Uncertainty regarding future revenue and profitability levels is scaring away investors, resulting in a deflated stock price, which is now trading below book value. As much as there are concerns and risks, there is at least as much opportunity, since many of the markets in which the company operates in are enjoying tailwinds. The company survived a disastrous 2011 and 2012, and has been improving its cost structure since. It is conservatively capitalized, and being run by capable management with industry experience and a long tenure. Valuation alone is a catalyst by itself, yet the company may benefit as well from being either an activist target or an M&A target.
Orion Marine Group (NYSE:ORN) is a marine constructor serving the marine infrastructure industry. It was founded in 1994 and IPOed in 2007. It employs 1200 people and operates in the U.S., Canada and the Caribbean Basin.
Ticker | ORN | Market Cap ($M) | $204 |
Company | Orion Marine Group | Enterprise Value ($M) | $202 |
Price | $7.41 | Short % of Float | 3.10% |
Exchange | NYSE | Average Volume (3m) | 128,449 |
Sector | Industrials | 52-wk Range | $6.71 - $12.10 |
Industry | Engineering & Construction | Institutional Ownership % | 91.00% |
Employees | 1,200 | Dividend Yield | 0.00% |
Orion operates and provides services in the following areas:
Marine Construction Services - construction, restoration, maintenance and repair of public port facilities for container ship loading and unloading; cruise ship port facilities; private terminals; Navy terminals; marinas and docks for yachts; underwater buried pipeline transmission lines; overwater bridges and causeways.
Dredging services - removal or replenishment of soil, sand or rock from waterways. Dredging provides recurrent revenues as it has to be done periodically in order to preserve and protect waterways.
Specialty services - mainly diving services to perform inspections, salvage, pile restoration, and encapsulation.
Orion's customers are categorized into the Federal, State, Local and Public sectors. Orion serves the U.S. Marine Transportation System ("MTS") in designing, dredging and constructing waterways. It serves the recreational waterside industry in building ports for cruises such as the ones in Miami, Tampa, New Orleans, Seattle, the Caribbean Basin, and others. It serves the U.S. Navy and U.S. Coast Guard in building marine facilities. It is involved in coastal restoration, environmental preservation and hurricane restoration and repair. In the private sector, it mostly serve the energy sector in building underwater pipelines and other near shore oil and gas infrastructure.
In 2014, the private sector was responsible for over half of its revenues, as depicted in the following table:
(source: 2014 10-K)
This is a significant change from the mix just a few years back, when in 2011 76% of revenues were generated from the public sectors:
(source: 2011 10-K)
Nevertheless, as seen in the tables above, diversification between the public and private sectors did not help revenues from fluctuating heavily.
Prior to 2011, revenues, EBITDA and net income grew steadily and steeply, as described in the company presentation below, dating November 15th, 2011.
(source: company presentation, November 15th, 2011)
While revenues grew steadily from 2006 through 2010 to $353M, 2011 was a disastrous year, with revenues falling 17% to a mere $293M. During 2011 the company suffered a severe revenue drop in the federal sector, mainly due to failures in the government budgeting process (widely known as the events around the fiscal cliff). Federal orders never recovered since. Moreover, the public sector postponed capital infrastructure projects, resulting in a 50% drop in orders. The public sector's revenues have recovered since and grew to become the largest source of revenues.
Not surprisingly, the stock price suffered as the steady growth of 2006-2010 had stopped and reversed, with shares trading below book for most of 2011 and 2012.
(source: stockrover.com)
The company responded in cutting costs and strengthening its balance sheet, eventually surviving the turmoil. In the 2011 Q3 press release, CEO Michael Pearson described his view of the situation and the measures that the company has taken:
We continue to be frustrated with our current situation and the ongoing economic and political uncertainties that have impacted our business. However, we remain focused on protecting the intrinsic value of the Company by controlling overhead costs and bidding responsibly. To do this, we have taken steps to right size the Company to meet current market activity levels. During the year, we began implementing several cost containment programs. These programs focus on controlling costs associated with idle crews, non-essential repairs and overhead costs. By doing this, we should be able to contain our non-direct job costs. As we have said before, our goal is to right-size our cost structure, facilities, and overhead to weather this storm while producing profitable quarterly results...The need for our services has not gone away. In fact, we believe we are seeing an increase in the demand for our services over the long-term...Likewise, we continue to experience a high level of bid activity...The third quarter was tough but there are some positive things going on, too. During the quarter we saw backlog grow sequentially, maintained a solid cash position and continued implementing our cost containment programs.
