Over the past six months, Expro has been a great trade, beating the S&P 500 by 6%. Its stock price has climbed to $15.66, representing a healthy 15.9% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Expro, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Expro Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Expro for now. Here are three reasons why XPRO doesn't excite us and a 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.
Expro’s $1.58 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.
Expro, which averaged 20% gross margin over the last five years, exhibiting 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.
Expro 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 1.3%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
Expro isn’t a terrible business, but it doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 15.5× forward P/E (or $15.66 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
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