Great Lakes Dredge And Dock: Wind In The Sails And Limited Downside

| About: Great Lakes (GLDD)

Great Lakes Dredge and Dock Corporation (NASDAQ:GLDD) operates in the construction industry, more specifically dredging and demolition services. The dredging industry is further divided into capital, beach nourishment, and maintenance segments. The capital segment involves deepening ports and land reclamation; beach nourishment is the creation and restoration of beaches; maintenance is the maintaining of current depths of waterways.

The company’s largest customers are various governments and government agencies, including the Army Corps of Engineers, 53.5% of 2010 revenues, and Bahrain, 8.1% of 2010 revenues. Last year dredging accounted for 89% of the company’s revenue. This analysis was conducted a few weeks ago, resulting in old numbers. But the thesis remains unchanged. I purchased this stock after completing this analysis.

Target Price: Estimated 2012 EPS is $0.56. Trading at an S&P average P/E of 13.5 values the stock at the end of 2012 at $&.58.

Thesis: The company, having shed its massive debt load, is positioned for massive growth with limited downside.

Downside Protection: The company is trading at 1.50 times tangible book value. (See the table below for the breakdown of tangible book value.)

The Fleet: The Company claims that the replacement value of its fleet and equipment is in excess of $1.5 billion, though it’s on the company’s books for only $309 million. Using public data, their fleet value is worth at least $353 million. This value excludes all other equipment, for which no information is given. The fleet value is calculated by regressing publicly available ship data concerning price, year built, and type-specific specifications. For example, hydraulic dredgers use a cutting tool that is measured by its diameter. Some ships and their characteristic are available on the company’s website. The average ages of each type of vessel are disclosed in the company’s most recent 10-K.

Limited Competitors: GLDD and the three other biggest competitors comprised 78% of the domestic bid market in the last three years. The Jones Act prohibits competition from foreign competitors in the domestic market. GLDD is the largest dredger eligible for U.S. dredging.

Growth Position: The company is positioned to exploit multiple economically linked revenue-drivers. Eleven percent of GLDD’s revenue is demolition-based. As the housing and construction market rebound, the demand for demolition services will increase. The new breed of cargo ships requires deeper ports. When shipping picks up with the economy, capital improvements on U.S. ports will be put out for bid. The company’s expansion to Brazil and India provides massive markets yet to be drilled by GLDD.

Change in Management: New management is focused on cutting cost and strategically shrinking fleet to decrease PP&E investment.

Catalyst: Analysts estimate that fiscal 2012 ESP will be $0.23 to $0.46. I predict 2012 EPS will be $.056.

Earnings: As stated above, I believe future EPS exceeds analysts’ expectations by a significant margin. Obtaining outstanding earnings will drive the stock price.

Construction: The construction segment has been struggling in recent quarters and hasn’t posted an operating profit. Only by listening to the conference can one find out that the current quarter loss is due to loss reserves taken in connection with three projects. Management believes, even with the half-year construction loss, that the construction business will be in the black for the year. A swing to profitability will positively impact the company’s stock price.

Increased Coverage: The company is only followed by four analysts, and these don’t actively cover the stock, evidenced by infrequent EPS estimate changes and analyst reports. As the company demonstrates its ability to grow, it will attract more coverage.

Spin-Off/Sale: Management stated that if the construction business doesn’t return to profitability, it will pursue selling the construction segment. This wouldn’t materially decrease synergistic cost savings, as there is little overlap in infrastructure. The sale would highlight the company’s core business.

Risk to Thesis: If the company doesn’t hit earnings estimates, their stock will be negatively impacted. This downside is limited by the company’s tangible book value, 67% of its current trading price. The construction division could continue to be a drag on GLDD’s earnings. Over half of the company’s revenue is from the Army Corps of Engineers; changes in government budgets could impact the Company; it is currently expanding into international markets to their dependence on the United States. GLDD’s success also depends on it winning bids out to market. It historically wins 40% of the bids out to market.

Disclosure: I am long GLDD.