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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

GulfMark Offshore

January 29th 2014 GulfMark Offshore
NYSE Symbol: GLF
Industry: ship builder
Price as of 1/29: $42.06

2014 is not starting out the way most investors predicted with the Dow Jones Industrial Average and the S&P 500 solidly in the red for the year. Conversely, the Nasdaq and the Russell 2000 were solidly in the green until last weeks' swoon. Global growth was expected to pick up this year, but don't tell that to the cyclically sensitive sectors. While the broader market trades for 14 to 15 times earnings, the energy and material sectors have plenty of components trading for 10 times earnings with better dividend yields than the S&P 500 index. This week we'll highlight a small-cap energy related stock we highlighted a year ago which continues to demonstrate great growth prospects. The stock of the week is GulfMark Offshore. 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 coming out the Gulf of Mexico and the North Sea. To put a finer point on it, GulfMark's fleet may not be particularly large but it has the characteristics needed to secure high-spec work in both the North Sea and deep-water Gulf of Mexico where market conditions are really starting to improve. Sales are projected to grow 22% this year while earnings are expected to rise 75% and yet the stock only trades for 10.5 times earnings, 1.1 times book value of $39.54 a share with the dividend yield of 2.3%. GulfMark is a small cap stock with only a $1.1 billion market cap, but great growth prospects and attractive valuation and insider buying in December makes this energy related stock an intriguing play to start 2014.
GulfMark's revenue is secured by contracts that can extend for up to a year, and are based on per-diem rates. The North Sea and the Americas account for 85% of revenue, with Asia contributing the remainder. While demand has been strong for Gulfmark's vessel operators in their core markets, those markets are expected to tighten further. J.B. Lowe, an analyst at Cowen, notes in a recent report that in the Gulf of Mexico, the working rig count is expected to increase by 40% through 2015, compared with 24% vessel-supply growth. Newly constructed boats are particularly coveted, as they are better adapted for deepwater operations. That plays well into GulfMark's strategy of updating its fleet with an average age of eight year compared with the industry's 13 years. The company is on track to commission 11 new platform-supply vessels by 2015. Five ships have already have been delivered in the North Sea, driving sales gains of 20% in the region in the September quarter. Rates there rose 20% to $23,626 a day. Over time, the new ships will lift the average day rates of the entire fleet. Strong projected earnings are expected to lift free cash flow reaching $80 million in 2014, and $140 million in 2015.
In an Oct. 22 earnings release, GulfMark management indicated that the company's fourth-quarter revenue would approach the low end of its previously forecast range. In a related conference call, CEO Quintin Kneen blamed the low-ball forecast on "later-than-anticipated delivery of vessels in our new build program," not "market factors." The sale of some vessels in the quarter also played a role. Management couldn't be reached for comment. Hopefully the setback will be temporary. Insider buying in December hopefully validates that claims that the setback is temporary.
As mentioned before, Gulfmark Offshore trades for just 10.5 times earnings, 1.1 times book value, and 2 times sales. The stock has pulled back since making new all-time highs back in October. Insider buying of nearly $3 million in December bodes well for future business fundamentals. The stock is a small cap and can be volatile with a beta rating of 1.51. The energy sector in general seems to be out of favor due in part to the turmoil in South America and Asia. But investors able to handle the stock volatility should be rewarded if the company can match current estimates of 22% sales growth and 80% earnings growth. Cowen's analyst has a $62 price target for GulfMark while Barron's expects the stock to rally into the mid $60s. That's a nearly 50% return from current levels with a 2.3% dividend yield while you wait.