Stock of the Week
NYSE Symbol: GLF
Industry: Oil rig vessels
Price as of 2/5: $38.41
A six percent rally to start the year has set up 2013 to be another great year. However, 2013 may be a little bumpier than 2012 with many of the major averages now trading at 5 year or all-time highs. Monday's 1% decline may be the start of a minor correction. The smart money may agree as money managers rotated into defensive issues. Last week the telecom sector rallied 3% followed by utilities and consumer staples. In Barron's this past weekend, the magazine speculated that besides defensive issues, many cyclical stocks could outperform even during a correction. That would be good news for the energy sector which is leading all other sectors in 2013. This week, we'll feature a small cap energy related stock that looks posed to break out. The stock of the week is GulfMark Offshore, symbol GLF. GulfMark is in the shipping business with a fleet of vessels for transporting supplies and workers for oil exploration companies to and from their offshore-drill rigs stations among other places. GulfMark is well positioned to benefit from the rising tide of global demand with a stock price that remains attractive trading for 10 times earnings, less than book value, a solid balance sheet, and a 2.7% yield. GulfMark is not a conservative stock, but has attractive growth prospects for growth investors looking for unique play in the energy space.
GulfMark will not report earnings for another couple weeks so cautious investors may want to wait to see the earnings, but longer term the fundamentals are in their favor. Demand for ships that GulfMark provides is only going higher. GulfMark has one of the youngest and highest-quality fleets in the industry with an average age of nine years. The company added 34 newly built vessels since 2006 while also disposing of 24 older vessels. Over the next three years, 11 new vessels will be turned out, with eight scheduled for delivery in 2013. The upgraded fleet will allow the company to compete for higher-margin work, and will likely generate strong demand, as drillers push into deeper waters and harsher environments, commanding better rates for their ships. The better rates will only improve their already strong balance sheet. GulfMark pays for its fleet upgrades out of internally generated cash flow, cash on hand, and proceeds from older vessel sales keeping their debt level under control. GulfMark also has a geographically diversified operation in three major drilling regions, the North Sea (42% of sales), Southeast Asia (15% of sales), and the Americas (42% of sales).
Earnings could jump significantly with the addition of the new vessels. In the last conference call, the CEO indicated the addition of nine new rigs with a combination of a colder winter could raise rig rates overnight. While sales for 2013 are expected to rise 17%, earnings are projected to double. Todd Scholl, who covers the company for Clarkson Capital Markets, estimates it will earn $4.91 a share in 2014 for a 50% increase. A company trading for a little more than 10 times earnings with growth prospects of 250% earnings growth looks really attractive, but with any small cap stock, earnings and the stock price can be volatile.