Core Labs (CLB) So What is It Worth? Is Einhorn Right?

One trick that Warren Buffett uses when he first looks at a company is NOT to look at the price OR another person’s opinion.  He doesn’t want price to influence his valuation of the company, and he seeks his own counsel.

Why don’t we test our valuation skills and do a valuation of Core Labs (CLB) with the data below.

  1. CLB VL 2015
  2. CLB VL 2017
  3. Core Labs CLB 2016_annual_report
  4. CLB 2017_1q_10q

Do your own work BEFORE looking at the post below.  See how you compare or differ Einhorn’s short thesis on CLB.    Do you differ?   Why and how.

 —
Whitney Tilson: CLB and HHC

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1) I (Whitney Tilson) attended the always-excellent Ira Sohn conference on Monday and, as often happens, Bill Ackman and David Einhorn stole the show with two outstanding, incredibly-well-researched ideas, long Howard Hughes (which has been one of my largest positions since it was spun out of GGP when it emerged from bankruptcy after the credit crisis) and short Core Laboratories (CLB), respectively.

They have posted their presentations here:

  • HHC
  • CLB   Here is Einhorn’s short thesis on CLB (Core Labs)

If you’re interested in learning more about HHC (and seeing the incredible development underway at South Street Seaport), the company is hosting its first investor day there a week from today, Wed. 5/17 from 8:00am to 1:30pm. Email Tracey.Wynn@howardhughes.com to register. I hope to see you there.

As for CLB, it doesn’t happen very often – maybe once every two years – but sometimes I (Whitney Tilson) see (at a conference) or read (on something like ValueInvestorsClub) an investment thesis that is so compelling and blindingly obvious that I immediately put the position on – which is what I did on Monday just after Einhorn’s presentation. Check it out for yourself – it’s that good. A highly cyclical company masquerading as a secular growth story – trading at nearly 9x REVENUES!


Must see video on indexeshttps://vimeo.com/216016883/10b948b174

I highly suggest you view the video—Yeah, there is hope for value investors.

7 responses to “Core Labs (CLB) So What is It Worth? Is Einhorn Right?

  1. Great exercise! I also came to the conclusion that the company is overvalued. While it is impressive that they are still making profits and their balance sheet is solid, it is clear that they are much affected by the lower oil prices. In 2014 which was a strong year they earned about $5.80 per share and the average for the past 3 years $3.3 per share.
    As long as the oil price remains low, companies will be reluctant to use their services. Hence, it would make sense to wait until oil prices recover before investing in this company UNLESS you can invest now at a great discount. There appears to be no discount at all. Rather, the market is adding a very high multiple for a company in a very uncertain market.
    Bad investment.

  2. Good for you for doing your own work. Did you learn anything from Einhorn’s analysis of CLB. I think you can be influenced if you read someone else’s work BEFORE doing your own digging and thinking.

  3. One of the things to take away is that ROIC is not so important if you can’t reinvest the funds. True, this technique is probably the best.

  4. Wow! That presentation was incredible, and led to some unexpected conclusions.
    I did my own work on this, and came to an analysis that it wasn’t an easy short because it could be trough earnings, and that reinvestment at its high ROIC would make the upside scenario too dangerous.
    I did analyze the two business segments, but mistakenly thought that Production Enhancement was the area that would suffer going forward, because, like many analysts, I thought the Reservoir Description business would benefit from secular growth. I thought that this would provide a floor for earnings going forward, and that any upside from Production Enhancement revenues might make the earnings meet analyst guidance.
    Einhorn did a fantastic job here of highlighting the precarious nature of their core business, Reservoir Description, because of its dependence on international offshore revenues. Furthermore, he made a great point that these complicated projects are planned out years ahead, so the revenues in Reservoir Description would not show any decline from the dropoff in Offshore until a few years after the drop in oil prices. This is particularly deceptive if you look at numbers from the 2008-2009 oil price drop, or even the dropoff in revenues 2014-2015, because it takes a while for all the pre-existing offshore projects to roll off.
    It pains me a bit to say it, because I was a shareholder in Core Labs in the early 2010’s, I talked to David Demshur before and he was a great guy, and I really believed in the bull argument for this stock, but I do happen to agree with Einhorn after reading through his presentation. If the crown jewel of Reservoir Description is truly correlated to international and offshore, it might be more vulnerable than most analysts expect. Since the growth path forward will be dependent on Production Enhancement, which ought to have a lower ROIC than Reservoir Description, the upside risk may not be as high as I originally thought.
    On a side note, I disagree a bit on his characterization of Demshur – while he may be promotional at times, I don’t think he intentionally was seeking to mislead investors.
    As PW noted, one of the important things I learned is that ROIC is only as good as your reinvestment opportunities. After all the Buffett quote is that the best business is one that employs LARGE AMOUNTS of incremental capital at very high rates of return, not one that uses all of its incremental capital (and then some) to pay a dividend.

    • I skimmed your reply but at the end you nailed it. You and PW. Greenblatt says high ROIC is great, but if the company can’t reinvest at the same high rates, then ask for the money (free cash flow) to be returned to you

    • Good work. You have developed your own analysis. Maybe the future will show the truth as not CLB collapsing in price, but underperforming the market in general. There are many shades of grey.

      I once owned CLB to start a position, but never got my margin of safety, so I sold. Over a year ago or so.

      Two lessons: Do your own work before you read others’ opinions/analysis.
      The key for high ROIC companies is to be able to reinvest at similar rates.

  5. John, thanks so much for sharing the Einhorn deck – i learnt much more from it than the Ackman one. I think shorting a stock helps in revealing all sorts of “disconfirming evidence”, akin to Darwin attacking his own hypotheses routinely.

    More than the assessment, what influenced me the most is this systematic approach to thinking where you decimate your cherished beliefs.

    Thanks!

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