As of writing (July 2015), revenues have largely recovered, margins and profitability are making their way back, and the outlook is much better. While Orion Marine Group does not provide a quantitative guidance, management is sharing in length their optimism for the positive future prospects of the company, given their perception of tailwinds being experienced in several markets they serve. Those tailwinds and opportunities are listed below.
The expansion of the Panama canal, scheduled to complete in 2016, is perceived as a huge opportunity. It will result in large Post-Panamax vessels reaching U.S. south and east coast ports. Those ports are bidding to expand their infrastructure to serve such large vessels. The company is seeing as much as $10 billion in planned port expansions over the next ten years. I believe that much of the increase in revenues from the local sector in the last two years (see table above) can be attributed to this factor. CEO Mark Stauffer, appointed in 2014, stated in a recent conference call:
Local port authorities should also continue to provide a steady source of bid opportunities as they undertake capital expansion plans in anticipation of larger ships and increased cargo volumes, primarily due to Panama Canal expansion. Currently, there is over $10 billion of planned port expansion in our market areas over the next 10 years. This level of activity will be a driver of opportunities for deepening projects, infrastructure improvements and associated maintenance services.
The Water Resources Reform & Development Act (WRRDA), which was passed into a law, is expected to be a catalyst for increasing funding for renewing and expanding waterway infrastructure.
Restoration projects following the 2010 oil spill in the Gulf of Mexico are expected to provide opportunities.
U.S. over-water bridges are aging, and eventually the federal government will allocate the funding to repair, maintain and improve them.
Better competitiveness in the private sector following the company's recent purchase of the DMPA (Dredged Material Placement Areas) of Houston.
Maybe the most interesting and counterintuitive tailwind is within the private energy sector. Albeit the brutal decline in oil prices and the decline in North America E&P activity, the company is still seeing strong demand for infrastructure projects. Indications for this strength can be depicted from the revenue tables, as well as from the positive commentary in the latest three conference calls. An excerpt from Q1'15 conference call follows to attest to this strength:
Veny Aleksandrov - FIG Partners
My first question is on your outlook and on the energy related customers. You are very upbeat about the demand that's about to come from these kind of customers, but the energy sector has been under pressure. Apparently you don't see that pressure. Can you talk a little bit more about it?
Mark Stauffer
Yes. Well there is a lot of infrastructure related projects. We're obviously well aware of what the price of oil has been doing, but we continue to see a lot of activity domestically in terms of the whole energy revolution that's going on here domestically. Certainly, we could in the long term be impacted by macroeconomic conditions, but right now what we're seeing is -- we continue to see opportunities. This stuff is being produced. It has to go somewhere. There is the whole infrastructure related efforts that are ongoing. And so we expect to continue to see these opportunities for the foreseeable future.
Orion is led by capable and committed management. Mark Stauffer, who has served as the company's CFO since 1999, has succeeded Michael Pearson as the CEO (and president), effective January 2015. Mr. Stauffer has 29 experience in the marine industry, and has been with Orion through the many peaks and troughs.
Recently, I started referring to ISS Quickscore as a tool to assess corporate governance practices. Those readers who are not familiar with this wonderful free tool, are advised to follow the link above and read the detailed documentation. It's the quickest way to get a glimpse on the quality the corporate governance practices a company is employing.
The score for Orion is solid. It has good compensation practices (a lower score is better), good audit and risk oversight and a fair board structure. The only bad score is related to takeover defenses, which is common for micro-caps.
Valuation
Ticker | ORN | Price / Book | 0.9 |
Price | $7.42 | 5-Year Price / Book Range | 0.6 - 1.7 |
5-Year Price Range | $5.18 - $15.88 | Price / Sales | 0.5 |
Market Cap ($M) | $205 | 5-Year Price / Sales Range | 0.4 - 1.3 |
EV / Sales | 0.5 | Price / Cash Flow | 19 |
EV / EBITDA | 6.1 | 5-Year Price / Cash Flow Range | 4.8 - 85.2 |
Price / Earnings | 30.3 | ||
Price / Earnings Adjusted | 30.6 | ||
5-Year Price / Earnings Range | 13.0 - | ||
EPS | $0.25 | ||
EPS Next-Year (Est.) | $0.45 |
Orion's revenues and margins are difficult to predict, as they depend largely on unpredictable (or hard to predict, at least by the author) government spending, and on the jittery energy sector. It's no wonder that the company does not provide quantitative revenue guidance. Attempting to assess the value of Orion, I matched the Price to Book ratio to the level of profitability in a given period. The reasons for choosing P/B ratio was two-fold:
While revenues and earnings fluctuate heavily, Equity book value was steady at $220M - $237M during the last four years.
