Great Lakes Dredge & Dock: Shipshape
Brains, brawn and beauty are a winning combination, never more so than with Great Lakes Dredge & Dock Corporation (Nasdaq: GLDD). It has the muscle: demolishing and rebuilding harbors, dredging silt, deepening rivers and ports, reclaiming coastal lands. It has the smarts: sophistication honed by more than a century of experience. Then there’s the jewel: Great Lakes is the runaway leader in a growing—and protected—market.
Great Lakes Dredge & Dock swamps its competition. Over the past three years, the company’s market share of the U.S. dredging market has averaged 37%, with four other companies combining for a 45% share—not one holding more than 20%. There are lots of players—about 180 companies using 600 dredges—but Great Lakes has the stronger, more diverse fleet of vessels. The size and complexity of the work, necessary equipment, bonding requirements and various regulations simply keep the shrimps out of the business.
Headquartered near Chicago in Oak Brook, Ill., Great Lakes has operated under one name or another for 117 years, and has reams of data on winning bids and project details. This intelligence, plus its strong history and reputation, helps the company win bids at profitable margins and build a backlog of business. Great Lakes prides itself on never failing to complete a contracted project.
Fueled by international trade and growing coastal populations, the need for dredging, deepening, excavating and reconstructing ports and shorelines will grow for years, said Richard Paget of Morgan Joseph and Co. in a research report when he initiated coverage of Great Lakes with a buy rating at the beginning of the year.
Paget, the sole analyst to follow Great Lakes, wrote that the U.S. dredging industry should grow solidly in the mid-to-high single digits over the next several years. And as Great Lakes adds to market share and extends its leadership position, the company should achieve low-double-digit earnings growth over the next several quarters.
Trade expansion is essential to Great Lakes. Domestic ports and harbors, which take in nearly all of the country’s imported goods, need to be deeper so that larger cargo ships can move freely to dock. Even dock space and piers need to be enlarged. The top 10 U.S. ports have an average depth of 45 feet, while the top biggest non-U.S. ports average more than 50 feet. Since vessels typically require 50 to 55 feet of channel depth, and the largest have drafts of more than 90 feet, very few ports are ready to handle these ships.
Maintenance complements the big-project port and harbor work. Silting is continual and roiled by weather, and the need for dredging is a constant. Erosion and other natural processes cause billions of dollars of damage in U.S. waterways each year.
As more people move to coastal regions, demand increases for restoration and “beach renourishment.” Residents want to protect their assets, particularly as land values rise, and this—barring an economic downturn—should raise local and state funding for restoration measures. The beach bid market has averaged $178 million for each of the past three years, and current bid schedules for 2007 are valued in excess of $190 million, according to the company.
More beauty: Great Lakes operates in protected waters. The Jones Act, or Merchant Marine Act, effectively keeps foreign companies out of the U.S. dredging industry, stifling competition, limiting concerns about overcapacity and ensuring that U.S. equipment will be used efficiently. Although there are opponents to the protectionist law, the country’s focus on border and harbor security means politicians are not likely to address any desires for a change.
Ironically, Great Lakes dredges in foreign waters. Although a minor player internationally, the company takes opportunities suited to its equipment and where competition from European dredgers is limited. The company’s solid reputation in the United States has been a factor in the growth of its international business, which has helped the company weather the “cyclicality” of the domestic market, according to Paget.
Founded in 1890 as Lydon and Drews Partnership, Great Lakes took its first project in Chicago and meandered to its current incarnation as a publicly traded company when it merged with Aldabra Acquisition Corp. in December of last year. Its trading range since is $5.00 to $10.00, and it settled Monday at $9.34, resulting in a market valuation of $375 million and a P/E of 23, based on Paget’s 2007 earnings estimate of $0.40 per share.
That’s too rich for Paget, who lowered his rating to hold after Great Lakes released its first quarter results May 9. Revenue in the quarter rose 17% to $127 million from 2006, driven by maintenance projects and jobs in the Middle East. Earnings were $0.02 per share, up from a loss of $0.38 in 2006’s first quarter. “It’s a valuation call,” Paget told SmallCapInvestor.com in reference to his rating change. “I like the company.”
But for now federal funding issues are holding back projects from the Army Corps of Engineers, the company’s largest U.S. dredging customer. The Corps, responsible for federally funded navigation and flood control projects, has signaled nearly $5 billion in new work to deepen and widen channels at 20 major coastal ports over the next decade, according to Paget. But, because of the lack of funding, he doesn’t expect a big uptick in the company’s value until the second half of 2008.
Clearly, federal budget problems have trimmed Great Lakes’ sails. Dredging revenue from the government fell 47% to $156 million in 2006 from $297 million in 2005. Government contracts were only 21% of Great Lakes’ backlog in 2006, compared with 38% in 2005 and 83% in 2004.
But brains, brawn and beauty can only be bogged down for only so long. Await the coming tailwind or just jump in: the water will be fine.
