that delays would impact some sales that they expected to make in the quarter. Overall, these factors would drag down its ceramic proppant sales volume by almost 18% sequentially bringing it in line with its first quarter numbers.

The stock was still trading above $100 a week before this news. It quickly fell below $60 by October 1 and has stabilized, relatively speaking, around $50 since their report two weeks ago. The steep drop in share price was all about earnings estimates getting slashed as follows…

FY14: From $4.25 in mid-August to $3.25 in mid-October, a 23.5% cut.

FY15: From $5.64 in mid-August to $3.93 in mid-October, a 30% slice.

And 2015 now stands at consensus EPS of only $3.26 this week, a further 17% slash to the earnings outlook.

As you can see below in the Zacks proprietary Price & Consensus chart, analysts were slow in cutting CRR earnings estimates, not taking any heavy action until September and that explains much of the rapid drop in the stock…

Crude oil and the fracking business may both stabilize and rise again in the near future. But before you think about buying CRR after its 66% bloodletting, first check with the Zacks Rank and see if the estimates have (a) stopped going down and (b) showed some signs of turning back higher.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.

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