Tom Konrad, CFA
Great Lakes Dredge and Dock is curiously in the center of a many emerging trends, some of which are not yet being talked about.
I’ve been watching Great Lakes Dredge and Dock (GLDD)
for a few months as a possible alternative transportation stock to talk about for my Best Peak Oil Investments series. My thinking goes like this: barge and river transport are two of the most fuel efficient ways to move bulk cargo. Barges are even more energy efficient than rail freight for most uses, according to the Congressional Budget Office.
One barge company I watch is Trinity Industries (TRN) which also manufactures and leases rail cars, as well as building wind towers. I profiled Trinity in 2008. While not extremely overvalued at current prices, Trinity is not a bargain at the recent price of $21.60, so I’ve had my eye out for other companies that might benefit from an increase in barge transport, which is why I started watching Great Lakes Dredge and Dock (GLDD). The more barge traffic there is, the more need for channel dredging and port expansion projects, both staples of GLDD’s business.
The Business
GLDD is the largest provider of dredging, land reclamation, and beach nourishment services in the US. The company builds and deepens ports, reclaims land, excavates underwater trenches, builds and maintains beaches, and maintains the depth of shipping channels, both in the US and internationally. They also have a small demolition unit, which accounted for 8% of 2009 revenues.
Geographically, the company has significant operations in high growth emerging markets, supplementing its dominance in the US market. About 15 to 30% of revenues come from foreign markets, while the US market is effectively protected from foreign competition by two laws passed in the early 1900’s: The Foreign Dredge Act of 1906 and the Merchant Marine Act of 1920.
Growth Drivers
There are many potential growth drivers for the dredging business, some of which GLDD is talking about, and some of which it isn’t. The company lists the following drivers of growth going forward:
- An increase in maintenance dredging due to increased interest in increasing port operating capacity by the US Army Corps of Engineers, the largest domestic user of dredging services.
- Coastal berm construction to protect the Louisiana coast from the oil spill. A GLDD dredge has recently begun work on these berms. The size of the spill make me think that berm construction and coastal restoration will continue to create high demand for dredging equipment in the Gulf for years to come.
- Expansion of the Panama Canal and the Port of Los Angeles
- New legislation in congress will create a harbor maintenance trust fund which will add $250-$400 million to the annual US dredging market.
- The 2009 Mississippi coastal improvements program created an additional $400 million demand for barrier island and ecosystem restoration work starting in 2011.
In addition, I see a couple of potential drivers for long term demand growth for dredging services
. Rising sea levels due to global warming will increase the need for artificial barrier islands, wetlands restoration, and beach nourishment. Global warming is also expected to lead to an increase in severe hurricanes. That should in turn lead to more contracts such as the recent award as part of the Maryland shoreline protection project. Meanwhile, increasing fuel prices will increase the demand for fuel-efficient transportation such as barges, and increase the need to maintain and expand port facilities.
Valuation
GLDD pays a $0.07 annual dividend for a modest 1.2% yield at theJuly 2nd $5.84 closing price. At that price, the 12 month trailing earnings is a somewhat expensive 17.59. However, the company has fairly low debt when compared to cash flow, and most analysts are expecting fairly rapid (25%+) annual growth over the next five years, so the company does not seem particularly overvalued at current prices, but neither does it seem to be a bargain, as it was when it fell below $4.50 in early March.
Investor interest arising from the oil spill may keep GLDD from ever returning to the cheap valuations it saw in March. But I’m not ready to buy just yet… a continued decline in the overall stock market is likely to create another great buying opportunity in either Great Lakes Dredge and Dock or my other barge transport stock, Trinity Industries.
DISCLOSURE: LONG TRN.
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