Dawson Geophysical First Quarter 2008 Analysis and Valuation
As I mentioned in a previous post, I think a disciplined investor should focus on earnings and intrinsic values rather than market quotes. So it is because of their recently reported earnings that I am disappointed with Dawson Geophysical (NASD: DWSN). After last quarter, I estimated full year proforma earnings for Dawson prior to adding their 15th crew. I expected that after having a full quarter with 15 crews that I would once again have to revise my estimates upward. It turns out that the opposite is true.
Below is a table representing the last four quarters that Dawson has reported. Starting this quarter, I have begun tracking revenue per crew and channel count as I believe these will be important metrics going forward.
| (in millions) | 1Q 2008 | 4Q 2007 | 3Q 2007 | 2Q 2007 |
|---|---|---|---|---|
| Revenues | $77.60 | $75.54 | $68.60 | $59.90 |
| Cost of Goods Sold | $58.13 | $54.96 | $49.80 | $45.60 |
| Operating Profit/Gross Inc. | $19.47 | $20.58 | $18.80 | $14.30 |
| Other Expenses | $7.35 | $6.86 | $5.80 | $5.50 |
| Taxes | $4.61 | $5.19 | $5.50 | $3.40 |
| Net Earnings | $7.51 | $8.79 | $7.60 | $5.40 |
| Depreciation & Amortization | $5.55 | $5.25 | $4.70 | $4.20 |
| Capital Expenditures | $14.89 | $13.86 | $31.30 | $10.90 |
| Growth Capex | $8.89 | $7.86 | $25.30 | $5.40 |
| Owner Earnings | $7.06 | $8.04 | $6.20 | $4.00 |
| Shareholder Equity | $157.24 | $149.16 | $139.20 | $131.20 |
| Shares Outstanding | 7.72 | 7.7 | 7.7 | 7.7 |
| Owner Earnings Per Share | $0.91 | $1.30 | $0.81 | $0.53 |
| Gross Profit Margin | 25.10% | 27.20% | 27.40% | 23.90% |
| Net Profit Margin | 9.68% | 11.60% | 11.00% | 9.00% |
| Crews | 15 | |||
| Revenue / Crew | $5.17 | |||
| Channel Count | 107,000 | |||
| Revenue / Channel | $725.22 |
Estimated Full Year Earnings
Looking forward, I’m estimating $5.1 million per crew per quarter. Gross margins in this projection will be 25%. Net margins could slip further due to higher depreciation expenses, so here I model 9.4% net margins, down from 9.7% in their first quarter. I’m still estimating that $24 million of their capital expenditures are for maintaining their business and the remainder is for new growth, largely an investment in increased channel count. It will be interesting to see how these investments increase revenue per crew going forward.
| (in millions) | Proforma |
|---|---|
| Revenues | $306.00 |
| Cost of Goods Sold | $229.50 |
| Operating Profit/Gross Inc. | $76.50 |
| Other Expenses | $29.92 |
| Taxes | $17.70 |
| Net Earnings | $28.88 |
| Depreciation & Amortization | $23.20 |
| Capital Expenditures | $59.00 |
| Growth Capex | $35.00 |
| Owner Earnings | $28.08 |
| Shares Outstanding | 7.72 |
| Owner Earnings Per Share | $3.64 |
| Gross Profit Margin | 25.00% |
| Net Profit Margin | 9.44% |
Valuation
For my valuation, I start with owner earnings as calculated above, assume a five year growth rate, and then a sale based on a price to earnings growth rate (PEG) of 1.50 at the end of five years. I discount these cash flows back at 10%.
I think the most likely scenario is a 9% growth rate for the next five years. At a 1.5 PEG ratio, this results in a sale P/E ratio of 13.5 times. Discounting these cash flows back at 10% results in an intrinsic value of $60 per share.
It is possible that a crew or two may be added in the next five years as well. If this occurs, growth will be closer to 15%. Assuming a 15% growth rate and a reversion based on a P/E of 22.5, the intrinsic value is $114.
Conclusion
My expectations for Dawson have obviously diminished, but crew growth could still cause this stock to leap higher. I cannot envision a contraction in demand at this point, given the demand for oil and natural gas. I will likely hold on to my shares and watch to see if all the investment Dawson has made in new equipment over the past several years translates in to additional revenue.
Disclosure: Long Dawson
| Related Entries
|
