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I first learned of Orion Marine Group (NYSE:ORN) in late 2009, when it was featured in a Forbes cover story regarding the 200 best small companies.


If you read it, I think you will quickly understand why the company is of great interest. I had the opportunity to meet with management in May, and I liked what I heard but was surprised by how poorly the stock had performed over the previous six months. I ended up adding it to the Top 20 Model Portfolio in June, and it has proceeded to move to a new 52-week low. I ordinarily am wary of stocks acting like this, but I am a huge sucker for a great story. If you want to hear that one-word theme, listen to David Lee Roth. If not, I will share it: Panama.

The Panama Canal is being widened over the next four years, and the project will have a major impact on shipping in the United States. In a nutshell, other ports will gain at the expense of Long Beach. But, for this to happen, they will have to invest in widening so that they can accomodate the larger ships. For a great read, real estate firm Jones Lang LaSalle highlighted how much spending they will do on page 8 of their Summer 2010 Port, Airport and Global Infrastructure Outlook. They state:

According to the American Association of Port Authorities, U.S. ports have invested more than $34 billion since 1945 in capital projects to enhance their facilities. By our estimates, the top 13 ports alone will pour nearly a quarter of that amount, roughly $8.5 billion, into container terminal and harbor dredging projects over the next five years. This ratio clearly demonstrates the efforts underway to ensure that our ports remain competitive and efficient in their quest for global market share.

When I reviewed the company's investor presentation that listed 10 different drivers for the company, which all seemed compelling to me, the first one, as described above, stood out as being so important that nothing else really mattered. ORN is the number three player in the industry, with two private companies ahead of them and a highly fragmented industry behind them. In fact, ORN was able to complete a significant acquisition earlier this year as an example of the consolidation potential that exists. Quite simply, these are family businesses that aren't that attractive to the next generation.

I shared a presentation with my institutional clients earlier this month that summarizes many of the investment issues, and you can download it here: Download Orion Marine (ORN) 7-2-10. The price hasn't budged since then, which is actually a bit disappointing given the recent resurgence in the market. I view the stock as consolidating a huge move off the lows in late 2008 - it has definitely marched to a different beat than the tenor of the market.

If you don't care to read the more detailed analysis, the key points beyond the secular driver are that the company has a strong balance sheet (cash no debt), high barriers to entry, and a very low valuation (10 PE). As I mentioned, the stock is now in the Top 20 Model Porfolio, and I am looking to add potentially after they report their second quarter absent anything that would more than justify the horrible price action lately. My current price target, based upon achieving a PE of just 14 a year from now (on current consensus and assuming 15% growth in the first half of 2012) is 21, representing a potential 60% improvement.

Disclosure: Long ORN in Top 20 Model Portfolio