ION Geophysical Corporation (IO)

RudolphsChoice (90.04) Submitted: 6/3/2008 11:52:47 PM : Start Price: $14.99 IO Score: -50.67

I’ve never written a full evaluation of a company before so I decided to give it a go while I have some time off of work. I have to admit that I received the stock idea from Smartmoney’s year end magazine but I truly do take stock suggestions with a grain of salt and try to analyze and do my own homework. Anyhow, Ion Geophysical (Symbol: IO), a technology company listed in the scientific and technical instruments sub sector. The company deals with using seismic waves in its services to the energy industry. It is very valuable at this time when companies, most specifically big oil companies, are searching for more oil for bigger profits. In the most recent quarter, the company beat earnings estimates by $.04 cents, posting $.08 per share. That came on 140.2 MM of revenue and was very good for a historically weak quarter.
Looking ahead, which is the part I want to get to, I believe the company will post basic and diluted earnings of $.17 and $.16 respectively. I will get to the reason that is in a second, but it’s important because it will beat Wall Street estimates.
So here is the analysis: Wall Street is expecting between 178-180MM in revenue so I took the 179MM as the average. Cost of goods sold has steadily been decreasing over the last 3 quarters from 70.18% to 67.65% to 65.48% in the recent quarter. To play it on the safe side (which I do throughout the analysis) I took 65% giving the company a gross profit of $62.65 MM. SG&A over the last 5 quarters has an average of 14.12% but increasing every quarter (with 18.5% in the recent quarter) and so I will take 15% (they also said that last quarter there was more SG&A because of initial openings of foreign relationships). Same idea for R&D with an average of 7.5% of revenue and most recently 8.6%. I took the 7.5% average because they said R&D last quarter was going to be the higher because of final touches to their new system they are putting out in Q3. After an income tax rate of 20% (also based on last 5 quarters average) we have a net income of $17.87 MM. With an increase in basic and diluted outstanding shares year over year, we arrive at our $.17 EPS basic and $.165 diluted. Adding the new quarter EPS to the last 3 and multiplying it by the current P/E ratio, we get a price of 17.42. This shows prior to next quarter’s earnings, there is a $1.22 difference with a 7.5% return. The year will continue to get better through its later and historically better quarters. I fully expect the company to be on the high end or beat year end Wall Street earnings. This could be a $20+ stock by years end giving you a close to 25% return in a great industry. I invested and will holding on for the ride.