Lufkin Industries, Inc. (LUFK)

Part I – Summary Description:

Composed of the two operational segments, Oil Field and Power Transmission, Lufkin Industries engages in the manufacture and sale of oil field pumping units and power transmission products (Yahoo - Finance).

Lufkin’s Oil Field segment specifically produces and services artificial lift products, including artificial reciprocating rod lift equipment and related products. The Oil Field segment is additionally associated with the design, manufacture, installation, and servicing of computer control equipment and analytical services for artificial lift equipment. An iron foundry is operated by the Oil Field segment and is used to produce castings which are then used for new pumping units. Gas lift (1), plunger lift (2), and completion equipment are also manufactured by the Oil Field segment (Yahoo - Finance).

Lufkin’s Power Transmission segment designs, manufactures, and services speed increasing and reducing gearboxes for industrial applications. The Power Transmission segment additionally manufactures capital spares (3) for customers in association with the manufacture of new gearboxes. Power Transmission parts are also produced for after-market (4) service. Beyond manufacturing, the Power Transmission segment provides both on and off-site repair and service for Lufkin Power Transmission products as well as products manufactured by other companies (Yahoo - Finance).

Lufkin Industries, which was founded in 1902 and is based in Lufkin, Texas, currently has operations in the United States, Europe, Canada, Latin America, the Middle East, and North Africa (Yahoo - Finance).

(1) Gas lift is one of the various processes utilized to artificially lift oil or water from wells in which there is inadequate reservoir pressure to produce the well.

(2) Plunger Lift is one of the various methods of natural gas well deliquification techniques available. These techniques are also known as artificial lift. The plunger is used to remove contaminants from producing natural gas wells. Common possible contaminants are water (liquid, mist, or ice forms), sand, oil or wax.

(3) Capital Spares are specific spare parts intended to have a long operational life or a small chance of failure. Failure of a capital spare part would cause the breakdown of equipment for an extended period because of the prolonged delivery of their replacement.

(4) After-market refers to any market where the customers who employ one product or service are anticipated to purchase a related, follow-on product.

Part II – Summarized Financials:

Yearly/Quarterly Financial Performance (Source: Morningstar)

Competitor Comparison (Source: Yahoo - Finance)

Lufkin CE Franklin Man SE Weatherford International Industry Market Cap: 1.28B 121.01M N/A 12.21B 470.78M Employ­ees: 2,600 N/A 51,3212 52,000 1.66K Qtrly Rev Growth (yoy): -45.00% -42.30% N/A -7.90% 22.00% Revenue (ttm): 521.36M 434.96M 17.24B1 8.83B 521.36M Gross Margin (ttm): 21.59% 17.54% N/A 26.78% 27.38% EBITDA (ttm): 55.88M 13.87M N/A 1.61B 78.95M Oper Margins (ttm): 7.18% 2.61% N/A 7.97% 3.79% Net Income (ttm): 22.48M 6.28M -369.80M1 253.77M N/A EPS (ttm): 1.478 0.35 N/A 0.351 0.04 P/E (ttm): 58.02 19.67 N/A 47.12 23.41 PEG (5 yr expected): 2.06 N/A N/A 0.62 1.83 P/S (ttm): 2.45 0.28 N/A 1.38 1.41

Industry = Oil & Gas Equipment & Services

Part III - Reasons to Buy:

- Lufkin’s 2009 fourth quarter earnings were 8 percent higher than that of the previous quarter (bringing 2009 Q4 earnings to $127 million). This earnings growth from 2009 Q3 to Q4 exceeded analyst estimates (Zacks Investment Research).

- This surprisingly successful 2009 fourth quarter earnings growth is additionally coupled with a bullish 2010 earnings growth estimate of 52% (Zacks Investment Research).

- Lufkin’s success is significantly affected by oil prices and the vigor of the economy as a whole. As a result, Lufkin will particularly benefit from a recovering global economy in which energy demand rises, and oil exploration and production consequently also increases (Zacks Investment Research).

- Even now, Lufkin’s shares are on an upward trend as a result of higher energy prices and the continuing growth in land-based drilling (Zacks Investment Research).

- Lufkin has recently engaged in a mutually beneficial licensing agreement with Global Energy regarding the development, marketing, and servicing of Hydraulic Submersible Pump technology in various markets worldwide (except for Canada) (New Technology Magazine).

Part IV - Reasons to Sell:

- Be wary of a financial performance which does not exceed or at least match bullish estimates.

- Remember, Lufkin produces equipment and machinery to be used by energy companies. Lufkin does not engage in the actual exploration, production or sale of oil or natural gas. As such, declining energy prices and a consequent reduction in oil production will assuredly have adverse effects on Lufkin’s performance.