PSB Monthly Issue June 2009
June 2009
TO BOOST THIS DREDGING COMPANY’S PROFITS
My recommendations this month are based on a powerful investment theme. The Obama stimulus plan.
As most companies struggle to survive the economic slowdown, a select few stand to collect a huge windfall. Courtesy of the U.S. government.
I know what you’re thinking. The stimulus plan’s old news, right?
That’s certainly true. But, new information about how these funds will be spent is coming to light.
It suggests the two penny stocks featured in this month’s issue are poised to grab big chunks of stimulus money.
As you can imagine, these stocks are on the verge of breaking out. Investors are going to send these stocks flying.
Keep reading for the full story…
The stimulus plan provides an astonishing $787 billion for expediting an economic recovery. Of these funds, $111 billion is earmarked for infrastructure projects.
Now, here’s a bit of new information for you. Approximately $350 to $400 million of stimulus money will be used to fund “dredging projects” over the next 18 months.
Ok, now I have your attention. But, what the heck is dredging? There are three different kinds of dredging.
One is capital dredging.
This is deepening a waterway to a port. It allows larger, deeper-draft ships to access the port. Many major U.S. ports are at risk of losing important business because they’re unable to accommodate larger cargo vessels.
Another is beach nourishment.
This involves moving sand from the ocean floor to eroding shoreline locations. Beach erosion is a constant problem. The normal ebb and flow of coastlines washes away sand, as does severe weather like hurricanes and flooding.
Beach nourishment is critical for protecting our shorelines. It also safeguards shoreline real estate and tourism. (Just imagine Miami without a beach!)
A third is maintenance dredging.
This involves re-dredging previously deepened waterways and harbors. Silt and sand naturally fill in dredged areas over time. As a result, most channels require maintenance dredging every few years.
Unfortunately, Congress has been spending the money raised for dredging on other things. Maintenance dredging at too many U.S. ports has been put off… but not this year.
The stimulus plan provides much needed short-term funding to address these problems. The government recognizes the urgency of the dredging situation. They’re finally providing more money going forward.
One company is perfectly positioned to grab a major share of these funds. IntroducingGreat Lakes Dredge & Dock Corporation (GLDD).
Name: Great Lakes Dredge & Dock Ticker Symbol: GLDD Market Cap: $305 Million Recent Price: $5.21 PSB Rating System 4.5 Stars Raging Revenue: (4.3 stars) Revenue soared 32% in the first quarter. Stimulus funding should boost top line growth this year and next. Beautiful Books: (5.0 stars) Earnings are expected to grow at a mind-boggling 49% a year over the next five years. Management is wisely using leverage to boost the company’s growth rate. Stellar Structure: (4.5 stars) Insider ownership is solid at 31%. Institutions own a healthy 58%. Plenty of room remaining for institutional buying to send the stock flying. Valuation Verification: (4.3 stars) The stock’s trading at huge discounts to the Heavy Construction Industry’s P/B and P/E ratios. My analysis indicates these shares are worth at least $9.00. Meaningful Milestones: (4.5 stars) The company had record revenue in 2008 and in the first quarter of 2009. They also won more than half of the dredging contracts awarded in the first quarter. Look for more revenue records as stimulus fund contracts are awarded. |
THE DREDGING BUSINESS
GLDD is the largest provider of dredging services in the U.S. They operate in all three dredging markets: capital, beach nourishment, and maintenance. Over the past three years, the company has won 42% of the dredging contracts awarded.
But, they’re not content just dominating the U.S. market.
They also have significant international operations. They operate in the Middle East, Africa, India, the Caribbean, and Central America. About 30% of their revenue comes from overseas projects.
The company benefits from a lack of competition in the U.S.
They and four other key competitors comprise 85% of the market. And, foreign owned companies are prohibited by federal law from doing business here. (Talk about your barriers to entry.)
And, GLDD’s many strengths give it a huge advantage over what competition there is.
First, they operate the largest and most diverse domestic dredging fleet in the industry. By selecting the most efficient equipment for any job, they often underbid the competition. Best of all, they can perform multiple jobs simultaneously.
Second, the company’s broadly diversified revenue base protects it from economic slowdowns in any one dredging sector. And, the international operations often help offset periods of weakness in the U.S. market.
