Despite the long odds against them, many people are drawn to the oil and gas industry. Like gold miners in the gold rush days, they know that one big discovery could lead to wealth for successful drillers. Others see the promise of the industry but prefer to take on less risk. This led to the business model of selling picks and shovels to miners. In the modern world, an updated version of that business plan is to provide data for the drillers showing them where oil is most likely to be found.
This data is often difficult to obtain and requires specialized expertise to analyze. TGC Industries (Nasdaq: TGE) says they are "a leading provider of seismic data acquisition services with operations throughout the continental United States and Canada. The company has branch offices in Houston, Midland, Oklahoma City and Calgary."
This gives the company broad exposure to the oilfields that have traditionally dominated the industry. Expansion into the shale oil fields in North Dakota and other states not usually thought of as part of as oil patches is possible and could boost the company's fortunes.
Seismic data helps drillers avoid losses. No one ever knows for sure that a well will be profitable. Collecting data before drilling reduces the chance that the well will be a loss. That makes TGE's services valuable since a new well can cost up to $15 million.
TGE is undervalued compared to other companies in its sector. TGE's price-to-earnings (P/E) ratio is about 13.36 compared with an average of 15.9 in its sector. Analysts expect the company to enjoy earnings per share (EPS) growth averaging 41% a year in the next five years, giving TGE a PEG ratio of 0.33, which is about one-fourth of the sector average of 1.3. The PEG ratio compares the P/E ratio to the growth in EPS and a value of 1.0 is generally considered to be fair value. By that measure, TGE is significantly undervalued.
The problem for TGE might be that the company has delivered erratic earnings in the past. After reaching 58 cents in 2005, EPS fell steadily and the company reported a loss in 2010. TGE reported earnings of 52 cents per share in 2011 and is expected to report 72 cents a share in profits for all of 2012. Fourth-quarter and full-year results for 2012 are scheduled to be announced on Feb. 25.
A steady workload should help the company stabilize earnings. The company reported a backlog of $103 million worth of contracts at the end of the previous quarter. This is a significant amount of work for TGE, which reported $179 million in sales during the past 12 months.
At the bottom of the chart is relative strength (RS), and with an RS rank of 93, TGE has been among the top performers in the stock market during the past six months. The stock is now more than 80% above the July low. That low formed after the stock gapped down on an earnings miss.
In the middle of the chart is the Momentum of Comparative Strength (MoCS) indicator, which converts RS to a Moving Average Convergence/Divergence (MACD) style histogram. MoCS compares the price moves of a stock to the moves of the S&P 500 index and provides clear buy and sell signals. When MoCS and RS are both bullish, as they are now, that tends to be positive for a stock. When stocks are in a bull market like they are now, this setup tends to provide a low-risk entry point.
Analysts expect to see a long-term turnaround in TGE, and with the oil and gas industry expected to see steady growth in the next few years, this is a company that could be a long-term winner. The earnings announcement at the end of the month could prove to be the launching point of a new advance in the stock. Risk should be limited with a stop at $8.50, a price that provided support in the recent short-term consolidation.
Action to Take --> Buy TGE at the market price. Set stop-loss at $8.50. Set initial price target at $10.37 for a potential 8% gain in 3-6 months.
This article originally appeared on ProfitableTrading.com:
Technicals Signaling This Undervalued Stock is a 'Buy'