Great Lakes Dredge & Dock: 'Quality, Comfort, And Price... That's Nice'

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George Fisher
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Summary

  • Great Lakes Dredge & Dock offers a unique and essential service, is supported by strong US Corps of Engineers investments in its services, and is valued priced.
  • In early 2020, management laid out their corporate priorities, and they have been executing well on these 4 corporate goals.
  • Trading at a forward PE of 14, most investors should agree GLDD is not overly valued in a stock market filled with extremely high valuation alternatives.
  • Great Lakes Dredge & Dock is mainly a harbor, ocean-going waterways and passageways, and beach restoration firm with a 37% market share.

Dredger near Archachon in France

alainfinger/iStock via Getty Images

From 1994 to 2014, "Quality, Comfort, And Price…That's Nice" was the quintessentially New England commercial jingle, advertising Bernie and Phil's Furniture stores. In the NE Jingle Wars, this phrase dueled with its regional archrival Jorden's Furniture's "Everyday Underpricing", and interestingly Jorden's was purchased by Berkshire Hathaway (BRK.B) in 1999. The jingle also describes an interesting company often overlooked by many investors: Great Lakes Dredge & Dock (NASDAQ:GLDD). Great Lakes Dredge & Dock offers a unique and essential service, is supported by strong US Corps of Engineers investments in its services, and is valued priced, especially considering its substantial market share.

Background

Dredging is the seemingly simple process of moving the ocean's seabed from Point A to Point B. Dredging, however, is an essential process to counteract the natural movement of the seabed, disturbing navigable passages, harbors, and waterways. Beach erosion caused by increasingly stronger ocean storms, coupled with the natural migration of sand, negatively impacts most all coastlines. Increasing the size of navigable waterways to accommodate larger, deeper ocean-going ships, combined with export terminal expansion, adds ongoing opportunities for dredging companies. The explosion of offshore wind farms will require turbine tower seabed foundations and seabed projects to lay power cables to transformers on land.

There is a considerable need for dredging services. Most dredging projects fall into one of five generic project types: coastal capital improvements, coastal harbor and navigable channel maintenance, coastal protection and restoration, inland lakes and river projects, and international work. Great Lakes Dredge & Dock specializes in coastal and harbor projects, where it has built a dominant market position, both in market share and in specialized assets. GLDD targets mostly East Coast and Gulf of Mexico projects. Throughout the year, GLDD has performed major port deepening works in the ports of Portsmouth, Boston, Charleston, Jacksonville, Mobile, Sabine, Freeport and Corpus Christi.

Great Lakes Dredge & Dock is the largest provider of dredging services in the US. GLDD owns and operate the largest and most diverse dredging fleet comprised of over 200 specialized vessels. The type of vessel used on each project is based on the type of material to be dredged (soft mud, silt, dense sand or clay) and the purpose of the project (dredging with sea bottom material removed off site, i.e. creating a wider, deeper, channel, or dredging with material used to replenish beaches and barrier islands).

Business

The major funder of dredging services is the US Government, through the US Corps of Engineers (USCOE), who have been assigned as the overseers of US harbors, beaches, and navigable passageways infrastructure. In addition, many private new harbor terminal projects require additional dredging and will necessitate individual companies to hire dredging services. For example, new energy export facilities built around the Gulf for the shipments of crude oil and LNG usually require waterways to be expanded.

Funding by the USCOE is categorized by two methods: direct Congressional funding and Harbor Maintenance Trust Fund dispersals. The USCOE 2022 approved budget for was a record amount, in addition to funding provided by hurricane relief legislation and the recently passed infrastructure bill. The Harbor Maintenance Trust Fund (HMTF) for dredging is similar to the Highway Trust Fund designed for road construction. Funding for maintenance dredging comes from the Harbor Maintenance Tax levied on all imported waterborne cargo, with proceeds deposited into the Harbor Maintenance Trust Fund and appropriated by Congress. Over the past few decades, the HMTF has not spent all the taxes collected and had generated a balance of ~$10 billion. In 2020, Congress passed legislation that requires the HMTF to both spend all its annual collections and to work off the outstanding balance. Great Lakes Dredge & Dock President and CEO Lasse Petterson covered this topic quite succinctly in their recent quarterly conference call:

We saw continued support for much needed infrastructure projects and the dredging industry in the Corps 2022 budget that was approved by the House of Representative at a record $8.66 billion, an increase of 11% over the prior year's level. In the Corps budget, the Harbor Maintenance Trust Fund would receive $2.05 billion, which is $370 million over the 2021 budget appropriation.

