Back in early 2010, I started writing for Complete Growth Investor with my first article highlighting Bolt Technology (BOLT). Here is the link to the original BOLT analysis that started my investment in the company.
Bringing you up to date, I sold my entire position back in April of 2011, and while I wait for BOLT to fall back into the $10 – $11 range, here is an updated version of the investment thesis.
Focus on the business and value and you’ll realize what a gem of an opportunity BOLT could be, despite the small market cap.
The analysis will be broken up into two articles. The first part will focus on the business and the risks. The second part will look at various quantitative analyses and comparisons.
Who is Bolt and How do they Make Money?
Aside from some technical terms, BOLT is very easy to understand and has the aura of a typical Buffett company.
An overview of the business can be found in the 10-K or the website, but to briefly sum it up, the company is broken down into three operating units (now four); Bolt Technologies (BOLT), A-G Geophysical Products (AG), Real Time Systems (RTS), and the recently added Seabotix (SBX).
- BOLT develops and sells seismic air guns to the marine seismic industry.
- AG develops and sells underwater cables, connectors, hydrophones, and other seismic related parts and equipment, as well as BOLT air guns.
- RTS develops and sells air gun controllers / synchronizers, data loggers, and auxiliary equipment (think remote controls).
- SBX is the fourth operating unit and added in Jan 2011 via an acquisition. SBX is a manufacturer of underwater remotely operated robotic vehicles. With the acquisition being so recent, there isn’t enough information on Seabotix to get a full understanding of its operational impact on Bolt’s financial statement. Future quarterly reports should provide more specifics.
Oil and gas drilling is not an easy task, nor is it cheap. With BOLT’s lineup of high quality products, explorers and drillers are willing to pay for such devices to increase the success rate of their digs.
What are Seismic Air Guns and Why?
The main revenues come from air guns, so a brief understanding of how air guns work will help visualize the business, operations, industry, and potential.
The purpose of an air gun is to create a 3D or 4D image of the sea bed by firing acoustic waves.
The image below represents an excellent illustration of how the whole process works. An air gun is attached to the ship called a survey ship, and fires waves aimed at the sea bed. The waves are reflected from the contours of the sea and ocean bed to the hydrophones, which collects information on the path, distance, strength and anything else related to the reflected wave.
This information is then used to create 3D or 4D model images of the layers of the ocean floor such as the image below.
From this brief intro to air guns and how they operate, think back to the four operating segments of BOLT.
- BOLT = air guns
- AG = cables, connectors, seismic, and air gun accessories
- RTS = data gathering and controllers
- SBX = underwater remotely operated robotic vehicles
As you can see, all four operating segments are highly synergistic yet differentiated.
Bolt originally started with air guns and then AG was acquired in 1999, RTS in 2007 and SBX in 2011. BOLT acquired three companies in a span of 12 years. This is one clear indicator that management is extremely selective of choosing the best possible match for the company.
BOLT’s Current Situation
BOLT operates in a cyclical environment and is heavily dependent on oil prices and demand. To simplify things, when the cost of oil per barrel is high, exploration companies increase their spending on searching and drilling. When oil prices are low, exploration and drilling activities drop.
As long as oil prices remain above $80 per barrel, oil explorers will be able to produce profits from the oil they drill.
What are the Risks?
The fewer variables and risks you have to work with, the smaller the field of outcomes and the more likely the investment will work out successfully. Plus, it also makes the investment much simpler to understand. Understanding and conviction in your analysis are keys to capturing huge gains.
Getting back to the point, there are five risks outlined below, but I feel that the first four are the viable risks for BOLT. However, I don’t believe any of them to be the critical “don’t-touch-with-a-10-foot-pole-type” risk.
1. Highly dependent on oil and economy
The obvious risk is the cyclic nature of the industry. It’s a pyramid effect. Low oil prices mean, less demand in producing, less exploration and eventually less orders for oil discovery products.
2. Sales Dependent on Major Customers
In 2009, the majority of sales came from the following three customers
- Schlumberger Limited (SLB): 16%
- Compagnie Generale de Geophysique-Veritas (CGV) makes: 15%
- Petroleum Geo-Services: 9%
In 2010, the majority of sales came from the following three customers
- Compagnie Generale de Geophysique-Veritas: 23%
- Bureau of Geophysical Prospective, Inc. (China): 11%
- Schlumberger Limited: 7%
A single customer makes up quite a large percentage of sales. You certainly do not want to lose such a customer. However, judging by how the major customers change dramatically year over year, I don’t mind concluding that BOLT has a diverse customer base and is capable of replacing customers with new ones. Who knew that a Chinese entity could make up 11% of sales?
3. Revenues from foreign sales
Revenues from foreign sales make up 78% of revenue. This can affect profit due to currency exchange rates and with all the Euro worries going on at the moment, the dollar has been rising against the Euro which will erode profits.
4. Deepwater Horizon rig Explosion in the Gulf of Mexico
News of the Gulf oil spill is long gone, but there could be further regulation and restriction on offshore drilling which could affect the sales of BOLT products.
5. Current management team's ages
The management team at BOLT are at the senior stages of their lives and could possibly retire any minute. Raymond Soto, aged 71, is the chairman, president and CEO. Three of the five members of the executive team, including Soto, are 68 and older, with the youngest being the vice president at 50 years old.
You could interpret this as a team that is very experienced and knowledgeable of the industry and business. Or if you are bearish, some have labeled this management as over the hill or senile. Seeing as how the company is rock solid, I’m going for experienced and shrewd.
If you look at Soto’s history, he has been CEO since 1990 but a director of the company since 1979. In total, he has been involved with the company for a mind boggling 32 years. The only way I can interpret this is that he has some serious passion for the job.
Awesome Niche Company
BOLT operates in a niche market where it is a leader. In the industry, its products are well known and as I go through a lot of the numbers in the following post, you’ll be able to get a better picture of how solid this company is and has been.