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Web Exclusive Follow-Up: CARBO Ceramics (CRR)

CRR was recommended in Investment Digest issue 696 dated June 1, 2011, at $149.94 by BI Research.

CARBO Ceramics (CRR) [reported earnings today, July 26, and] the shares vaulted nearly $6 in early trading after reporting EPS well above expectations. EPS weighed in at $1.38, vs. expectations of $1.29 and vs. last...

CRR was recommended in Investment Digest issue 696 dated June 1, 2011, at $149.94 by BI Research.

CARBO Ceramics (CRR) [reported earnings today, July 26, and] the shares vaulted nearly $6 in early trading after reporting EPS well above expectations. EPS weighed in at $1.38, vs. expectations of $1.29 and vs. last year’s $1.29 (also) and Q1’s $1.31. Revenues were up a whopping 19% (given all the issues facing the company/industry) over last year to $177.6 million in Q2 vs. expectations of $162.8 million and Q1’s $163.2 million. Both great news.

“However, the company painted a less than glowing picture of the environment through the end of the year, most notably including an excess of ceramic proppant in the market, primarily from China, that caused average pricing for the quarter to decline 4%, was declining as the quarter progressed, was worse at the close of the quarter and would likely continue to ‘place pressure on proppant pricing, volumes and margins for the remainder of the year.’ (… at least.)

“While this was in the press release, it clearly went largely ignored/discounted in initial trading today, but as the Company elaborated on this and emphasized it in the conference call, the shares turned and began to slide. China overbuilt ceramic proppant capacity over there (of varying quality but generally 20% heavier) and this is increasingly making its way to the U.S. and its lower price is causing problems for Carbo. Combining this with the ongoing low natural gas prices and volatility in oil and NGL markets, and things just seem to be going from bad to worse. The initial distribution problems we had been facing due to the relocation of drillers from natural gas fields to oil and liquids rich fields had largely been addressed by the end of Q1, allowing for a stronger Q2, but now cheap Chinese proppant grabs center stage. I just finished listening to the conference call and immediately began writing this update having decided to throw in the towel here as I do not know how long this Chinese proppant situation in particular will last. While there has always been some of this around, the degree of the impact of this now is a new issue. Then there is the whole ongoing fracturing controversy and the risk/uncertainty of whatever some regulators might do down the road on that score to add to the mix — though the technology is vital to the industry. While the market already reacted quickly to this, downgrades and another round of lowered earnings estimates are sure to follow. Another great idea, run aground on the rocks of the real world. The BI Rank of 3 is also not feeling any love for Carbo. All in all, that’s enough — Sell. Whether we’ll get some bounce for this morning’s initial reaction I cannot say.”

Tom Bishop, BI Research, July 26, 2012