Commodity prices are inherently volatile and difficult to predict over the short to medium term.

This poses risks for companies with direct exposure to commodity market fluctuations through their business operations or revenues.

The uncertainty surrounding commodities adds an element of unpredictability to corporate earnings, cash flows, and overall performance.

As a result, the market tends to apply a risk premium when valuing commodity-linked businesses. This risk perception can translate to lower stock valuations for companies operating in commodity-intensive industries.

One such example is Cactus (WHD).

Wellhead and pressure control leader Cactus has consistently delivered impressive financial results thanks to its industry-leading technologies and operational excellence.

Last year, the company achieved a Uniform return on assets ”ROA” of 33%, far exceeding the oilfield services sector average of around 5%-10%.

This high level of profitability is a testament to Cactus’ focus on operational efficiency. The company meticulously designs each product with input from customers and engineers to ensure optimal performance while minimizing costs.

Cactus’ SafeDrill wellhead systems, for example, include a complete line of drill-through single-piece multi-bowl wellhead systems that enhance field personnel safety and save valuable rig time.

Cactus also grew its assets by 53% last year through both organic initiatives and strategic M&A.

The acquisition of FlexSteel extended Cactus’ technological leadership into pipeline solutions. The deal expanded Cactus’ addressable market and immediately added scale in the growing deepwater and offshore sectors.

Despite these strong fundamentals, Cactus’ stock currently trades at a 14x P/E multiple.

This low valuation is caused by the market’s concerns about volatility in oil prices and uncertainty surrounding energy policy changes under the new presidential administration.

As a supplier to the hydrocarbon industry, Cactus is inevitably exposed to fluctuations in crude markets.

However, Cactus has several factors supporting its market position that could alleviate these macroeconomic risks.

Its wellhead systems and proprietary technologies such as the frac stack have created formidable barriers to entry, consolidating its dominance in onshore well construction.

Furthermore, the energy independence agenda of the current government indicates ongoing support for domestic shale production, a key driver of demand for Cactus’ products and services concentrated in the prolific Permian Basin.

Looking ahead, Cactus is well-positioned to continue expanding across international offshore and deepwater markets where its pressure control expertise is in high demand. The company’s stacked order backlog reflects robust customer appetite for its integrated solutions.

The company’s strong market position and near-term sector tailwinds, including a resilient economy and the rising relevance of U.S. oil in the global economy provide a basis for upside going forward.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.