RealMoney Silver - Wallflowers: Seacor Could Be a Core Holding

Wallflowers: Seacor Could Be a Core Holding
By Bill Trent
RealMoney.com Contributor
5/15/2008 11:19 AM EDT

This is the next entry in an ongoing series of stories focusing on companies that have little or no Wall Street following. These firms are often referred to as "wallflowers." Many times, shares of these companies are quite undervalued, as most portfolio managers do not get a chance to hear their story. Today, we're looking at Seacor Holdings, which is followed by just two analysts.

As energy prices soar with no end in sight, a U.S. company that supports offshore oil and gas exploration efforts could become an even better value, even if it gets little notice from Street analysts.

Seacor Holdings (CKH) operates a fleet of offshore support vessels and helicopters servicing oil and gas exploration, development and production facilities worldwide and a fleet of U.S.-flag product tankers that transport petroleum, chemicals and crude products primarily in the U.S. domestic trade.

It also operates a fleet of inland river barges transporting grain and other bulk commodities on the U.S. inland waterway and offers environmental consulting services to companies that store, transport, produce or handle petroleum products and environmentally hazardous materials.

Despite having a market capitalization of nearly $2 billion, and despite its exposure to the agriculture/energy/infrastructure boom, Seacor has Wall Street coverage from just two analysts. This surprising neglect makes Seacor an enticing wallflower, in my opinion.

Seacor's $1.4 billion in operating revenue for 2007 was divided approximately as follows: 51% offshore marine services, 16% aviation services, 12% environmental services, 9% inland river services and 9% marine transportation services. It generates about half its revenue in the U.S., and about 30% in potentially volatile regions such as Africa and the Middle East. Many of the services are capital intensive, and small swings in revenue can have an outsized impact on profitability.

Batten Down the Hatches

Because of the leverage inherent in the business and the potential for short-term hangups that are outside the company's control (think weather in the Gulf of Mexico), investors who are interested in Seacor should prepare themselves for a potentially bumpy ride. Since there are only two analysts publishing estimates, there is little consensus about the company's prospects, and overshooting or undershooting the consensus estimate should be considered the norm rather than the exception. Earnings surprises have recently ranged from a 6-cent miss in the most recent quarter to a 52-cent beat in the September 2007 quarter.

Reflecting that volatility, earnings estimates have been brought down recently. The estimate for 2008 stood at $9.35 per share three months ago, but it has been reduced to $7.45. The 2009 estimates have been cut from $10.18 to $8.58. In a report, Lehman Brothers attributed its estimate reduction to adverse weather conditions affecting utilization rates in the Gulf of Mexico, flat drilling activity and a higher tax rate.

The only thing certain about Lehman's list is taxes. Weather changes, and with oil trading above $125, I'd lay odds that drilling activity won't remain flat for long. Meanwhile, in spite of the sharp reductions to estimates, Seacor is trading at just 11.6 times this year's expected earnings and 10.1 times next year's.

Over the last year, Seacor has performed roughly in line with the S&P 500. Its earnings appear to be of relatively high quality, as the accrual ratio indicates just a 2% difference between its cash-based and accounting-based earnings. The company ended March with $445 million in cash on its balance sheet, which is sufficient to cover nearly half its total debt load.

Free Cash Flow at High Tide

Over the last 12 months, Seacor has generated about $325 million in free cash flow, which equates to a very juicy free cash flow yield of nearly 17%. This wasn't just a fluke number, either. Over the last three years, free cash flow has averaged $295 million per year.

The company is using most of that cash flow to buy back its stock and convertible bonds. Over the last three years, debt has been reduced by $177 million, and $336 million has been used to repurchase stock. The diluted shares outstanding fell by more than 1 million (4% of total shares outstanding) in 2007.

At 1.2 times book value, Seacor is trading well below the industry average (according to Zacks Research Wizard) of 2.7 times. On the basis of its return on equity, I estimate a sustainable growth rate in the high single digits. Adding in a potential valuation expansion to the industry average, total return could range from 20% to 30% per year, with the main variable being the estimated time for Seacor's price/book to converge to the industry average.

Even at the low end of that range, Seacor could prove worth the wait.