Tuesday, July 09, 2013

Instrumental Profits

Next on our list of holdings by the small-cap exchange traded fund Power Shares S&P Smallcap Energy (PSCE: Nasdaq) is Geospace Technologies.  About 5% of the fund is tied up in its shares.  PSCE, of course, is based on the energy components of the S&P Small-cap 600 Index.

Based in Texas, Geospace Technologies Corp. (GEOS: Nasdaq) manufactures instruments to capture and process seismic data as well as thermal imaging equipment.  While the seismic data instruments are popular with oil and gas exploration and development companies, players in the printing, signage and textile industries use the thermal imaging equipment.  Besides equipment for land-based applications, the company also manufactures cables and “umbilicals” along with marine seismic products, deep ocean-bottom seismic acquisition systems, and borehole-deployed seismic acquisition systems. 

Geospace recently introduced a cable-less seismic data acquisition system, which offers improved economics and productivity.   For oil and gas developers such economies are very appealing and can make a difference in getting the order or losing the business to a competitor.  Indeed, Geospace has some competition.  Sercel and INOVA are two top players in the seismic data collection sector.

The company earned $53.9 million in net income on $246.3 million in sales over the last year.  That is represents a profit margin of 21.9%.  Besides wild profitability, Geospace has a pristine, debt-free balance sheet.  The majority of its assets are tangible, not that there is any concern about solvency.  Over the past three years cash flows from operations have covered required investments in facilities and equipment.

Of course financial performance is not the key to the S&P Small-cap 600 Index, which is a market-value weighted index.  Geospace keeps its berth in the index with a market cap that is now near $977 million.  The company has 12.9 million shares outstanding, only 4% of which are owned by insiders.  Short-interest in the stock has crept higher in recent months, probably in response to the rise in the stock price to a 52-week high of $113.73 set in February 2013.

Geospace is valued at 11.4 times the consensus earnings estimate for the year 2013.  A comparison to the 18.8 price/earnings ratio for historic earnings, suggests there is a 65% upside potential in the stock valuation.  


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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