Finally, with 118 years in the business, GLDD has developed a solid reputation for quality and customer service. Their management team averages 25 years experience in the dredging business. And, they’ve never failed to complete a project.
While competition in the U.S. is sparse, the international dredging market is a different story.
It’s dominated by four large European dredging companies. They all have larger equipment and bigger fleets. But, GLDD is carving out a niche. They’re having success targeting opportunities well suited to their equipment.
In addition to dredging, GLDD is involved in two other businesses. One is commercial and industrial demolition services. And, the other is a marine sand mining operation. These two businesses account for less than 20% of revenue.
Now, let’s take a look at GLDD’s financial situation.
BIG PROFITS IN DREDGING
The domestic dredging market jumped 30% last year. Of the $783 million in dredging contracts awarded, more than a third was won by GLDD.
For the year, revenue rose 14% to a record $587 million.
Unfortunately, higher payroll and healthcare costs took a bite out of profits. Earnings fell from 14 cents per share in 2007 to 9 cents last year. (It looks like management has better control over these costs now.)
GLDD is off to a fast start in 2009.
Revenue in the first quarter jumped 32% to a record $179 million. Maintenance work was a big contributor. It more than doubled from a year ago.
Gross profit soared 125% to $27 million. And, gross profit margins nearly doubled to 15%. Better fleet utilization and increased operating efficiencies are driving margin expansion.
Expanding margins are producing bigger profits.
Net income was $7.3 million or 13 cents per share for the quarter. This compares to a loss of $1.2 million in the first three months of last year.
The outlook for the rest of the year looks bright.
The company’s dredging contract backlog is up to $344 million. GLDD won more than half of the $182 million domestic bid market in the quarter. Most, if not all of this backlog, will be recognized as revenue this year.
A sound balance sheet completes the picture.
As you can imagine, GLDD’s business is capital intensive. It takes a lot of money to build, maintain, and operate a fleet as big as theirs.
The company’s financing their capital needs with low cost long-term debt. Cash flows are more than sufficient to cover interest payments. And, none of the debt matures before 2012.
INVESTMENT RISKS
An investment in GLDD does involve some risks.
Most of the company’s revenue depends on government dredging contracts. If government funding for dredging projects declines significantly, the company could suffer.
Another risk is damage to the company’s dredges, vessels, or personnel from various operating hazards. If this happens, the company could suffer losses and legal liability.
A third risk is the company currently depends on one foreign government for its international revenue. If that customer chooses to use other dredging vendors, GLDD’s revenue could decline substantially.
POTENTIAL RETURNS OF 73% OR MORE
GLDD presents a great profit opportunity.
The government stimulus is providing more funding for dredging services. With their size and experience, GLDD is sure to capture a big portion of these funds.
The company’s diversified operations protect them from a downturn in any one dredging sector. And, their international operations should help offset weakness in the U.S. market.
The fact the company pays a dividend shows management has confidence in the company’s future cash flows.
And, the stock’s a huge bargain at current prices. A comparison with the Heavy Construction Industry shows just how misvalued GLDD really is.
PGLDD is trading at a 40% discount to the industry’s average price to book ratio. That’s just way too low. Using the industry average P/B of 2.2x, the stock is worth $8.87.
The stock is also trading at a huge discount to its long term annual growth rate of 49%. Given the company’s strong growth outlook, the stock deserves a multiple that’s at least twice the industry average. Using a P/E of 30x, GLDD is worth $9.00.
Based on my analysis, I think the stock’s worth at least $9.00 a share. Buy GLDD now for potential gains of 73% or more.
ACTION RECOMMENDATION
BUY Great Lakes Dredge & Dock (GLDD) up to $6.50.
Recent price is $5.21.
Use a stop-loss of $1.70 on this position.
Don’t forget your position sizing and stop-loss rules.
NOBODY’S HEARD OF… UNTIL NOW!
Everyone experiences major transitions throughout their lives. Graduation. A first job. Marriage. The birth of a child. The list goes on and on.
A big transition in my life happened in 1990.
I remember it well. That was the year I entered law school at George Washington University. I was beginning the toughest journey of my young life.
But that’s only half the story.