The business operates in a capital intensive industry. It has large PP&E investments in the forms of heavy machinery. The economics of the business are relatively coupled with the value of those assets.
I extracted some margins and profitability measures:
(source: stockrover.com)
Looking at the price chart, one can see that when margins and profitability were high, for example during 2007-2010 (excluding the trough of the big recession in Q4'08 and Q1'09), P/B was above 2x, even reaching 4x at some point in 2009. The company was trading around 1x P/B only during the disastrous 2011 and 2012, when it was losing money and surrounded by pessimism. The company is marching back into the black since 2013, and have generated a respectable 8.5% EBITDA margin in 2014. While management is seeing tailwinds and large opportunities, as discussed above, the P/B is failing to reflect that. It has yet again fallen below 1x, now trading at 0.9x, as if the company is non-profitable and bound to stay so in the foreseeable future.
I believe that the market is giving too much weight to the bad short-term news provided in the Q1'15 conference call, and too little weight to the long term potential. In the Q1'15 conference call, the company reported that it anticipates lower margins in Q2'15, due to temporary reasons.
some near term challenges in regard to utilization in the second quarter as a result of slower lettings from the Corps of Engineers and the timing of anticipated awards for work floated that we now expect to begin in the second half of 2015.
As a result we will have gaps between projects during the second quarter, which will pressure Q2 margins. However, we believe this is a timing issue and we remain excited about our opportunities for growth.
Specifically, we anticipate to see the majority of the delayed opportunities from the core to be led in our third quarter, which should bode well for the remainder of the year.
Adopting a longer term view, I like the following characteristics of Orion Marine Group:
Moat - The company operates in an capital intensive industry which requires high specialization, resulting in high barriers to entry.
Dredging is a periodical activity, resulting in recurring revenues.
The company focuses on asset utilization, and has shown good results in this front in 2014 and Q1'15.
The company still sees good demand in the energy sector, despite the prolonging low oil prices.
Port expansions related to the Panama canal widening project is a huge opportunity.
The company is seeing increased international activity, especially in the Caribbean Basin, constituting 12.9%, 8.5%, 4.1% of revenues in 2014, 2013, 2012, respectively.
More than half of the PP&E has already depreciated. The company also sold under-utilized equipment in 2013. It is more likely than not that the book value of PP&E does not overestimate the fair value of those assets.
The capital structure is conservative. CEO Stauffer says he is comfortable with 2.5-3 times EBITDA, while the company currently carries only $33M, which is around 1x EBITDA. When Orion re-stabilizes its profitability, increasing debt levels may result in increased profitability.
The company has a share repurchase program in place, and already bought $2.1M worth of shares this year.
Nevertheless, at such a compelling valuation, one cannot expect that there wouldn't be anything to dislike:
I do think that the company should exercise increased transparency in its reporting and report earnings in more than a single segment.
I am uncomfortable with the transactional nature of most of its projects.
I am uneasy with the lumpiness of revenues, and the concentration and reliance in few large customers in the public sectors.
With shares trading below 1x P/B, more or less approaching liquidation value, I believe that most or all of the problems and concerns are already priced in. Surely, shares may trade lower. The lowest valuation they traded in was as low as 0.65x P/B, 28% lower than today's level, in the midst of the 2011 crisis. But back then - the company was not profitable, had a higher cost structure, and could see only a dire outlook.
Examining another metric, EV/sales, shares trade today at only 0.5x (compared to a history of 0.6x to 1.6x since 2007), while analysts expect sales to only grow from here.
Summary
Where there is uncertainty, a value investor sees opportunity. There are multiple ways to make money in this situation. Given the low valuation and limited downside, should margins and revenue growth continue to improve, re-rating may take shares up 50%, 100% or more. In addition, a catalyst may form if Arnold van der Berg, a 8.2% owner of the company takes an activist approach, as he has done in some of his other holdings. In addition, with its healthy balance sheet, low insider ownership, and low price, the company may be a target for M&A activity. Walter Schloss is attributed with the saying: "if you protect the downside, the upside will take care of itself". It is the author's belief that Orion Marine Group fits that bill.
