Marvelous Microcaps

Drilling Tools International Corp (DTI)

INTRO:

At Perritt Capital Management, we take focused positions in companies where we have a high conviction in their success; companies that are out of the mainstream of small cap investing. To highlight our process, we are pleased to present the newest installment in our ongoing series “Marvelous Microcaps – Big Ideas on Small Companies.”  This series profiles companies that we believe have a niche in their existing markets or are launching a product that could disrupt their marketplace.

THE COMPANY:

Drilling Tools International Corp (DTI) is an oil and gas service company. They provide oilfield equipment and services to oil and natural gas sectors in North America, Europe, and the Middle East. The company offers a wide range of products and services, including downhole tool rentals, machining, and inspection services to support the global drilling and wellbore construction industry. Products offered include bottom hole assembly components, drill pipe and drill pipe accessories, and ancillary equipment and handling tools. Their rental fleet consists of downhole drilling tools used in horizontal and directional drilling of oil and natural gas. They offer tool rental services, inspection, machining, and repair services.  Drilling Tools International is based in Houston, Texas.

WHY WE OWN: THE PERRITT ADVANTAGE

We believe that Drilling Tools International is a deep value play in the oil and gas space. Trading at just eight-tenths of book value and producing strong cash flows, valuations are increasingly attractive despite the weakness in the underlying stock and the sector they operate in. The company recently reported results for their 2024 fiscal year and reported $17.2 million in free cash flow, which was double their previous year. In addition, they issued formal guidance indicating that they will grow revenues by 12% on a year over year basis despite the underlying weakness in the oil and gas industry.

They are growing revenues through a series of acquisitions and increasing traction in their international markets, especially in the Middle East, where they expect strong growth in 2025. On the acquisition front, the company has completed four major acquisitions, purchasing competing service companies as well as new technology at compelling multiples. They have financed these acquisitions through debt financing, which they can easily afford given their strong cash generation from the rental business.

As stated above, the valuation multiples on the stock are extremely attractive at these levels. In addition to trading at just eight-tenths of book value, the company is trading at an enterprise value to EBITDA ratio of just three times. This is well below their historic norms, and we expect these multiples to go up as they demonstrate success in their execution this year. We also expect that multiples will go up should we see recovery on the macro side with an increase in oil prices. In the meantime, we are confident that they will generate sufficient cashflow to fund their internal capital needs as well as fuel their M&A strategy. We are excited for what the future holds for DTI and look forward to what 2025 will bring for the stock.

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Data here is obtained from what are considered reliable sources. We consider the data used to be relevant and reliable.

Fund holdings and sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security. Please click PRCGX for a list of the top ten holdings.

Before you invest in the Perritt MicroCap Opportunities Fund, please refer to the prospectus for important information about the investment company, including investment objectives, risks, charges, and expenses. You may also obtain a hard copy of the prospectus by calling 800-331-8936. The prospectus should be read carefully before you invest.

Price book ratio – A company’s price-to-book ratio is the company’s current stock price per share divided by its book value per share (BVPS).

Free cash flow -is the cash that a company generates after accounting for cash outflows to support its operations and maintain its capital assets.

Enterprise Value/Earnings before interest, taxes, depreciation, and amortization (EV/EBITDA), also known as Enterprise Multiple, is a popular valuation multiple used to ascertain a company’s value. The metric gives the potential acquirer an overview of the company’s debts.

Mutual fund investing involves risk. Principal loss is possible. The Fund invests in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Fund invests in microcap companies which tend to perform poorly during times of economic stress.
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Past Performance does not guarantee future results.

The Perritt Fund is distributed by Quasar Distributors, LLC.

First published March 2025.

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