I love most aquatic sports. From fishing and kayaking to powerboating and waterskiing, if it's warm out, I want to be near or on the water.
I grew up near several major rivers where I often fished and boated as a youngster. Although these rivers were hundreds of yards wide, they were usually shallow. They were constantly becoming silted in from runoff, debris and assorted other factors. The same thing occurred in local reservoirs, where the water got continuously shallower as mud and silt piled up against the dam.
If you have ever stepped into this muddy, silt-filled mess when boating or fishing, then you know it's pretty disgusting. Not only is the silting of rivers and reservoirs a real issue for recreational users of waterways, but it can impede crucial transportation and navigation routes.
It's a problem begging for a solution -- and in a twist of fate, I discovered a company that provides one.
Several weeks ago, when researching the Gold Trust ETF (GLD), I inadvertently added an extra "D" to the GLD ticker symbol. What I serendipitously fell into reminded me of the waterway silting issue.
This company, Great Lakes Dredge & Dock (GLDD), provides a solution to the silting problem, without even mentioning its other diversified problem-solving businesses. I decided to take a closer look at this company as a potential investment.
Great Lakes Dredge & Dock is a 122-year-old U.S.-based dredging company. Dredging is the process used to remove the silt and muck from the bottom of waterways to maintain a navigable depth -- think of backhoes that can dig underwater -- and is the only practical solution to the problem of silting. The company owns the largest fleet of dredging vessels in the industry, with more than 200 boats.
Although based in the United States, Great Lakes has a strong international presence. The company is also involved in other businesses beyond dredging. It provides demolition services in the Northeast U.S., holds a 50% share of a New Jersey-based marine sand-mining company and even owns a 50% share in an environmental services company focusing on remediating polluted swamp lands.
Not only does Great Lakes save inland waterways, but the company is also involved in beach replenishment and protection. This often involves pumping in sand from offshore locations to rebuild beaches lost to storms and steady erosion.
The company recently won a contract of more than $100 million from the U.S. Army Corps of Engineers to deepen the Miami Harbor. Dredging is expected to start in the fourth quarter. The project will begin by digging out the offshore entrance to the port with additional work to potentially be awarded in 2014.
While the company's dredging division is posting solid results -- not to mention winning more than 50% of the U.S. market -- the demolition division is dragging on overall performance. Digging into the details, Great Lakes' revenue increased more than 20% in the first quarter, to nearly $190 million. In addition, gross profit margin rose slightly to 13.7% from 12.9% a year ago. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) grew 23% to just over $18 million, from just under $15 million in 2012.
However, Great Lakes followed an annual loss last year of $2.7 million, down from a profit of $16.5 million in 2011, with a year-over-year decrease in net income in its first quarter, down from just over $1 million to $433,000.
I expect a stronger remainder of 2013 due to a $361 million dredging backlog, the Miami Harbor project, a $30 million New Jersey shore protection project, as well as 15 to 20 potential coastal projects in the wake of Hurricane Sandy.
But the most exciting potential growth catalyst is the $340 million in Gulf restoration projects funded by the first BP (BP) Deepwater Horizon spill settlement. In addition, the company is focusing on improving execution and internal controls to help improve its demolition division's bottom line.
Technically speaking, GLDD has fallen back to the 50- and 200-day simple moving averages after hitting upside resistance at $8.75. Consolidation support also exists in the $8 range.
Risks to Consider: The company has recently been downgraded by BB&T Capital from a "buy" to a "hold." Although I don't put much faith in upgrades or downgrades, this company is taking heat from investors due to an annual loss. However, Great Lakes could be in line for a portion of the BP oil spill settlement work, which would help its bottom line tremendously. Always use stops and position size properly when investing.
Action to Take --> Despite the annual loss, I think this company is on an upswing due to the pending workload and its willingness to make positive changes in its money-losing demolition division. The price is sitting on support right now, setting up a solid technical buy opportunity. Buying now with stops at $7.75 and a six-month target price of $10 makes good technical sense.
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