I also had to make another equally challenging transition. I had to learn how to live in a big city… Washington D.C.
I grew up in a relatively small town in Michigan.
I was used to wide open spaces and a laid back way of life. We didn’t have tall buildings, noisy streets, and crowds of people scurrying about.
Lucky for me, the transition was an easy one.
I fell in love with D.C. from the start. It was the ideal place for a history buff like me. I couldn’t get enough of the monuments, museums, and historical landmarks. (The restaurants and nightlife were pretty amazing too.)
One big adjustment I had to make involved transportation.
I was used to driving my car everywhere I went. But, driving is not the most efficient way to get around D.C. The best way to travel is on the city’s rapid transit system, the Washington Metrorail (most people just call it “the Metro”).
You can ride the Metro to almost any destination within the District. It will also take you to nearby suburbs in Maryland and Virginia (millions of commuters ride it every day).
I rode the Metro every chance I got.
It was remarkably clean, convenient, and inexpensive. I preferred it to fighting bumper to bumper traffic on the surface streets.
One thing I really appreciated was they announced upcoming stops. I can’t tell you how many times these announcements saved me from missing my stop. Or, even worse, a transfer point.
Here’s how they do it.
Every train is equipped with an Automatic Voice Announcement (AVA) system.
The AVA uses GPS tracking technology to identify the train’s location at all times. At certain points, the GPS triggers the AVA to announce the name of the next stop. (Pretty ingenious, right?)
So, what prompted this trip down memory lane?
My penny stock research of course. I stumbled upon a company that was a pioneer in developing AVA technology. I was excited to learn the market for AVA and other digital communications technology for the transportation sector are growing rapidly.
Here’s why.
More and more people the world over are riding public transit systems. As a result, these systems have to expand (add more trains, buses, etc.) to accommodate exploding ridership levels.
A critical component of the expansion process is adding features to improve system mobility, flow, safety, and security. Transit systems just need the right technology to do the job.
And, cost is often not an issue.
In the U.S., public transit systems have access to billions of dollars from federal, state, and local governments.
The federal government’s spending $10.3 billion on public transit projects this year.And, the Obama stimulus plan provides another $8.4 billion. That’s the largest amount of federal funding for public transportation in our nation’s history.
A number of states are opening the floodgates for public transit as well. They’re preparing to spend a whopping $75 billion.
As you can see, the public transportation market is literally drowning in government money. So, how do we profit from this opportunity?
You guessed it. I’ve found a microcap company perfectly positioned to grab a big chunk of this massive government spending spree.
I’m thrilled to introduce DRI Corporation (TBUS).
Name: DRI Corporation Ticker Symbol: TBUS Market Cap: $13 Million Recent Price: $1.19 PSB Rating System 4.9 Stars Raging Revenue: (5.0 stars) Beautiful Books: (5.0 stars) Earnings are expected to DOUBLE this year. This follows gains of 216% last year. There’s a good possibility these numbers will be revised higher due to massive stimulus spending. Stellar Structure: (4.8 stars) Insider ownership is strong at 16%. 12 insiders bought 50,000 shares on the open market in the first quarter. Institutional ownership of 23% is substantial for such a small company. This suggests the stock is already on many institutional investors’ radar. Valuation Verification: (5.0 stars) The stock’s trading at a huge discount to industry P/E, P/S, and P/B ratios. Upside potential is 236% from recent prices. Meaningful Milestones: (4.7 stars) The company posted record revenue in 2008. And, it entered the huge Russian transit market earlier this year. |
THE DIGITAL COMMUNICATIONS TECHNOLOGY BUSINESS
TBUS is a leading provider of digital communications technology to the transportation and transit security markets. The company’s technologies are used on buses, light rail trains, subway trains, and many other kinds of transit vehicles.
A lot of companies claim to be “global” these days. But, TBUS is the genuine article. They have over 500 customers in more than 50 countries worldwide. And, more than half their revenue comes from international markets.
What’s so special about the company’s products?
They help transit system operators increase the mobility, flow, safety, and security of their passengers.
Here’s how.
First, the company’s AVA technology provides greater travel related information to passengers. It enables voice-announced transit vehicle stops, next stop, transfer point, route, and destination information. This helps passengers use public transit more efficiently and safely.
