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With a Real Improvement in New Home Construction, Here Is a Stock with Long-term Turnaround
Posted by: Damian Illia (IP Logged)
Date: December 13, 2013 04:54PM
In a macro view, the Construction & Engineering industry includes companies that design, manufacture and install products for the residential & commercial construction and automotive markets. The industry is characterized by its cyclicality to the U.S. economy. I think the level of new construction or the sales of existing houses will remain favorable, so we are expecting a positive outlook for the sub-industry. With this promising outlook, let's take a look at Gabelli´s last trade and try to explain to investors the reasons of this appealing investment opportunity.
On Dec. 9, Mario Gabelli added Layne Christensen Company (LAYN). Layne is a water management, construction and drilling company. The company has five segments: Water Resources Division, Inliner Division, Heavy Civil Division, Geoconstruction Division and Mineral Exploration Division.
In May 2013, the firm announced the launch of the water transfer business within the Layne Energy Services Division. Layne is currently providing these services for its clients operating in the Permian Basin. This division will provide solutions to address every phase of the water cycle as it relates to its use in the oil and gas industry.
Furthermore, Layne Christensen has good results in its Inliner business. Layne Christensen provides a range of rehabilitation services through traditional pipeline replacement or trenchless, cured-in-place pipe (CIPP) technologies through its Inliner product line. I think I will see better reported results in this segment.
In terms of valuation, the stock sells at a price-to-book ratio of 1x which indicates a discount versus the industry average of 1.05x and the price-to-sales ratio of 0.31x is below the industry average of 0.49x.
Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago. We include the stock price because EPS often lead the stock price movement. The stock price is down 30.7% in the last 12 months, which is an alarming sign, but also positive for investors, because it is cheaper than most other peers in its industry
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness. Moreover, it is worse than those shown in the table like Aegion Corporation (AEGN), EnerNOC Inc. (ENOC), MYR GroupInc. (MYRG) and Pike Corporation (PIKE).
Layn´s revenue growth has been disappointing, for the six months ended July 31, 2013, were $458.5 million vs. $559.7 million in the prior year, down 18% year over year.
Despite having found a major weakness in the result of ROE, the firm has other highlights. On June the company and its lenders amended the $300 million credit agreement to provide covenant relief. We think this will give more flexibility to the company management.
Hedge fund managers have also been active in the company. Hedge fund gurus like Chuck Royce and Arnold Van Den Berg have invested in it.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: Arnold Van Den Berg: Current Portfolio, Stock Picks
Chuck Royce: Current Portfolio, Stock Picks
Stocks Discussed: LAYN, AEGN, ENOC, MYRG, PIKE,
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