Hornbeck: Another Undervalued Offshore Play

Apr.29.14 | About: Hornbeck Offshore (HOS)

Summary

After pulling back 25% to 35% from their highs late last year, myriad offshore plays look like they have bottomed.

Sentiment is improving on the sector, companies are reporting better-than-expected numbers and some are garnering analyst upgrades as well.

Hornbeck Offshore Services is another offshore play that seems to on the mend and is cheap based on its longer term growth prospects.

Readers that follow me on SeekingAlpha or Real Money know that I have turned increasingly bullish on the offshore drilling sector over the past few weeks. Most of the plays in the space posted losses ranging generally from 25% to 35% from their highs late last year due to concerns around overcapacity and declining day rates.

A lot of the stocks in the sector look like they have bottomed, numerous offshore plays like Diamond Offshore (DO) have reported better than expected numbers this quarter and some companies in the industry have even received analyst upgrades in recent weeks.

The sector represents my largest contrarian bet in the market right now. I added this morning to this allocation by picking up some shares of beaten down Hornbeck Offshore Services (NYSE:HOS).

Company Overview:

Hornbeck Offshore Services provides marine transportation services to exploration and production, oilfield service, offshore construction, and the United States military customers. The company has slowly but consistently added to its vessel fleet since the late 90s. New vessel growth tends to come in fits & starts but overall growth has been impressive (See Chart).

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Earnings Trajectory:

One of the biggest positives in the Hornbeck story is the predicted earnings trajectory of the company. Hornbeck posted earnings of just over $2.40 a share in FY2013. The current consensus calls for the company to deliver earnings of ~$3.20 a share this year and over $4.80 a share in FY2015.

Revenue Growth & Valuation:

Driven by new vessels coming online as well as hopefully a better pricing environment, revenue growth should come in between 20% to 30% annually for both FY2014 & FY2015. The stock has a minuscule five year projected PEG (.23). The shares go for just 8.5x FY2015 projected EPS.

Analyst Commentary:

The twelve analysts that cover the shares have a median price target of $57 a share on HOS, ~40% above Hornbeck's current stock price. Wunderlich upgraded its rating on Hornbeck from "Hold" to "Buy" this morning. Wunderlich's analyst also raised his price target from $47 a share to $55 a share. The analyst also believes Hornbeck could book up to $9 a share in free cash flow in FY2015.

Outlook:

I firmly believe that the sentiment in offshore plays is starting to turn. I am also encouraged by the recent upgrade on these shares by Wunderlich as well as a strong earnings trajectory over the next couple of years. The shares have declined almost a third from their recent highs in the fourth quarter of 2013. The stock also looks like it has consolidated and formed a bottom at levels just below the current share price. I think the current price level offers a good entry for patient contrarian investors. BUY

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Disclosure: I am long HOS. 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.