Layne Christensen: Stretched Valuation

Layne Christensen (LAYN), a water-infrastructure construction firm, beat earnings, announcing 2nd quarter earnings per share of 23 cents, 9 cents ahead of expectations. The company looks extremely pricey, though, and I can't even "back into" an earnings scenario that justifies the current share price. I think short-covering, rather than new investor interest, is responsible for the 11% lift in the shares Thursday.

The good and the bad, from the release:

"Activity levels in the second quarter were up across all our business segments from the extremely depressed first quarter levels. In our water infrastructure division, the more infrastructure intensive pipeline construction product line was actually up over the prior year's second quarter. I believe this is quite a feat in today's economy. The weak earnings comparison to the prior year in our water infrastructure division is coming from Layne's traditional water business where demand for additional water supply, outside of a few drought stricken markets, is still weak. At this point, across all our divisions, it does not appear we will see much appreciable change in activity in the current market environment, but we do appear to be off the bottom for now." -- Andrew B. Schmitt, President and Chief Executive Officer

So business is bottoming and they're off the low. The current EPS (earnings per share) estimate for 2009 is 48 cents, so let's be very aggressive and say that with this 9 cent beat and an increase in the next two quarters they earn a dollar a share this year, and take next year's EPS to 1.75 (versus 95 cents where it is now). Why be aggressive with these estimates? Because like I'd be conservative and err on the downside for earnings on a long bet, with a potential short/sell I'd rather give them upside benefit of the doubt and see if it's still not a good value.

$1.75 in earnings next year means $34 million in net income, and certainly less in Free Cash Flow (capital expenditures have been persistently high, and won't come down enough). So maybe $20-25million in Free Cash Flow in 2010 is a 5% FCFY (Free Cash Flow Yield) based on (net-of-cash) the current market value, a much lower yield than this risky company should have. And again, this is with me using much higher estimates than the street.

Below is some more previous operating data. The stock is expensive now, and I can't even stomach how anyone bought shares near $60... I think part of the reason stocks like this get high valuations (at least temporarily) is the "story" nature of owning the "water infrastructure rebuilding" concept, which people think will be so big in the future. It may, but fundamentals like reasonable valuation still matter.

Disclosure: No position

Comments

[redbaron:]

LAYN is not only Water Infrastructure, as that is only one of four parts to the story. Two of the other three are, 1) energy exploration work done for drillers, and, 2) mineral exploration work, done for miners and mineral producers of various kinds, and those two would seem to have very good outlooks for the future. (The fourth 'leg' is landfill water monitoring wells, drilled for waste disposal companies.)

If we contine to see energy and mineral prices recover, and if we work back up towards the same 'Peak Oil', 'Drill, Drill, Drill', scenario that we had just last year, as we may be doing currently, I for one could see this stock work up some more from where it is currently. It is, afterall, still less than half of last years old highs.

Sep 05 10:12 PM

[long_on_oil:]

When LAYN was in the $40's the forward pe was only 8. As far as LAYN's current price, just go back and look at any oil or mineral related stocks and they are all off their highs about the same amount as LAYN. Just look at the run this company had from Dec 2000 thru Nov 2007. This run will be continued again only this time the run starts in april 2009.
Mineral exploration will pick up as the world adds more people which will require more copper, lead etc. Water infrastructure will be huge because all our big cities will need these services.
The diversification of this company is what makes it great. Natural gas, mineral exploration, water plants and infrastructure.
The shorts did have their day after the panic due to the last earnings report but IMO if you sell this stock now you will regret it a year from now and 5 years from now you will really be kicking yourself.
With the problems China is having with their fresh water LAYNs future looks great.

Sep 06 10:06 AM

[redbaron:]

LAYN was at 28.50 when this was written on 9/5, and today, 9/11, it is currently trading at 32.83, or another 15% above where it was when the author wrote this article, just a week ago. Of course, oil and natural gas continue to go up as well, and I would think that there is more correlation there than what the author could see.

Sep 11 12:17 PM