This allocation from the Harbor Maintenance Trust Fund is part of the Corps budget. The US government including the Corps are presently operating under a continuing resolution, with budget approval anticipated before the end of the first quarter of 2022. In September of 2021, our supplemental bill was passed that included approximately $5.7 billion for emergency funding as a result of Hurricane Ida's impacts. In addition, the Congress passed the $1.2 trillion infrastructure bill where the Corps will be granted $11.6 billion in funding to improve the nation's resilience to the effects of climate change, including flood control and waterway dredging. We'll see projects related to the infrastructure bill starting in 2023. Overall, increased funding will drive much needed infrastructure projects forward in the coming years.

Overall, funding for services provided by GLDD seems to have a bright and secure future.

Market Share

According to the latest investor presentation, Great Lakes Dredge & Dock believes they have a 37% market share of the US dredging market. However, that includes Inland and Rivers dredging work, which is a segment GLDD does not focus on - GLDD is mainly a harbor, ocean-going waterways and passageways, and beach restoration firm. It could be assumed GLDD has a substantial share of its focused market. GLDD revenues in the past 3 years have been between $711 million and $733 million out of an average 3-yr total domestic bid market of $1,800 million, including Inland and Rivers business.

During the most recent conference call, management announced a year-end 2021 order placed backlog of $552 million. In addition to awarded projects, GLDD ended the year with $567 million in low bids and options pending award, including a private project of $100-$150 million for a Gulf LNG terminal yet to be awarded. These are project GLDD believes they are the low bidder and am waiting for the award announcement. When awarded, these projects move from low bids to backlog.

Outlook

Last 3 years revenues have been at a plateau, but CFRA expects that to turn shortly. CFRA projects 2022 revenue at $752 million and 2023 at $840 million, up from $723 in 2021. Revenues and earnings were negatively affected by COViD expenses, coming in at $723 million and $0.75 per share in 2021. Earnings are expected to be in the $0.91 to $1.12 per share range over the next 2 years.

Of interest is the two new dredge ships Great Lakes Dredge & Dock has on order. Scheduled to be delivered in the first qtr. 2023 will be a new ~$100 million, mid-size 6,500 cubic-yard-capacity hopper dredge, adding to the existing fleet of 6 hopper ships. GLDD has an option for a sister ship, further adding to the company's mid-size hopper capacity. In late 2017, GLDD took delivery of the 15,000-cubic-yard-capacity Ellis Island, which is the largest capacity hopper vessel in the US. The new highly automated dredge addition will increase the capabilities of GLDD's hopper fleet used in coastal protection and maintenance markets, as well addressing specific needs in the growing offshore wind market.

In addition to the new hopper, Great Lakes Dredge & Dock announced it has contracted for the first Jones Act compliant subsea rock installation vessel. Costing almost $200 million, this specialized vessel will support the construction of offshore wind farms by focusing on providing underwater tower foundation work. The US government has a goal of installing upwards of 30 GW of offshore wind power generation by 2030. Using the recently approved Dominion Energy (D) 175-individual towers, 2.6 GW Coastal Virginia Offshore Wind as a yardstick, the number of individual offshore wind towers could exceed 2,000. Each tower requires a seabed foundation and a crane-type vessel to lift and install the tower and turbine on the foundation. Dominion has ordered a $500 million wind turbine installation vessel. Simplified, a Dominion-type vessel will install the tower on the seabed foundation work conducted by GLDD. GLDD's seabed foundation vessel should be delivered by the end of 2024.

