08 July 2007

TDW: Looking Back and Ahead

On July 26, Tidewater (TDW) will announce its results for the quarter that ended on 30 June 2007, which was officially the first quarter of the company's fiscal 2008.

GCFR first discussed Tidewater on 26 November 2006, which was the weekend of the Thanksgiving holiday. Little did we know then how thankful Tidewater would make us. Analyzing the results from the quarter that ended the previous September, our Overall Gauge score clocked a superlative 73 points for Tidewater. The stock price was then $52.80, which was up almost 20 percent in less than two months. We thought the shares were still cheap, but we fretted that the big move had been missed. In January, when the results from the December quarter became available, we found that Tidewater's gauge scores had defied gravity and had gone up another notch while the stock price had fallen below $50. There was no reason not to act at that point. Actually, there was one very big reason. Out of nowhere, an influential analyst issued a sell recommendation, which caused Tidewater stock to drop from $46.50 to $43.78. Buyers that day are the most thankful of all since Tidewater stock closed last Friday at $73.90 per share.

When we analyzed Tidewater after the March 2007 quarter, the company racked up another set of very good scores, although down from their peak values. The Overall gauge read a robust 66 points; it would have been 61 points if calculated according to our updated methodology. No matter, the bottom line is that Tidewater did a better job at keeping costs under control than we had hoped.

Now what? Have the shares outpaced the growth in profits and cash flow, or, despite their meteoric rise, does Tidewater stock still hold great value?

The pace of growth has already started to slow, which is perfectly natural given that the earlier increases were built on a much smaller base. Also, there are practical ceilings on how fast new ships can be deployed, how much lease rates can rise, and how close the utilization rate can get to 100 percent.

Revenue started to surge at Tidewater in late 2004, after a couple years of flat (or declining) performance. The growth peak was in June 2006, when quarterly revenues were 40 percent greater than the year-earlier period. By comparison, revenues in March 2007 quarter (the most recent one for which data is available) were 19 percent higher than in March 2006.

Our task is to make sure that the growth rates and profitability measures don't slow too much too fast, in comparison to the stock price. And, our gauges will help us keep score.

We will pore over the soon-to-be-released June 2007 results to gauge the latest corporate performance. To give us a basis for comparison, as we do for many of the companies analyzed in GCFR, we are predicting what the earnings will look like if the company stays on track. When the actual results become available, it will be easy to see the ways in which the company's performance surpassed or lagged expectations.

Because the June 2006 quarter was so superlative, we will view revenue growth in the latest quarter of 14-15 percent as good. Our prediction for the June 2007 quarter is $309 million, compared to $270 million in the earlier period.

Tidewater's gross margin has been increasing steadily, from about 35 percent to almost 55 percent of revenue. No slippage has yet been seen, so we're optimistically assuming 54 percent for the June quarter. Given our revenue estimate, we're looking for a cost of goods sold of $142 million.

Depreciation has been about 11 percent of revenue in recent quarters. So, our forecast for this expense is $34 million. Similarly, if trends continue, SG&A expense should be about 9 percent of revenue. This equates to $28 million.

As a result, operating income of $105 million seems attainable. If we guess an additional $10 million in income from asset sales and interest, and a 21 percent income tax rate, our estimate for net income become $91 million.



Op expenses

CGS 142

Depreciation 34

SG&A 28
Op income

Other income

Asset sales

Interest, etc.
Pretax income

Income tax

Net income



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