ProPetro has had an impressive run over the past six months as its shares have beaten the S&P 500 by 11.7%. The stock now trades at $13.14, marking a 19.5% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in ProPetro, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think ProPetro Will Underperform?
We’re happy investors have made money, but we’re swiping left on ProPetro for now. Here are three reasons you should be careful with PUMP, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
The size of the revenue base is a way to assess topline, and it tells an investor whether an Energy producer has crossed the line between being a more vulnerable commodity taker and a durable operating platform. Scaled businesses tend to produce and generate revenue from many wells, pads, takeaway routes, and geographies, not just a single field or drilling program.
ProPetro’s $1.18 billion of revenue in the last year is pretty small for the industry, suggesting the company hasn’t hit a level of diversification where investors can sleep easy at night.
2. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
ProPetro, which averaged 27.4% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
ProPetro has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
We see the value of companies helping consumers, but in the case of ProPetro, we’re out. With its shares beating the market recently, the stock trades at 82.8× forward P/E (or $13.14 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.
Stocks We Would Buy Instead of ProPetro
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