Geospace Technologies (NASDAQ:GEOS) is an oil services company that designs and manufactures equipment used to explore and monitor oil and gas reservoirs, including underwater sensors and wireless seismic data acquisition systems. The company has a strong history of earnings growth, with annualized earnings growth of over 75% in the past 5 years.
However, the stock price has pulled back dramatically lately amidst concerns that this growth could be slowing. One of the main concerns is the wind-down of a lucrative permanent reservoir monitoring contract with the Norwegian government-controlled entity Statoil (NYSE:STO). This contract made up a sizable portion of its revenue in the last quarter, $28 million worth of the just over $100 million generated in the first quarter.
This contribution is expected to decrease to $25 million in the second quarter, with a remainder of $6 million being realized in the third quarter. Obviously, the loss of a quarter of its revenue in subsequent quarters is somewhat worrisome, and this fear was compounded when Geospace disclosed a possible loss of funding for another order that was expected in the third quarter, this one worth almost $30 million.
This contract called for the installation of over 2,300 stations of Geospace OBX Ocean Bottom Recorders, but the ordering company, Seafloor Geophysical Solutions, notified Geospace that some of its previous capital commitments had been withdrawn. However, it should be noted that the contract has not been cancelled at this time, as SGS is seeking new investors, and this might just result in a postponement of the contract beyond the third quarter when it was originally expected.
However, the market immediately discounted the news into the stock price, sending it down over 15% in the following days. This seems overblown, to have lopped off over one hundred million in market cap over a lone $30 million contract that may not have even been cancelled, but merely delayed.
At the recent price in the low 60s, Geospace's stock offers enticing value. Even after earnings estimates have been ratcheted down lately, GEOS trades at under 12 times expected 2014 earnings, and just over 10 times estimated 2015 earnings. Given the company's history of exceeding earnings expectations, this seems much too cheap for a company that is still growing revenues and earnings at such a high rate.
While earnings growth may take a breather this year due to the expiration of the massive Statoil contract, they are still expected to average 37% annual growth over the next 5 years. Even growth of just half this would be good for a miniscule PEG ratio of 0.65. The shares are currently being priced like they'll never be able to replace this revenue, even though the company's products and services are still in high demand. Management is optimistic they'll be able to continue their impressive organic growth, adding manufacturing capacity through expansion of some of their facilities.
These plants, along with an associated increase in R&D spending and personnel, should help Geospace continue to develop innovative products like its wireless data acquisition systems, now available for marine applications as well as land-based systems. This technological advancement allows end users to avoid having to run cumbersome cable through the harsh environments where oil reserves are often located, as well as eliminate data interruption or loss of fidelity due to damaged connections.
Geospace is the leader in this burgeoning field, outselling all of its competitors' products combined in this area, according to its website. The continued acceptance by oil and gas companies of the convenience and performance offered by this technology should help continue to drive sales, as evidenced by management's mention of increased customer interest in the Q&A portion of the last conference call.
Continued demand from more customers for these new products could help smooth out the revenue picture, which has traditionally relied on large orders or contracts. While the company's earnings will probably continue to be fairly lumpy, as they have historically been, Geospace Technologies offers value-added products and services to an industry that should continue to provide attractive growth.
Growth and value investors should be intrigued by the potential the company's shares currently offer, based on both its historic performance as well as the enticing prospect of future growth through innovation. Opportunistic buyers should explore this desirable business that is now available at a compelling price, and continue to monitor the continued earnings growth that the company will likely achieve.
Disclosure: I am long GEOS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.