Great Lakes Dredge & Dock Corporation (GLDD): Is This Company a Buy After an 18% Drop?

Recently, Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) experienced a significant drop of nearly 18% to more than $7.30 per share, after the company reported a plunge in its fourth quarter profit. Great Lakes’ stock price jumped from $6.20 per share in June 2012 to around $10 per share at the beginning of March 2012, and now it is down to around $7.30 per share. Is Great Lakes a good buy after the stock has become so much cheaper? Let’s find out.

Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD)

Business snapshot

Great Lakes, founded in 1890, is considered the biggest dredging service provider in the U.S, operating in two main business segments: dredging and demolition. The majority of its revenue, $586.9 million, or 85.3% of the total 2012 revenue, was generated from the dredging segment, while the demolition segment contributed around $100.7 million in revenue. The dredging business of Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) is quite dependent on contracts from federal agencies. More than 50% of its total revenue derived from around 53 different contracts with federal agencies or third parties under contracts with federal agencies. The company accounted for around 40% of the total dredging bid market in the U.S., and it kept expanding into overseas market. Recently, it was also awarded a $180 million project in Australia.

Declining profit and fluctuating free cash flow

In the fourth quarter of 2012 the company reported that it earned $302,000, or one cent per share for its common stockholders, much less than analysts’ estimates of $0.19 per share for the quarter. In the full year 2012, the contract revenue experienced a 9.6% growth, from $627.3 million in 2011 to $687.6 million, while the operating income dropped significantly, from $54.3 million to only $15.5 million. The decline in its operating income was due to the significant increase in its cost of goods sold, from $534.3 million to $619.2 million. When Great Lakes earned $16.5 million in 2011, it generated a loss of -$2.7 million in 2012. In terms of balance sheet strength, I think Great Lakes is reasonably leveraged. As of December 2012, it had $273.4 million in total stockholders’ equity, $24.4 million in cash, and around $263 million in both long and short-term debt.

As Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) is in the dredging service business, I would expect that it would require a lot of capital spending for fleet expansion and maintenance. Indeed, since 2008, although it has kept generating positive operating cash flow, the free cash flow has fluctuated widely, in the range of -$70 million to $98 million.

Peer comparison

At around $7 per share, Great Lakes is worth around $435 million on the market. It is valued at 11 times EV/EBITDA. Compared to peers, including Orion Marine Group and Willbros Group, Great Lakes is the biggest company. Willbros, trading at nearly $9 per share, has a total market cap of $420 million. The market values Willbros at 9 times EV/EBITDA. The smallest company among the three is Orion Marine, which is worth only $272 million on the market. However, Orion has the highest EV multiple at 33 times EV/EBITDA.

None of these three companies generate high profitability. Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) had more than 2.25% operating margin in 2012 while the operating margin of Willbros is only 1.4%. Orion is the least profitable company with a -4.8% operating margin. Neither Willbros nor Orion Marine pay any dividends to shareholders, while Great Lakes offers its shareholders a dividend yield of 0.9%.

The Foolish bottom line

With its fluctuating free cash flow, small profitability and low dividend yield, I personally do not think that investors should consider Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD) as a long-term investment. If investors want to speculate on its ups and downs in the market, they should dig deeper to find a possible near-term catalyst for this stock.

The article Is This Company a Buy After an 18% Drop? originally appeared on and is written by Anh Hoang.

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