Digging for Success With Great Lakes Dredge & Dock
Some of the most interesting investment stories are often the most unglamorous. One good example is the dredging business.
Dredging is the evacuation of material from a water environment such as lakes, shorelines or canals. Possible reasons for dredging include improving existing water features, reshaping land and water features to alter drainage and commercial use, constructing dams, dikes and other controls for streams and shorelines and recovering valuable mineral deposits or marine life having commercial value. Typically, the excavation is undertaken by a specialist floating boat, known as a dredger. Dredging is a four-part process involving loosening the material, bringing the material to the surface, transportation and disposal.
The industry leader in this field is Great Lakes Dredge & Dock Corp. (NASDAQ:GLDD), which owns the largest and most diverse fleet in the U.S. dredging industry. The company utilizes experienced civil, ocean and mechanical engineering staff in estimating, production and project management functions. In 2021, Great Lakes formed an offshore wind division, which has become a strategic growth area for the company.
Founded in 1890, the company currently has a market capitalization of $505 million.
Fleet review
The companys fleet, which includes 17 dredges, 17 material transportation barges, one drillboat and numerous other support vessels, is believed to be the largest and most diverse fleet of any U.S. dredging company. Dredge ship types include hopper, mechanical and hydraulic.
The fleet of dredging equipment can be utilized on one or many types of work and in various geographic locations. Great Lakes' flexible approach to fleet utilization, which is driven by the project scope and equipment, enables it to move equipment rapidly in response to changes in demand for dredging services to take advantage of the most economically attractive opportunities. The companys fleet value was carried on the balance sheet at approximately $1 billion on a gross basis (before depreciation).
Financial review
2022 was a disaster year for the company financially as it was hit with a perfect storm of problems. Issues included the bond market declining in the first half of the year, high inflation, supply chain disruptions, difficult on-site conditions and an unusual amount of delays from hurricanes and poor weather conditions.
These problems hampered revenue growth and crushed margins. Revenue declined 10.8% to $648.8 million from $726.1 million in the prior-year period. The gross profit for the year was $31.2 million, a decrease of $114.1 million from 2021. The gross margin decreased to 4.8% for the full year compared to 20% for 2021 due to the items mentioned above. In addition, the slow bid market during the year left the company with some idle space on utilization and it proactively used the down time to perform preventive maintenance on the dredges. The operating loss for the full year was $27.7 million compared to $84.4 million of operating income in the prior year.
As of March 31, the company had $32.5 million in cash and cash equivalents and total debt of $371.7 million. Availability under its revolving credit facility was $195.7 million with $50 million of draws outstanding at the end of the quarter. At the end of the first quarter, the company had $327.1 million in dredging backlog as compared to $377.1 million on Dec. 31, 2022. Low bids and options pending award totaled $516.9 million.
Valuation
The company is still in recovery mode in 2023 and earnings are expected to be approximately breakeven this year. Revenue is expected to increase slightly to $655 million according to analyst estimates.
The GuruFocus discounted cash flow calculator generates a value of $11 when using normalized forward earnings estimates of 63 cents per share in 2024. This incorporates a 10% long-term growth rate.
There is one analyst that covers the company with a $10 price target.
Guru trades
A guru who has purchased the stock recently is Caxton Associates (Trades, Portfolio). Investors who have reduced or sold out of their positions include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Paul Tudor Jones (Trades, Portfolio).
Summary
Although the company has faced difficult times recently, it appears things are beginning to turn around. There appears to be record funding for the U.S. Army Corps of Engineers budget, which is approximately $8.7 billion for 2023, of which $2.3 billion is allocated towards maintenance and modernization of the domestic waterways. For the first five months of 2023, the bid market size was over 2.5 times that of the prior year period. For fiscal year 2024, the proposed budget is also large and in the $7.4 billion range.
Another important growth area for the company is offshore wind power, in which the company provides installation services for wind turbines. The goal is to install 30 gigawatts of offshore wind power by 2030. This typically involves the company laying subsea rock installations. This is expected to be a profitable growth engine for the company.
Although the company has not yet returned to traditional margin levels, the current backlog and bid market should provide profitable growth in coming years and makes Great Lakes an interesting long-term value investment.
This article first appeared on GuruFocus.
