Oil and Gas Demand Will Give This Stock a Boost

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Conrad Industries (NASDAQOTH: CNRD) builds, repairs and refurbishes marine vessels at its facilities in Louisiana and Texas.  It serves both inland and coastal customers.  CNRD constructs large and small deck barges, single and double hull tank barges, life boats, push boats, towboats and offshore tugboats and other supply vessels. 

The stock appears cheap trading at a TTM P/E of 5.74x.   Its end markets are attractive, cash flows strong, and earnings are relatively stable even in a downturn for a cyclical.   The financial metrics for CNRD are another highlight with a 22% ROE, 15% ROA, and an operating margin of 11.8%, the latter within range of where it should be for this type of business.  In addition, CNRD has cash of $5.27 per $18.25 share and a debt to equity ratio of 1.73.  Management has a track record of returning cash to shareholder via share repurchases and most recently a $2.00 special dividend declared prior to the end of 2012.    

CNRD has significant exposure to oil & gas, energy and chemical industries. Conrad does not provide a breakdown of their business tied to inland and coastal waters but both are likely key drivers.  The part of the business tied to inland waterways, which means Mississippi River system traffic for the most part, has benefitted from oil and gas shale related traffic.  A lack of pipeline capacity has pushed oil and gas into tank barges and railcars over the recent years.  In addition, low cost natural gas has served as cheap feedstock for the petrochemical industry leading to increased exports.  All of these are transported via tugboats and barges and companies like Kirby (NYSE: KEX) have benefitted in though higher earnings and stock price.   Kirby has a fleet of almost 1000 tank barges and many other vessel types.  An aging fleet and replacement needs offer further support in both inland tank and dry bulk barges should also support new builds and repairs for the coming years. 

In addition, their coastal business, more heavily tied to oil & gas and offshore rig counts in the Gulf, is also improving.  Expectations are for rig counts in the Gulf to increase which should support order activity for Conrad’s services.  The largest offshore drilling contractor, Transocean (NYSE: RIG), is planning to significantly increase production.  In December, Transocean announced that they had recently received new contracts worth $119 million. Transocean’s backlog has been significantly increasing which means that other companies involved in offshore drilling are seeing demand as well.  The strong end markets and positive outlook have led Conrad to recently expand capacity leading us to believe earnings can continue to grow.  

The strong end markets pushed the backlog higher to $104.4 million at the end of 3Q12 up from $87.7 million at the end of the prior year.  A quick note for investors, the backlog and bookings for this stock should be more in focus than revenues.  The stock will likely sell off behind any decline year over year in backlog so investors should key on this and be careful if it begins to soften. 

The shares of Conrad have performed well over the past few years, up 145% since January 1, 2011 and the multiples are within their historic range.  Typically CNRD trades in a 5-6x TTM P/E range and the multiple peaked in early 2008 at 8.73x earnings.  That said, the range and multiple is pretty low for a stock like this. 

Negatively impacting the stock price is likely the low volume and hence little institutional interest.  An average volume of 5,796 shares traded per day over the past three months makes the stock difficult to get in and out of.  The depressed multiple should have attracted acquirers and given their stable cash flows, private equity.  Management holds a significant portion of the firm and may not be willing sellers since it is a family business is one possible reason this has not happened. 

This is a value stock that lacks a clear identifiable catalyst, but should pay off for an investor with patience.   Given the cash flow, financial stability and end markets, the multiple should expand.  If it remains low, management can continue to use cash flow to buy back shares and should consider taking the company private.  Multiples in this range are fair if earnings were at peak levels.  That is not the case for CNRD.  Their offshore/coastal end market is seeing improving fundamentals, the inland related business should remain strong and Conrad is expanding its footprint, product offerings and capacity in order to benefit from higher levels of demand.  All of this should translate to higher earnings and a higher share price.   

mthiessen has no position in any stocks mentioned. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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