Cactus Plans to Pump $150 Million Into a Share Repurchase – Buyback Wednesdays

Last week, footwear retailer Designer Brands Inc. (DBI), decided to buyback share through a Dutch auction offer of $100 million representing 25% of its class A shares outstanding. The company, with a market cap of $605 million and an enterprise value of $1.77 billion, announced its intention to repurchase shares in a price range of $7.00 to $8.00 per share. The stock immediately ran up more than 40% in a week following this announcement and currently trades at $9.52 per share.

Dutch auctions are infrequent but intriguing. This offer also includes an odd lot provision where the company will acquire odd lots of less than 100 shares. Given the low share price and the fact that the stock is trading well above the range provided, there isn’t an option to participate in the odd lot tender. I have owned DBI in the past and was in one of their stores a couple of weeks ago, so I was initially intrigued when I saw this announcement. However after looking at the company’s balance sheet, revenue growth rate (or lack thereof) and net margin, I decided to instead focus on an oil services company called Cactus this week.

Key Insights:

• Cactus, Inc. (WHD) designs, manufactures and sells wellhead and pressure control equipment to major oil operators.
• In addition to operating service centers across North America and Australia, it serves a few international markets.
• Cactus’ stock price tends to fluctuate with the overall oil and gas market due to the cyclical nature of its business.
• Management anticipates that the acquisition of FlexSteel will have a positive impact on Cactus’ financial metrics.
• With three consecutive years of dividend growth, the company currently has a dividend yield of 1.1% and a payout ratio of 20.28%. While not impressive at present levels, there is potential for future dividend increases with rising cash flow.

Source: Cactus Investor Presentation – May 2023

On June 7, 2023, Cactus, Inc. (WHD) announced a share repurchase program worth $150 million, equivalent to approximately 6% of its market capitalization at the time of the announcement. The company intends to repurchase its shares primarily to counterbalance the dilution resulting from the acquisition of FlexSteel. Following the announcement, the stock rallied almost 7%.

Scott Bender, President and CEO of Cactus, commented,

“I am very pleased to announce the approval of our inaugural repurchase authorization. This decision reflects our expectation of stronger cash generation from both the Cactus and FlexSteel businesses through industry cycles, which we believe is not considered in our current equity value. We intend to continue to invest in attractive organic growth opportunities, pay down debt, evaluate attractive M&A opportunities and maintain a sustainable dividend while executing repurchases under this authorization.”

Management:

Cactus has an experienced management team with strong connections in the industry. CEO and President Scott Bender possesses over 40 years of experience in the energy sector, having held leadership positions at various companies, including Wood Group Pressure Control and Superior Energy Services. He successfully established and monetized Ingram Cactus Company (sold to Cameron in 1996) and led the profitable expansion of Wood Group Pressure Control until its $2.8 billion acquisition by General Electric (GE) in 2011. Mr. Bender graduated from Princeton University in 1975 with a Bachelor of Science and Engineering and University of Texas in 1977 with a Master of Business Administration.

Joel Bender, the senior vice president and chief operating officer at Cactus, has over 30 years of experience in the energy industry. He holds degrees from Washington University and the University of Houston. The two Bender brothers co-founded Cactus in 2011.

FlexSteel Merger:

Cactus started 2023 with a significant deal. On February 28, 2023, Cactus acquired FlexSteel, a manufacturer of unique onshore spoolable pipe technologies on a cash-free, debt-free basis, for total upfront consideration of approximately $621 million. Cactus intended to finance the acquisition of FlexSteel through a mix of cash, debt and/or equity.

In connection with the acquisition, Cactus amended and restated its existing credit facility to provide for a term loan of $125 million and $225 million in revolving commitments. Upon closing of the merger, $30 million has been drawn on the revolving portion of the facility in addition to funding the $125 million term loan. Prior to the FlexSteel deal, Cactus has $344.5 million of cash on its balance sheet and no debt.

The acquisition of FlexSteel represents a significant milestone for Cactus due to the product diversification it brings. The current President and CEO of FlexSteel, Thirucherai Sathyanarayanan, will continue leading the FlexSteel business.

