Friday, July 14, 2006

Seacor Holdings [CKH] gets a SELL

In the July issue of Forbes money manager Kenneth Fisher recommended Seacor Holdings [CKH], an oil-services firm based in Houston. He notes (correctly) that recent revenue and earnings were up 85% and 100% from the prior year, but that the company is trading at a very low price / earnings ratio. When I check the price to free cash flow the company seems similarly undervalued.

An undervalued company is a rare and great thing to find these days, naturally I checked it out.

Alas, I must disagree with my fellow writer Mr. Fisher and suggest that you AVOID buying CKH. There is plenty of reason that it is trading at a price that looks “undervalued.” Most of those traders apparently are familiar with the company and see why it trades so low. I will explain.

From 2001 to 2004 CKH’s operating revenues barely changed at all. In millions the annual revenues were: $434m, $403m, $406m, $491m, for a total growth of 13% over the entire time period. It looks a little better if you go back to 1999, but the company has changed a lot and the more recent revenues are more appropriate to look at. The company has been buying other companies and tacking their revenue on top of previous revenues, so the 2005 numbers look very high ($972m), but that is due to a lot of special circumstances.

The valuation of the stock seems low because industry investors understand that the good results are unlikely to last, unusual circumstances are not part of the recurring business.

The first unusual even was a huge acquisition from Seabulk International that increased operating revenue by 23% in 2005 even though the assets were only held for half the year.

The second unusual event was from the American Jobs Creation Act of 2004, which allowed for a one-time repatriation of built up earnings from overseas which were moved onto the balance sheet. Of course this won’t be repeated. I am also somewhat disturbed as to how the money was hidden overseas before the tax break, looking at the old annual reports makes me wonder what else they might have off the balance sheet.

The third unusual item is that CKH sold a number of marine vessels. During 2005 they sold 29 vessels and added only 9. In the last five years they have sold $665 million in ships and purchased $320 million, adding $345 million to the bottom line by essentially selling their assets of production. Some might say that this is an investing style, with the company arbitraging and making money by selling boats when the prices go up but all those boat sales empowered their competitors last year and left the company 100% booked and unable to accept more contracts – preventing growth of the business.

Finally, the reason that they have been able to increase margins to provide the remainder of the increased operating revenue is the damage wrought by hurricanes Katrina and Rita. Repair vessels have commanded a premium since then.

Looking into the future, however, we see a different set of circumstances.

The recent increase in business in fixing Gulf equipment has resulted in a large forward order book for servicing equipment worldwide. This will result in much more competition in CKHs bread-and-butter category of servicing offshore platforms and depress prices. At the same time many platforms are moving out of the area, reducing the market. More competition and fewer customers is not a good thing. Seacor can move certain operations abroad, but this is an expensive proposition.

The CEO and Chairman of the Board also notes in the 2005 annual report that “Capital is plentiful and many who manage it get paid only if they deploy it. …. Buyers are hence competing with “private equity”…” In short he is seeing a lot of capital flowing into competing efforts. Those efforts may well lose money in the long run, but their presence will be bad for Seacor. The oil rig servicing industry in 5 years may look like the airlines did a few years back: excess capital desperately seeking customers and depressing prices.

The one time repatriation of overseas assets and the income from selling off ships is also not a sustainable business component. This alone suggests that within 12 months CKH could have some quarters where performance will fall below year-prior numbers.

Buying this stock isn’t a growth play, because you can’t really expect growth from it historically. And yet the stock does not pay a dividend, has debt and other liabilities equal to 22 years worth of earnings (using the average of the last 3 years of earnings), and we can expect some breaks to the downside when the inevitable bad news hits.

Kenneth Fisher is no fool. Perhaps he had a position he needed to unload or his editor hurried him… but I’m giving this a SELL.
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Anonymous Anonymous said...

Nice work as always, you definitely have brought up good points.

Just wanted to know if you have a opinion about Borders group (BGP) , wanted to know why are not able to execute while Amazon and BKS (Barnes & Noble) have not experienced sales growth slowdown like BGP.

Can you please comment?

Many thanks.


10:52 AM  

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