Tidewater Inc. (TDW) owns "the world’s largest fleet of vessels serving the global offshore energy industry." Since Tidewater's assets are mobile, the company can shift vessels to the regions where activity is greatest and leasing rates are highest. Once focused on the Gulf of Mexico, international operations comprised almost 80 percent of Tidewater's business in fiscal 2007.
High prices for crude oil and natural gas leads to increased offshore production, which increases the need for maritime services, which, in turn, allows Tidewater to lease more of its vessels and at higher rates. If the economy slows substantially in industrial nations, the demand for energy products would abate, prices would decline, and offshore production would become relatively less attractive. In this scenario, Tidewater would probably have to cut lease rates to keep its vessels active.
A similar result would occur simply if too many new vessels are put into operation at the same time. At the Southcoast Energy Conference in December 2007, the Times-Picayune reported that CEO and Chairman Dean Taylor said Tidewater "plans to invest between $300 million and $500 million annually through 2011 to renew its aging vessel fleet, with the hope of taking advantage of the growing opportunities in international markets."
When we analyzed Tidewater after the December quarter, we found that the Overall gauge score had declined to 41 points from 63 points one year earlier. Of the four individual gauges that fed into the composite result, Value was the strongest at 17 points. Profitability was weakest at 4 points.
Now, with the available data from the March 2008 quarter, our gauges display the following scores:
- Cash Management: 11 of 25 (up from 8 in December)
- Growth: 10 of 25 (up from 8)
- Profitability: 4 of 25 (unchanged)
- Value: 16 of 25 (down from 17)
- Overall: 43 of 100 (up from 41)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement to our previously communicated expectations.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | | March 2008 (actual) | March 2008 (predicted) | (actual) |
| Revenue | | 331 | 320 | 294 |
| Op expenses | | | | |
| | CGS (1) | (170) | (157) | (137) |
| | Depreciation | (32) | (32) | (30) |
| | SG&A | (33) | (32) | (26) |
| Operating Income | | 97 | 99 | 100 |
| Other income | | | | |
| | Asset sales (2) | 2 | 5 | 3 |
| | Interest, etc. | 6 | 5 | 7 |
| Pretax income | | 104 | 109 | 110 |
| Income tax | | (19) | (20) | (23) |
| Net Income | | 85 | 89 | 88 |
| | | $1.63/sh | $1.66/sh | $1.56/sh |
| Shares outstanding | | 52.3 | 53.5 | 56.0 |
2. Tidewater considers gains on asset sales to be an operating item.
We estimated Revenue would be 8.8 percent greater than in the year-earlier quarter, and it exceeded expectations with an increase of 12.9 percent. Revenue was down in the U.S., but up by a greater amount internationally.
Operating Expenses were higher than we expected. We thought Tidewater would achieve a Gross Margin in the quarter of 51 percent, and the actual margin was 48.8 percent. This translates into a Cost of Goods Sold (CGS) of 51.2 percent of Revenue.
Depreciation expenses were 9.6 percent of Revenue, which was a little less than our 10 percent estimate. Sales, General, and Administrative (SG&A) expenses were 10.0 percent of Revenue, matching our predication.
The lower-than-expected Gross Margin outweighed, although just barely, the positive effects of greater Revenue. This resulted in Operating Income falling short of our forecast by a mere 2 percent.
Our estimates for Non-operating income were close to the actual results. Income from asset sales was $3 million less than our estimate, and non-operating income was $1 million more than we forecast. The Income Tax Rate was 18.2 percent, slightly above the prediction of 18 percent. Net Income fell short of our prediction by 4.5 percent. However, the EPS shortfall was only 2 percent because the number of shares outstanding was fewer than expected.
Cash Management. This gauge increased from 8 points in December to 11 points now.
| March 2008 | 3 months ago | 12 months ago | |
| Current Ratio | 3.2 | 2.7 | 5.0 |
| LTD/Equity | 15.5% | 16.1% | 15.9% |
| Debt/CFO | 0.6 yrs | 0.7 yrs | 0.7 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 85.6 days | 87.3 days | 85.0 days |
| Working Capital/Market Capitalization | 13.5% | 11.6% | 16.3% |
| Cash Conversion Cycle Time (CCCT) | 63.4 days | 56.5 days | 70.3 days |
Tidewater has plenty of cash and low debt. The company is well managing its acquisition of new vessels.
Growth. This gauge increased from 8 points in December to 10 points now.
| March 2008 | 3 months ago | 12 months ago | |
| Revenue growth | 12.9% | 14.3% | 28.2% |
| Revenue/Assets | 46.2% | 45.5% | 42.5% |
| CFO growth | 12.5% | 1.9% | 46.3% |
| Net Income growth | -2.2% | 5.2% | 51.3% |
The small decline in Net Income was softened by a change in the income tax rate from 20.9 to 18.0 percent. The increasing ratio of Revenue to Assets is often a sign of sustainable growth, which can have long-term positive effects.
Profitability. This gauge remained unchanged from December at 4 points.
| March 2008 | 3 months ago | 12 months ago | |
| Operating Expenses/Revenue | 69.3% | 68.0% | 65.5% |
| ROIC | 16.2% | 16.2% | 17.1% |
| FCF/Equity | 7.0% | 5.4% | 10.6% |
| Accrual Ratio | 4.8% | 6.7% | 2.7% |
The increase in Operating Expenses is Tidewater's most significant challenge. Crew costs, Insurance and loss reserves, leases, and the ubiquitous "other" were all up substantially. We're also concerned that the increasing Accrual Ratio is indicating that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.
Value. Tidewater's stock price increased slightly during the quarter from $54.86 to $55.11. The Value gauge, based on the quarter-end price, slipped from the 17 points achieved three months ago to a still-healthy 16 points.
| March 2008 | 3 months ago | 12 months ago | |
| P/E | 8.3 | 8.4 | 9.2 |
| P/E to S&P 500 average P/E | 50.1% | 47.3% | 57.8% |
| Price/Revenue | 2.3 | 2.4 | 2.9 |
| Enterprise Value/Cash Flow (EV/CFO) | 6.0 | 6.7 | 7.3 |
This gauge is indicating that Tidewater shares hold substantial value.
Now at a modest 43 out of 100 possible points, the Overall gauge has fallen from lofty levels in the 60s last year. The offshore industry seems to be past the top of the latest boom-bust cycle, and we see this manifested in the Growth and Profitability gauges. Activity in the Gulf Coast is especially weak. Fortunately, the Tidewater's management has diversified the business into various international markets. Management also deserves credit from cost containment, despite the slowdown, and in investing in the future by acquiring more modern, efficient vessels without harming the company's financial strength. The drop in the stock price has pushed up the Value gauge to attractive levels. If economic growth proves to be more robust than currently feared, we will see the other gauges perk up, and Tidewater will once again become quite attractive.
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