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Layne Christensen - A Waiting Game?

March 28, 2010 | About:
wax

Wax

Author's Website
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We noticed yesterday that Layne Christensen Company, Inc. (LAYN) had scheduled their fiscal 2010 earnings call for March 30, 2010. While we hate to admit it, this is a great example of just what can happen when investors fail to believe their own research.

Several years ago, we were asked if we knew of a company that actually owned water rights. Admittedly we had never heard of such a thing, but were intrigued with the idea. In the end, we never found a company that actually owned water rights, but we did come across Layne Chistensen.

Curious, we ran some numbers, read a few SEC filings, and decided we would wait, since the stock seemed just a bit to expensive. We actually waited right through the recent market bottom in March 2008, when the stock was trading in the $14 range.

Today we are still waiting. The question is, should we be?

Basis

Financial information related to the Layne Christensen Company, Inc., contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending January 31, 2009, as filed with the Securities and Exchange Commission on March 31, 2009.

What They Do

Layne Christensen provides drilling and construction services and sells related products, in two principal markets: water infrastructure and mineral exploration. The company also operates as a producer of unconventional natural gas for the energy market.

The company operates throughout North America, Africa, Australia, Europe, and Brazil, as well as through their affiliates in South America.

The company's customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting engineering firms, heavy civil construction contractors, oil and gas companies and, to a lesser extent, agri-businesses.

Short-Term Investment

The stock has resistance at $35.14, a 26% increase from a recent close of $27.96, and finds support at $27.47, a 2% decline from a recent close. Since the stock appears to us to be in an uptrend the spread between resistance and support makes sense.

But when we start to look at the trend line for the stock, we think upward momentum is starting to play out, and that the stock price could start to pull back.

So at the moment, with a current PEG Ratio of 1.9 and a quarterly PE ratio of 33, we happen to think that for short-term invstors, waiting is the right thing to do until after earnings are announced may be the right thing to do.

Long-Term (5 Year Hold) Investment

The stock is currently trading at 1.5 times FY09 tangible book value and at just over 8 times FY09 free cash flow, which, considering the industries the company serves, seems extremely

reasonable to us. However, as we noted earlier, the company is set to release FY10 numbers in a few days, and we simply don't believe these numbers will be as positive as FY09 numbers.

In addition, we found the company's FY09 current ratio, acid test ratio, and cash ratio to be below what we consider to be investment quality, and note that these metrics were down slightly from FY08.

Additionally, we were please to find the company's net current asset value to at least be a positive number, and with the ongoing economic slump, we think this bodes well for management.

Couple a positive net current asset value with a return on invested capital of almost 22%, and then factor in management's statement in November of 2009 that the company was debt free, and we have to think, maybe the time to wait has past.

Further, while much improved over FY08, we noticed that management continues to allow the company to pay their bills faster than than the company's receivables are collected.

While we admire that the company pays its bills timely, we simply don't think it prudent that the company provide an average 14 day interest free loan to its suppliers.

Final Thoughts

Our reasonable value estimate for the company is in the $52-$60 per share range and we believe that over the longer term, patient investors may be pleasantly rewarded.

In the end, at least for FY09, the company produced an earnings yield of 11.38%, an almost 8% delta when compared to a recent 10 year T-Bill yield of 3.66%, which again bodes well for investment consideration.

As we said at the outset, since we stumbled across this stock several years ago, we seem to have been waiting, admittedly for what we aren't quite sure.

But all things considered, we think the patient long-term investor might be well served with a share or two of Layne Christensen, especially if earnings come in at or below current estimates, something we will have to wait until Tuesday to find out.

Wax

To download the Wax Ink Layne Christensen Raw Value Worksheet, please click here.

About the author:

Wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

Visit Wax's Website


Rating: 3.0/5 (8 votes)

Comments

kfh227
Kfh227 premium member - 4 years ago


The most recent year seems to have good FCF numbers. But historically, the FCF numbers are hohirble I don't even know if they are i nteh black over hte past 10 years overall.

Also, the sahre count keeps going up. Why? Aquisisitons? If so at what price? Did they pay a fair price or udnerpay or did they overpay?

With the FCF nuybmers I see and continues shareholder dilution, I have a hard time thinking that the current market cap of $500m is way to high.
wax
Wax - 4 years ago
Kfh227;

Free cash flow for FY09 was $3.39 per share, and shares outstanding were 19.4 million, while free cash flow for FY08 was $2.62 and shares outstanding were 19.2 million.

The company did have an acquisition in November 2009 when it acquired W.L. Hailey & Company, Inc., a water infrastructure company, which the company paid $15M for and was funded from the company's current cash balances.

Wax

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