DA Davidson believes that whoever bought a frac sand stock on Friday is a moron of the first magnitude. The sector is up by 100% since December and the fundamentals haven’t improved all that much since then.
They’ve taken liberties to downgrade EMES, FMSA, SLCA and HCLP this morning.
Truth be told, the gains enjoyed in the frackers are a gift, a wild eyed generosity bestowed upon an indigent people by lunatics.
DA Davidson believes their frac sand coverage universe is trading well ahead of fundamentals for a growing industry that is still in flux. The group has moved nearly 100% since their Dec. 4, 2015 initiations and current valuations and/or estimates are devoid of reality; firm would recommend selling the group in favor of a less frothy entry. Further, they believe the group is grossly misunderstood and suffering from a recency bias that disguises a number of sell-side inconsistencies about the space: 1) assuming anything is “Normalized” in an industry that is this new and never been in a steady state; 2) assuming peak margins don’t equate to painfully compressed multiples; 3) underestimating how attractive adding new capacity is, even at mid-single digit FOB margins (17%-25% returns on investment); and 4) assuming a “Secular” sand demand theme will be met with a rising cost curve.
It’s time to get off the beach and into the shade.
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