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MMCapitalMgmt (99.75)

Turning the Tide(water)

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December 26, 2012 – Comments (0) | RELATED TICKERS: TDW , BAS , GLF

Tidewater, Inc. provides service and support for offshore energy companies, including operation of marine vessels, offshore exploration, towing and repositioning of offshore drilling units, construction, seismic support, ROV operations, pipe and cable laying, among many others.

The company was briefly analyzed in a recent Fool piece by Seth Jayson, featured here:

http://www.fool.com/investing/general/2012/12/24/heres-how-tidewater-may-be-failing-you.aspx

Mr. Jayson points out Tidewater’s lower margins, explaining they are currently lower than the five year average. However, he seems to ignore the actual trend, which includes a significant drop in 2010 and 2011, a stabilization (and even significant improvement in FY 2012) and continuing increase for the LTM through Sept 30, 2012.  Granted, Tidewater does, as Mr. Jayson exclaims, “[have] some work to do”. Clearly margins are still lower than their FY 2008 and FY 2009.

Lacking from Mr. Jayson’s post was context around the numbers. If you look at the period Tidewater reports its annual financials, it has been March 31st for the entirety of the 21st Century. This means, FY 2012 actually includes substantial results from three quarters of calendar year 2011 and only one quarter of calendar year 2012. As anyone knows, energy prices, and more specifically oil and gasoline prices, rose dramatically in 2007 and 2008. The chart below demonstrates this significant augmentation in price, a major factor in driving margins for companies that service the industry.

http://research.stlouisfed.org/fred2/graph/fredgraph.png?&id=OILPRICE&scale=Left&range=Custom&cosd=2005-01-01&coed=2012-11-01&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=a&fq=Monthly&fam=avg&fgst=lin&transformation=lin&vintage_date=2012-12-26&revision_date=2012-12-26

Another reason for margin declines is a vessel construction and acquisition program. About 1/3 of the total cost was already invested through 9/30/12, before any revenue was derived from the investments. After two acquisitions of vessels in October and the beginning of the arrival of newly constructed vessels in the same month (per the 9/30/12 10-K report), revenue and margins should be expected to pick up. According to management, “[the] delivery of the final newbuild vessel [is] expected in January 2015”, meaning the full benefits of this investment program will not be realized until fiscal year 2016. That does not mean investors won’t start seeing some of the benefits beforehand though. 

Tidewater’s LTM Revenue accounted for a 13.2% increase over the prior twelve months, while EBITDA increased 33% year-over-year (YOY). More importantly, EBTIDA margin for the LTM period stands at 28.1%, a 3.2% improvement over FY 2012’s margin. Tidewater is expected to grow its top line by over 15% each of the next two years and boost its EBITDA margins to 33.3% in FY 2014 and 35.7% by FY 2015, the Company’s highest margin since FY 2009 (and mostly calendar year 2008), according to consensus analyst estimates (Source: S&P CapIQ). There is plenty of reason for shareholder optimism as EPS are expected to grow from the present $2.79/share (LTM) to $4.78 in FY 2014 (remember, that is three quarters of 2013 and only the first quarter of 2014).

Unfortunately, the stock market continues to discount Tidewater’s growth, providing medium and long-term investors with plenty of potential gains over the next 2-3 calendar years.  Currently trading at a mere 16x LTM earnings and only 9.4x forward earnings, the stock indicates undervaluation. Adjusted for the strong growth rate for the top and bottom lines, Tidewater’s PEG reads only 0.255 (Source: CapIQ). Additionally, the Company is trading below book value.

From a risk standpoint, the company is less levered than its peers with debt, with a 35.3% debt-to-equity mix and 26.1% debt-to-total capital reading. The peer average is 63% and 34% for debt-to-equity and debt-to-total capital, respectively. Tidewater’s total debt/EBITDA has fallen to 2.7x, its EBITDA-to-Interest stands at 11.6x and both the current and quick ratio indicate plentiful liability, interest and debt coverage.  

 For investors exploring a solid medium or long-term investment and an employing a fundamental strategy, Tidewater is certainly a name to consider. 

 

 

 

Disclosure: MMCapitalMgmt holds zero positions in TDW and is unaware of any direct conflicts of interest between his fund holdings and the Company. 

 

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