Management

When investing in small cap stocks, it is important to feel comfortable with the management team piloting your investment. As described in my March 2021 article, Great Lakes Dredge & Dock: A 'Champagne And Reefer' GARP Selection GLDD replaced their management team in 2017, bringing in Mr. Lasse Petterson as President and CEO. From the article:

The current CEO, Lasse Petterson, was hired in May 2017 to manage the company after a few bad years and a restructuring program. Of interest to me is the experience and history Petterson brings to GLDD. Petterson was an Executive Vice President for Chicago Bridge and Iron (NYSE:CBI) from 2009 to 2013. While CBI fell on hard times several years after Petterson left, during his stay there, share prices skyrocketed from under $10 to over $60. I was a shareholder of CBI and thought the company did well with his involvement. I fully expect the same type of performance from GLDD over the next several years - but maybe just not a 6-bagger. Petterson seems to know his way around marine construction projects and contracts. My only concern is the fixed-price nature of GLDD's contracts, but with most being short-lived and relatively small, the risk of a few contracts going poorly should not sink the whole ship.

In early 2020, management laid out their corporate priorities, and these do not seem to have changed.

#1 - Refreshing the fleet

#2 - Getting into markets that are very close to what we do, like offshore wind

#3 - Acquisitions

#4 - Dividends and share buybacks

As shown over the past multiple quarters, management has been achieving its first two priorities by adding the mid-sized hopper dredge, with an option for a second, and is expanding into the wind farm seabed foundation business.

Overall, I still believe Great Lakes Dredge and Dock is an overlooked but essential infrastructure company with both growth/expansion opportunities and a substantial current market share. While revenue and profits seem to have stalled, the stage is set for another leg up in both. With over a $1 billion in backlog orders and low bids outstanding, GLDD should continue to steam ahead over the next few years. Personally, I am looking for a $16 to $19 price target over the next several years. In addition, I feel GLDD to be somewhat recession resistant as the natural movement of sand, clogging passageways and harbors, combined with beach erosion from more severe storms and sea level rise, are not economic growth or interest rate sensitive. Trading at a forward PE of 14, most investors should agree GLDD is not overly valued in a stock market filled with extremely high valuation alternatives.

Residing in my investment bucket titled "Bought Primarily for Capital Gains", I could describe Great Lakes Dredge & Dock attributes with the jingle "Quality, Comfort, And Price…That's Nice".

This article was written by

George Fisher profile picture
5.38K Followers
I am the author of Guiding Mast Investments monthly newsletter, focused on timely dividend paying stocks. Our mission at Guiding Mast Investments is to help investors keep a steady pace of wealth accumulation as they navigate through their financial voyage.  I have been a Registered Investment Advisor, financial author, and entrepreneur. I bring a variety of expertise to my clients, from personal investment planning and management to stock market analysis skills. I am the creator of the late 1990s investment newsletter Power Investing with DRIPs focused on timely selections of dividend paying stocks. I have also published two books through McGraw Hill, All About DRIPs and DSPs (2001), and The StreetSmart Guide to Overlooked Stocks (2002). My work experience covers a variety of fields.Prior to being a RIA, I spent 15 years as a corporate manager at Georgia-Pacific Corp before venturing out on my own, operating several businesses from manufacturing to export marketing management. President Ronald Reagan appointed me to the National Advisory Council overseeing the Small Business Administration from 1988 to 1991. Now comes the obligatory disclaimers: The opinions and any recommendations expressed in this commentary are those of the author . None of the information or opinions expressed in this article constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this commentary constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. The information contained in this report does not purport to be a complete description of the securities market, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Expressions of opinion are as of this date and subject to change without notice. Either Mr. Fisher or his employer, if any, may hold or control long or short positions in the securities or instruments mentioned.
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Disclosure: I/we have a beneficial long position in the shares of GLDD, D, BRK.B either through stock ownership, options, or other derivatives. 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.

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