Wednesday, August 6, 1997

Dawson Geophysical Co.
(Nasdaq: DWSN)
Phone: 915-682-7356
Price (8/6/97): $20

HOW DID IT DOUBLE?

Rather than taking the Jed Clampett approach of finding crude by shooting at some food, Dawson Geophysical uses seismic technology. Off-the-charts growth has caused the company's stock to erupt from an April low of $9 1/2 to a recent high of $19 5/8.

Second quarter results announced in April saw EPS rise 73% to $0.26 on 37% higher sales. Third quarter results reported July 22nd had EPS tripling to $0.36, beating estimates by 38%, as revenues jumped 46%. For the first nine months of FY97, Dawson has recorded a 40% boost in sales and a 169% increase in EPS to $0.78. Profit margins have more than doubled, from 5.8% a year ago to 12% in the recent quarter.

What happened? More sophisticated 3-D data collection equipment and new drilling tools have created a technology-driven boom in the oil and gas exploration business. To take advantage of the opportunities, Dawson has added a fifth operating crew in the last year. It has also added a double complement of the big trucks that thump on the ground to produce seismic waves. This has made the existing crews more efficient. Plus, the all-important weather has been cooperative. Relatively fixed costs and fast-rising revenues make for some refined profits.

BUSINESS DESCRIPTION

Based in Midland, Texas, Dawson acquires and processes land-based three-dimensional seismic data used by oil and gas companies to determine if there's really black gold in "them thar hills." 3-D is to 2-D as an MRI is to an x-ray. You see the same stuff, but with an added dimension that often greatly improves the accuracy of a reading. The company uses truck-mounted vibrators and other devices to gather the data. Dawson's customers include major and mid-sized oil and gas companies plus some independent oil drillers.

Dawson collects data mainly in the southwestern U.S. It will soon add a sixth crew that will use cableless data collection equipment, allowing the firm to expand into more geographically challenging areas of east and south Texas. Capital expenditures of $16 million last year, in addition to outlays in the previous two years, have positioned the company to meet current demand.

Insiders own about a third of the shares outstanding. Competitors include VERITAS DGC (NYSE: VTS), WESTERN ATLAS (NYSE: WAI), and UNIVERSAL SEISMIC (Nasdaq: USAC).

Income Statement

      12-month sales: $43.3 million
      12-month income: $4 million
      12-month EPS: $0.94
      Profit Margin: 9.2%
      Market Cap: $84.4 million

      Balance Sheet*
      Cash: $1.2 million
      Current Assets: $12.4 million
      Current Liabilities: $3.0 million
      Long-term Debt: $4.4 million
      (*As of March 31, 1997)

      Ratios
      Price-to-earnings: 21.3
      Price-to-sales: 1.9

HOW COULD YOU HAVE FOUND THIS DOUBLE?

If the oil and gas boom didn't lead you to Dawson, a simple check of earnings announcements could have. The second quarter results showed sales up 37% and EPS soaring 73%. Rising margins matched with skyrocketing sales often point to a gusher. Also, management said the company could continue cranking out $0.26 per share in quarterly earnings for the rest of the year. With the stock around $10, it traded for less than 11 times forward estimates and sported an astonishing PEG ratio of 0.18.

WHERE TO FROM HERE?

The First call consensus EPS estimates of $0.96 for FY97 ending in September and $1.26 for FY98 are stale according to Dawson's CFO Christina Hagan. She said the last two quarters are "representative" of the company's performance potential, assuming favorable weather. Assuming that the fourth quarter splits the difference between these quarters ($0.31), you get a FY97 estimate of $1.09 per share. Hagan said FY98 results could fall in the ballpark of $1.65 per share.

These earth-shaking numbers give Dawson a 57% growth rate over the next five quarters, or a PEG of about 0.35. Using Hagan's FY98 guidance and the industry's long-term growth rate of 21%, we get a YPEG fair value of nearly $35.

The company's recent history reveals steady revenue growth but erratic profits. The whole oil and gas exploration business is prone to cycles, making both the PEG and YPEG less useful tools for evaluating Dawson. Bad weather can also flatten a quarter's earnings (note the $0.02 a share for the first quarter of FY96). Plus, the company seems shy about publicity, not even issuing press releases to discuss quarterly earnings.

Even so, investors hankering to get geophysical might find some added dimension in Dawson.

--Louis Corrigan (RgeSeymour@aol.com)

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