Peer comparison
ION Geophysical’s peers include Dawson Geophysical Company (NASDAQ:DWSN) and CGG Veritas.
CGG Veritas, based in Paris, France, provides a range of geological, geophysical and reservoir related services to its customers in the oil & gas industry. It owns Sercel, a direct competitor of Ion Geophysical Corp (NYSE:IO), which has a 60% market share of the seismic equipment market, according to its most recent investor presentation. ION Geophysical’s edge over CGG Veritas is its asset-light model, reflected in a higher ROA of 6.1%, double than of CGG Veritas’s ROA of 3.0%. In line with the reasoning above that an asset light model requires lower leverage; CGG Veritas is more highly geared than ION Geophysical, with a gross debt-to-equity ratio of 55%.
Operating leverage cuts both ways and the tables might be turned in boom times. Investors in CGG Veritas will contend that it has a competitive advantage in that case by owning marine vessels and operating land crews of its own, making it less susceptible to vessel and manpower shortage. Moreover, given its dominant market share, CGG Veritas is able to extract cost savings from its asset heavy model by spreading its fixed costs over a larger base.
However, being a conservative investor, I prefer a seismic data related products and services provider like Ion Geophysical Corp (NYSE:IO) which has the ability to weather bad times by simply engaging less contract ships. In contrast, it is more difficult for CGG Veritas to dispose of ships or lay off workers when things are not going well. I will gladly exchange the upside of operating leverage, in exchange for downside protection in the form of an asset light operating model.
Unlike its peers, Dawson Geophysical Company (NASDAQ:DWSN) does not provide offshore seismic data acquisition services; instead it focuses on onshore imaging services. It also actively avoids conflicts of interest issues, as it neither sells data acquired as part of client assignments, nor stores such data in its own data libraries. Dawson Geophysical Company (NASDAQ:DWSN) has the strongest balance sheet of the three with a net cash financial position.
Conclusion
I like companies like Ion Geophysical Corp (NYSE:IO), which provide critical “must-have” services to customers and have the ability to weather difficult conditions. ION Geophysical ticks the boxes on both counts and is attractively priced at a PEG below 1.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Dawson Geophysical Company (NASDAQ:DWSN). The Motley Fool owns shares of Dawson Geophysical Company (NASDAQ:DWSN).
The article This Company Solves the Most Critical Problem That Its Customers Face originally appeared on Fool.com.
Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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