Geospace Is Down, But Not Out

Geospace Technologies (NASDAQ: GEOS  )  is the market leader in wireless seismic data acquisition devices, commanding 50% of the global market. The stock has taken a beating recently and is trading about 50% below its 52-week high. The decline was due to postponement of a $29.4 million order from Seafloor Geophysical Solutions and lower than expected earnings. At the current price, the stock seems relatively inexpensive and now could be the right time to take advantage. Let me explain why.

Niche and diversified portfolio
Geospace has a diversified portfolio of niche products that translates into greater pricing power in the market. Apart from manufacturing seismic data recording systems, such as geophones, leader wire, cables, and connectors for on-land purposes, it is the only manufacturer of streamers that caters to the marine market.

In the wireless seismic systems segment, it has developed two products -- GSX, a land-based wireless equipment system, and the marine OBX system, which can be deployed at depths of up to 3,450 meters, providing high fidelity seismic data. The wireless equipment allows significant cost saving as well as higher productivity. As customers transition to this technology, the company is strategically placed to leverage its market leadership in this segment.

Source: Company 10K

Additionally, Geospace leads in permanent reservoir monitoring systems that are being increasingly used by oil and gas companies as it significantly accelerates oil production and increases extraction.

With several patents across products, Geospace does not seem to be in a mood to concede the lead it has over its competitors.

Demand in the marine seismic market
Barclays forecasts a 6.1% uptake in global E&P spending to $723 billion in 2014. Increasingly, oil exploration is going deeper and offshore. Geospace saw an increase in demand in marine products though demand for land seismic equipments declined. The company expects the softness in the land seismic market to continue. But the demand for products such as the GSX and OBX systems is expected to pick up as customers move from wired to wireless solutions and as more customers focus on deepwater drilling.

Evolving business model
Geospace Technologies currently sells its products to customers through direct sales of its products and leasing out its equipment. Since the introduction of rental equipment in 2010, the company has increased its rental fleet from 2,000 channels to 133,000. In Q2 2014, the company posted record revenues from GSX channel rentals, and it appears that the mix is shifting toward product rentals from direct sales in this slow market for land-based equipment. I expect the equipment rental revenue to gain at the expense of revenue from direct sales of equipment, as long as the market softness continues.

Strong financial position
As of March 31, 2014, the company had a cash position of over $44 million as against $2.7 million a year ago. Despite the low sales attributable to softness in the land seismic market, Geospace managed to generate cash flow from operations of $55.8 million during the six months of FY 2014. The company has no debt on its balance sheet, unlike its competitors.

Valuation considerations
It has one of the best margins in the industry. In addition, the company's P/E and EV/EBITDA currently stands at 10.63x and 6.09x respectively, significantly lower than the peer average. This indicates that the stock has been beaten down more than justified and we can expect a mean reversion.

Company Name P/E TTM EV/TTM EBITDA Net Margin
FLIR Systems (NASDAQ: FLIR  ) 31.86x 15.32x 8.50%
Ion Geophysical (NYSE: IO  ) NA 4.25x **
Dawson Geophysical (NASDAQ: DWSN  ) * 5.06x 2.15%
CGG (NYSE: CGG  ) NA 4.45x -2.79%
Amphenol (NYSE: APH  ) 24.13x 15.13x 12.82%
Geospace 10.63x 6.09x 15.78%
Average 28.00x 8.84x 5.17%

Source: Yahoo Finance

     

* P/E for Dawson is an outlier and has been excluded

 

**Net Margin for Ion is an outlier and therefore excluded

 

Geospace has been adversely affected by the cyclical nature of drilling activities in addition to the indefinite postponement of the $29.4 million contract. This led to some analysrs downgrading the stock rating. But the long-term prospects of Geospace remain intact. It promises to be a great story for long-term investors.

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