Second, the company’s GPS-based automatic vehicle location (AVL) and automatic vehicle monitoring (AVM) technologies help operators manage their vehicles better. They’re able to track vehicle location, monitor vehicle operating efficiency, and keep tabs on vehicle health – all in real time!
Finally, a combination of AVL and AVM with advanced digital video recording and wireless technology helps reduce security risks. Operators use this advanced security and surveillance system to monitor vehicles and passengers at all times.
TBUS combines all of these technologies into a product package it calls “Engineered Systems.” These state of the art systems are driving a new era of growth for the company.
Credit for this new growth era goes to the company’s strong management team. They have more than 17 years of industry experience on average. And, they’re perfectly executing a sound growth strategy.
Here’s what they’re doing:
• Introducing new products and providing upgrades to existing products;
• Expanding international presence;
• Cross selling vehicle tracking/monitoring systems to signage customers;
• Increasing focus on the airport security market; and
• Pursuing strategic, complementary acquisitions.
Just look at the company’s financial results. You’ll see how successful this strategy really is.
THE NUMBERS
Last year’s results were off the chart!
Revenue rose 22% to a record $70 million. And, earnings rocketed 216% higher to 10 cents per share. Increasing sales of higher margin engineered systems is driving this phenomenal growth.
What’s more remarkable is TBUS delivering these kinds of results during a global economic slowdown. One that’s crippling most other industries.
The truth is the recession is hardly affecting TBUS at all. The long-term growth trends in the global transit industry are just too powerful. And, it’s not about to change anytime soon.
In fact, 2009 is shaping up to be another record year.
The company’s order backlog is now up an amazing 64% since the end of last year. The long-term industry growth drivers are firmly in place. And, Obama’s stimulus package is prompting a flurry of new orders.
Management’s certainly confident.
They recently confirmed their positive outlook for the year. They expect revenue to jump 28% to $90 million. And, they believe earnings will double to 20 cents per share.
Just imagine how this company will grow when the economy improves.
Now, let’s take a look at the balance sheet.
TBUS doesn’t have a lot of cash on hand. They use it along with funds drawn against various lines of credit to fund growth. It’s typical of fast growing microcaps. Nothing to be concerned about.
The company recently replaced several maturing credit lines. The new lines are bit larger and extend to 2011. These should provide ample liquidity for the next two years.
No need to worry about the company’s debt levels either. They’re debt to equity ratio is in line with the industry average.
All in all, the balance sheet looks solid.
INVESTMENT RISKS
Despite the company’s strong performance and outlook, an investment in TBUS does carry some risks.
The company depends on a small number of key customers for a third of its revenue. If they lose one or more of these customers, the business could suffer.
Another risk is customers may not accept new products developed by TBUS. If this happens, the company’s growth could stall.
A third risk is the significant portion of revenue (60%) generated outside the U.S. Fluctuations in currency exchange rates can substantially affect the company’s top line.
POTENTIAL RETURNS OF 236% OR MORE
I like TBUS for several reasons.
First, three trends are combining to drive faster growth. Increasing ridership on mass transit systems. Rising demand for the company’s unique products. And, record levels of government funding for public transit infrastructure projects.
Second, the company’s fundamental outlook is terrific. Revenue is expected to grow 22% this year and 15% next year. More importantly, earnings are estimated to double in 2009 and then jump 40% in 2010.
Third, the company’s business is insulated from the global economic downturn. A lot of microcap companies are surviving the recession. But, very few are actually thriving like TBUS.
Finally, the stock is incredibly cheap. A comparison with the Communication Equipment Industry shows just how misvalued the stock really is.
TBUS is trading at huge discounts to the industry’s average P/E, P/S, and P/B ratios. The disparity between them is much too large.
I believe TBUS is going to rocket higher as the market recognizes the company’s huge growth potential and solid balance sheet.
Based on my analysis, the stock’s worth at least $4.00 a share. Buy TBUS now for potential gains of 236% or more.
ACTION RECOMMENDATION
BUY DRI Corporation (TBUS) up to $2.00
Recent price is $1.19
Use a stop loss of 59 cents on this position.
Don’t forget your position sizing and stop-loss rules.
Category: PSB Monthly Issues
