Dawson Geophysical Company (DWSN)

TMFPlatoish (29.28) Submitted: 11/25/06 3:14 PM : Start Price: $31.37 DWSN Score: 90.36

This is my second go around on Dawson for CAPS. I probably would have been better never ending the first pick from a score point of view, but I did duck a 5-6% run-up in the S&P, so it may be a wash. I'm diving back in because their year-end conference call served to dial back some of my nagging concerns about the fortunes of this asset heavy company. I am now viewing the huge capital expenditures required in 2006 to be catch-up phenomenon and not indicative of the steady state. I think they took the opportunity to greatly expand capacity and at the same time upgrade to some higher quality equipment. This was in response to what they see as long term demand for their services.

Their capital budget for 2007 is far lower and more in-line with what you might expect for maintenance and a reasonable amount of upgrades. Dawson should achieve good levels of free cash flow over the next year. That was the piece that was missing from the puzzle for me. They are seeing some pricing power and bumping up rates. They are able to negotiate favorable contract terms in areas such as bad weather protection because their customers want the high quality of results that Dawson is known for. There are some potential growth catalysts such as the work with Western Geco, which I'm not putting much weight on, but which could evolve into significant business down the road.

Dawson looks like a nice small cap, medium growth story in a strong services niche which should be in demand for quite some time. Their management team is quite transparent, continually learns how to tell the investment community what it needs to know, takes the needs of their customers quite seriously, and is truly invested in their employees. They should outperform the market going forward.

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