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Mitcham Industries: Strong Balance Sheet with Profitability Track Record

February 11, 2013 | About:
Mitcham Industries Inc (MIND) is a geophysical equipment supplier, which offers for lease or sale, new and "experienced" seismic equipment to the oil and gas industry, seismic contractors, environmental agencies, government agencies and universities. Headquartered in Texas, Mitcham is the largest independent exploration equipment lessor in the industry. Through its Seamap business, MIND designs, manufactures and sells specialized seismic marine equipment.

Guru and Insider Insights

Chuck Royce initiated a new position in MIND with a purchase of 46,800 shares in the fourth quarter of 2012, while Peter Blum, a director of MIND, bought 20,000 shares in December 2012.

Valuation MIND currently trades at a trailing twelve months P/E of 8.7 and a trailing 12 months EV/EBITDA of 3.2. In terms of asset-based valuations, its current P/B of 1.15 is at a 15% discount to its five-year average P/B of 1.35. MIND achieved a trailing 12 months ROE of 15.1% and a five-year average ROE of 11.4%.

MIND Historical Earnings and Enterprise Value Multiples1360566632992.png

MIND Historical P/B and P/NTA Multiples1360566701082.png

MIND was profitable and operating cash flow positive for eight consecutive years since 2005. Its cash flow generation historical track record was less impressive with negative free cash flow in 2007 and 2009 to 2011, largely attributed to the need to purchase new lease pool equipment. However, it delivered strong positive free cash flow of $34 million and $48 million for fiscal 2012 and the trailing 12 months financial period, respectively. Management grew MIND's revenue and EBITDA by a six-year CAGR of 18% and 21%, respectively.

MIND Earnings-Cash Flow Comparison

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MIND Profit Margins Analysis1360567066561.png

Business Quality and Capital Allocation

MIND is the largest independent lessor of latest technological seismic equipment globally. Its land equipment lease pool includes a total of more than 200,000 seismic recording land channels, geophones and cables, and other peripheral equipment; while its lease pool of marine seismic equipment includes more than 17 kilometers of streamers, air compressors, air guns, streamer positioning equipment, energy source controllers and other equipment. MIND's extensive state-of-the-art equipment inventory deployed worldwide in Canada, Colombia, Peru, UK, Hungary, Russia, Singapore and Australia encourage seismic data acquisition contractors and oil field service providers to lease, rather than purchase, such equipment, due to the capital and operating efficiencies provided by short-term leases.

MIND also benefits from the growth in the global seismic market. Although seismic has always been and remains a critical component for maximizing exploration success and efficiency, certain industry trends are favoring growth in the industry. First, the industry trend toward higher resolution surveys requires higher channel count, which drives an increase in demand for MIND's products. Second, there have been expanded applications for seismic in the area of exploration, production and life of field monitoring.

MIND does not pay a dividend.

Financial and Business Risks

MIND has a strong balance sheet with a low gross debt-to-equity ratio of 8% and a net cash financial position.

MIND Cash-Debt-Market Capitalization Comparison1360567159713.png

MIND's top five customers accounted for approximately 43% of its consolidated revenues in fiscal 2012, while its largest customer represented 17% and 19% of its fiscal 2012 and 2011 revenues. The customer composition also changes from year to year as leases are initiated and concluded and as customers’ equipment needs vary.

MIND's profitability is dependent on obtaining additional lease contracts after the termination of an original lease. The revenue generated from the short lease terms of seismic equipment leases of between two to six months only allows it to recover a portion of its capital investment on the initial lease. It targets a payback period of two years for purchase of new equipment.

MIND entered into equipment purchase agreements with Sercel related to its DSU3 three-component digital recording system and Unite cable-free recording system and is the exclusive third party provider of short-term leases for these two products throughout the world, except for China and the Commonwealth of Independent States. Approximately 44% and 35% of its revenues were generated from the rental of products it acquired from Serc in fiscal 2012 and 2011 respectively.

ConclusionThe share price for MIND has run up by nearly 15% since the start of the year and MIND appears to be fairly valued now. Still trading at slightly above book value with a strong track record of profitability and net cash financial position, it could look interesting on a pull-back.

DisclosureThe author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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