26 May 2007

TDW: Financial Analysis through March 2007

We have updated our analysis of Tidewater's (TDW) financial results for the fiscal year and quarter ending on 31 March 2007 to address the data reported to the SEC on Form 10-K. Our evaluation, adjusted to account for a handful of minor changes to the Balance Sheet and Cash Flow Statement, is reported in this post.

Tidewater, which is in the Oil Well Services and Equipment business, claims to own the world's largest fleet of vessels serving the global offshore energy industry.

When energy prices are high, offshore production becomes more profitable, demand for maritime services increases, and Tidewater can charge higher leasing rates. Similarly, when offshore production diminishes, the company has to work harder to find customers for its ships.

When we analyzed Tidewater after the results from December 2006 became available, the Overall score was a superlative 75 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 22 points. Cash Management was weakest, if you can call it that, at 15 points.

The following table shows how the data for the March quarter, in millions of dollars, compared to our expectations:

Operating income$100
Other income
Net income

Tidewater clearly did a better job at keeping their costs under control than we had hoped.

With the available data from the most recent quarter, our gauges now display the following scores:
Cash Management. This gauge dropped 6 points from 15 to 9. This seemingly large change is not as significant as it first appears. It was the result of a small change in Accounts Receivable/Revenues. With Inventory data not meaningful for Tidewater, changes to the other Cash Management parameters get amplified. Since Cash Management only contributes 15 percent to the Overall Gauge calculation, the overemphasis of one change isn't important. The Current Ratio, has now increased to an oddly high 5.0, which by our standards is too much of a good thing. Maybe the company is keeping the till full of cash to pay for the new vessels scheduled for delivery this year and next. If so, we would view the transformation of low-return financial resources into productive assets as a positive step. Long-Term Debt/Equity has been reduced to a manageable 16 percent; therefore, debt could be tapped for capital investments. The debt ratio has steadily declined since it hit 28 percent in September 2004. Accounts Receivable/Revenues equal 93 days, up from 91 days last quarter. These levels would be considered very high for many companies, but it happens to be the long-term average at Tidewater.

Growth. This gauge held onto December's strong 22 points. Revenue growth is now 28 percent year over year, about the same as a year ago, although the growth was more robust in the earlier quarters of the year. Net Income growth is an explosive 51 percent year over year, yet down from the even-more spectacular 133 percent a year ago. The increase significantly benefited from a change in the income tax rate from 27 to 21 percent. CFO growth is an impressive 46 percent, down from a tremendous 86 percent a year ago. Revenue/Assets is now 42 percent, having moved up from 31 percent in the last two years. The uptrend, which signifies improved efficiency, seems to have reached a plateau.

Profitability. This gauge dropped 3 points from the 18-point level in December. ROIC grew to a healthy 17 percent from 10 percent a year ago, continuing a two-year series of increases. FCF/Equity edged up to 11 percent from 8 percent. Operating Expenses/Revenue moved down in the last year from 74 percent to 65 percent, and these expenses are now the lowest they have been since 1998. The change was primarily due to an increase in Gross Margin of 6 percent. The Accrual Ratio, which we like to be both negative and declining, moved in the wrong direction from 5 percent to 6 percent. This tells us that a bit less of the company's Net Income is due to cash flow, and, therefore, more is due to changes in non-operational balance sheet accruals.

Value. Tidewater's stock price rose significantly over the course of the quarter from $48.36 to $58.58, and it has continued to increase. The Value gauge, based on the 31 March price, dropped to a still-strong 18 points, compared to 20 and 11 points three and twelve months ago, respectively. The P/E at the end of the quarter was 9.2, which is consistent with recent quarters, but only half of the five-year median value. The decrease in P/E indicates the shares have become much less expensive, even though the share price has increased. The average P/E for the Oil Well Services & Equipment Industry is also a more expensive 18. To remove the effect of overall market changes on the P/E, we note that the company's current P/E is 40 percent below the average P/E, using core-operating earnings, for stocks in the S&P 500. The company's P/E has been a significantly below the market's P/E in recent years, but this wasn't always the case. Companies tend to trade at a discount when their growth rates are lower than average, or when the growth rates are unlikely to be sustained. The PEG ratio of 0.18 is indicative of a dirt-cheap stock. The PEG has been strangely low for a long time, suggesting that the market is expecting the earnings growth rate to decline precipitously. The Price/Revenue ratio, which is less affected by the one-time factors that cause wide swings in earnings, is 2.9. Since the average Price/Sales for the Oil Well Services & Equipment Industry is 3.7, Tidewater seems less expensive than its peers by this measure.

Now at a very good 66 out of 100 possible points, the Overall gauge has dropped off its recent highs. Tidewater's operations are performing exceptionally well. The stock price, which has run up significantly, still seems to hold a lot of value.

1 comment:

  1. I liked the analysis, but the market didn't: TDW off two bucks as I write.