Source: Cactus Investor Presentation – May 2023

During the last month, Cactus introduced FlexSteel’s Spoolable Technologies to its select legacy customers, and it was successful. This trend is expected to continue, with potential for additional large accounts that can significantly impact future operations.

Financials:

Despite a moderate gross margin of 36%, the company manages to achieve a net margin of over 17%, surpassing the sector median by 12.5%. The stock is currently valued at 12.5 times EBITDA. The forward EV/EBITDA of 7.9 looks attractive and indicates significant earnings growth in 2023. Cactus is projected to achieve 42% revenue growth this year, largely driven by the recent acquisition. Over the past 3 years, the company has grown its revenue and EPS at a CAGR of 7.3% and 8.4% respectively.

Cactus generated $1.83 earnings per share in 2022 and earnings are expected to grow by 53% this year, reaching $2.80 per share.

Within the last 90 days, three out of five analysts have revised their earnings estimates upward.

Source: Cactus Investor Presentation – May 2023

Q1 2023 Results:

Reported results for the quarter include one month of contribution from FlexSteel’s business.

• Earnings per share for the quarter were $0.64, surpassing the consensus estimate of $0.56 by $0.08.
• Net income amounted to $51 million, compared to $44 million in Q4 2022.
• Revenue for the quarter reached $228.40 million, exceeding analysts’ expectations of $217.45 million. This represented a 56.5% increase compared to the same quarter last year.
• On a total company basis, first quarter adjusted EBITDA was $79 million, up 20% from $66 million during the fourth quarter.
• Gross margins, including depreciation expense, stood at 40%, down 40 basis points sequentially due in part to product mix.
• In Pressure Control product business, the U.S. wellhead market share increased to 43.3% during the period.
• Pressure Control SG&A expenses were $22.7 million during the quarter, relatively flat sequentially despite higher transaction related fees and expenses amounting to $8.6 million in the first quarter

Both revenue and EPS have exceeded estimates in six out of the last eight quarters.

Outlook for Q2, 2023

The company has a positive outlook for its second-quarter performance.

• Adjusted EBITDA margins in the Pressure Control segment are expected to range from 33% to 35% for the second quarter, inclusive of Pressure Control’s SG&A and general corporate expenses.
• Revenue for the Spoolable Technologies segment is projected to reach $105 million in the second quarter, representing an increase of approximately 15% to 20% compared to the first full quarter total, including the two months prior to the acquisition’s completion. This highlights the benefits of the acquisition.

Bottom Line:

There is a lot to like about Cactus including co-founders at the helm, an experienced management team, excellent margins and a complementary acquisition that should help the bottom line. The primary concern would be the cyclical nature of oil & gas investments and the continuous decline in both crude oil and natural gas prices we have experienced over the last year.

Welcome to edition 63 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

The pace of buyback activity remained consistent, with 13 companies announcing buybacks last week.

Top 5 Stock Buyback Announcements 

1. REV Group, Inc. (REVG): $13.14

 On June 8, 2023, the Board of Directors of this specialty vehicles manufacturer authorized a new $175 million share repurchase program, equal to around 23% of its market cap at announcement.

2. Designer Brands Inc. (DBI): $9.52

 On June 8, 2023, the Board of Directors of this footwear and accessories retailer authorized a new $100 million share repurchase program, equal to around 21% of its market cap at announcement.

3. Global Indemnity Group, LLC  (GBLI): $33.75

On June 9, 2023, the Board of Directors of this insurance company authorized an additional $75 million share repurchase program of the company’s Class A common stock, representing around 17% of its market cap at announcement.

4. Cardinal Health, Inc. (CAH): $88.02

On June 8, 2023, the Board of Directors of this medical products distributor approved a new $3.5 billion share repurchase program, equal to around 16% of its market cap at announcement.

5. Equity Commonwealth (EQC): $20.79

On June 13, 2023, the Board of Directors of this office REIT authorized an additional $150 million share repurchase program, equal to around 6.5% of its market cap at announcement.

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