Back from my World Cup Hiatus with CE Franklin (CFK - $13.50)

Now that the World Cup is winding down, watching games at night will no longer get in my way of researching stock picks. Since the US team poorly represented our country over in Germany, I am going to head to our friendly neighbors in the North to nab my next stock pick. CE Franklin has a very compelling growth story behind it and consequently has been on my radar for a couple months.

CE Franklin is a distributor of oilfield supplies (pipes, valves, equipment) to companies in Canada that produce oil and gas. It has 41 branches and stocking points positioned around Canada to meet the needs of their customers. This is a great growth story because not only is Canada already a huge oil producing nation but it is only going to grow in the future with the development of the Oil Sands region. CFK should be well positioned to take advantage of this growth trend as they are already located in and servicing the product needs of the Companies producing the oil.

CFK is not a complete hidden gem as it got a fair amount of attention from its exposure to the Canadian Oil Sands. It along with many other stocks had an incredible run in the past year, more then tripling from May of 2005 to May of 2006 before pulling back 25% to these current levels. Anytime a stock has had this much of a rise in price I am always weary of what may come next as people will be looking to cash in on their profits. I am hoping, however, that this recent drop has flushed out the profit takers and this $13 level will be seen as a great entry point to others.

Beneath the growth story are some astronomical financial results. In the previous four quarters their sales growth over the same quarter the year before grew at 37%, 56%, 35% and 38% respectively. That is some great consistent growth while their income growth has even been larger then that. With that kind of growth and the fact that CFK is in a hot sector I was amazed to see that it only has a P/E of 13. Depending on how one calculates, that is much less then half the company’s growth rate. So even after having a dramatic price increase over the past year this stock is still incredibly undervalued.

As always with these small stocks there are several caveats. This stock has a small market cap of $240 million, only averages 120,000 shares in volume each day and according to their press release the summer months are their lowest in sales:

The Company's sales levels are affected by weather conditions. Many exploration and production areas in northern Canada are accessible only in the winter months when the ground is frozen. As warm weather returns in the spring each year the winter's frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have dried out. As a result, the first and fourth quarters typically represent the busiest time and highest sales activity for the Company. Sales levels drop dramatically during the second quarter until such time as the roads have dried and road bans have been lifted.

While the company warns that sales will be lower then the first quarter of this year, the key point to look at will be the sales from the second quarter this year compared to the second quarter from last year. So far there are no indications or reasons to think that they can not continue this 30% - 60% sales growth rate. This should be seen in their next quarterly report and provide a nice bump in price.

A quick look at Yahoo! Finance shows no analysts currently covering the stock, so another potential catalyst is the opening of coverage by an analyst. Generating more attention and if given a good coverage rating a bump in price.

It is hard to say what price per share I am expecting for CFK in the future. Generally I would think at least a P/E equal to its growth rate if not double its growth rate. A P/E of 30 would put this stock at over $30. Do I think that is fair? Yes. Do I expect more than that? We shall see…