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Why the market is loving Enerflex today

Also: why deteriorating market internals remind one analyst of the spring of 2007

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Jun 3, 2014

by Max Fawcett

Enerflex (TSE:EFX) shares are up almost 10 per cent today on the heels of a transaction in which it paid US$430 million for the international contract compression and processing business and the after-market services of Axip Energy Services. The market’s not alone, either, as AltaCorp Capital’s Dana Benner thinks it was a shrewd move. The deal considerably raises Enerflex’s debt load, but Benner says that the company’s free cash flow generating ability – which will only be enhanced by the Axip deal – will allow it to deleverage its balance sheet in due course. “After transaction costs, our 2014 [estimated] EPS moves to $1.17 from $1.07 prior, while in 2015, our EPS estimate moves to $1.81 from $1.50 previously (a remarkable 21 per cent accretion). What EFX loses in terms of more balance sheet risk (1.7-times net debt to forward cash flow), it makes up for in a greater percent of recurring revenue. This is a smart transaction.” He bumped his price target from $23 to $27 (an implied premium of more than 40 per cent on where the company’s shares are trading today) and maintained his outperform rating.

Meanwhile, in broader market movements, while the major global indices continue to churn within a narrow band, the internals are continuing to degrade. Charlie Bilello, the director of research at New York-based investment advisor Pension Partners, says they’re not indicative of the kind of economic strength the indices would seem to suggest. “While on the surface all is well in the markets, there is a subtle rotation going on underneath,” he wrote in a note last week. “Energy and materials are the leading cyclical sectors while consumer discretionary and financials are the weakest sectors. Together, this backdrop is classic late cycle behavior and not typically what you see in a strong economy.”

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His read? Things look a lot like they did before the last cyclical bear began. “The parallels between May 2007 and May 2014 are unmistakable, with broad market strength masking underlying weakness. That is not to say what happens next will play out in the same fashion this time around as it most certainly will not. But at the same time, to completely ignore what the market is telling us here would be foolish as well. This may not be a repeat of 2007, but the persistent weakness in areas such as the Consumer Discretionary sector as we have seen this year is not likely a positive sign.”

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