Continue Reading Below
Shares of Fairmount Santrol Holdings (NYSE: FMSA) are down 15% as of 11:15 a.m. EST today after the company released fourth-quarter earnings. Fairmount's earnings were similar to those of almost every other frac sand producer this past quarter: big gains in volumes but little change to the bottom line.
Image source: Getty Images.
One would think that after every other major frac sand producer reported that they had seen large upticks in sand volumes in the fourth quarter but little in terms of profitability, Wall Street would have expected similar results from Fairmount Santrol. That wasn't the case, though. The company reported that volumes of frac sand shipped in the fourth quarter were 1.8 million tons, up 5% sequentially and up 35% compared to the fourth quarter of 2015. The reason that we didn't see similar gains in revenue, though, was that prices for sand in the fourth quarter were lower than this time last year, as the company was selling under much more favorable contracts in 2015.
The company also noted that costs of goods sold were higher in the prior quarter, but that has been a pretty common theme among Fairmount's peers, too, as all of these companies restart idle sand mines to meet rapid growth in demand. As those mines get back to full capacity, the fixed costs for running mines will be spread out among a larger revenue base, which will likely lead to higher margins.
Continue Reading Below
Based on the performance of Fairmount's peers, it's hard to see why this earnings report came as a surprise. The results were pretty much par for the course in the frac sand industry today, and there was plenty of heads-up from other producers that we were likely going to see higher volumes with stagnant sales prices and continued losses at the bottom line.
In the longer term, though, things are looking up for the company. It used an equity issuance in the fourth quarter to pay down some debt and clean up its balance sheet, it has plenty of room to add production capacity by starting up idle mines, and frac sand demand per well is growing so fast that the total number of wells drilled doesn't need to come anywhere near pre-crash levels for the overall demand for sand to get back to strong levels. Fairmount still has some work to do, but getting rid of shares after this earnings report seems a bit shortsighted.
10 stocks we like better than Fairmount Santrol Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Fairmount Santrol Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of February 6, 2017