Valuation concerns drove our April '08 downgrade of W-H Energy Services, Inc. (WHQ) shares from Buy to Hold, which in hindsight turned out to be premature. We, however, had a pretty fruitful run with the stock, having upgraded it to Buy in the spring of 2005, when it was in the mid-$20s.
Following the merger agreement with
Smith International, Inc. (SII), which we expect to succeed without any competition or hurdle, WHQ shares are expected to trade in line with Smith's offer. The take-out multiples of 16.0x and 7.3x our 2009 EPS and EBITDA estimates, respectively, are fair given current peer group multiples. Our recommendation and estimates remain unchanged.
We view the transaction as a good strategic fit in terms of mix of products and services. The new company will lead to the creation of a stronger oilfield service franchise strengthened in both drilling and completion product and service offerings.
Post-merger, WHQ shares are expected to trade in line with Smith's offer. The take-out multiples of 16.0x and 7.3x our 2009 EPS and EBITDA estimates, respectively, are fair given current peer group multiples. Given our $78 target price for Smith shares, our WHQ price objective works out to $93.54 ($56.10 + 0.48x$78), roughly around where the stock is right now.
