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Dredging is dirty work, but it's also big business, and the sultan of silt in North America is Great Lakes Dredge and Dock
Great Lakes is one of those behind-the-scenes companies that keeps important things running without us even knowing about it. Take, for example, trade in and out of U.S. ports. Without Great Lakes keeping the depth of the ports and other waterways at appropriate levels, we'd have quite a problem on our hands.
This is a great business and a well-run company. However, Bahrain (of all things) has thus far kept me from buying shares.
This silt is our silt
Being a dredger in the U.S. is a pretty sweet deal. Under the Foreign Dredge Act and the Merchant Marine Act (known colloquially as the Dredging Act and the Jones Act, respectively), dredging vessels operating in the U.S. must be:
- Manned by U.S. crews
- Built in the U.S.
- Owned and operated by a company that is at least 75% owned and controlled by U.S. citizens
Together, these regulations effectively thwart any foreign competitors from entering the U.S. dredging market. In fact, there is only one foreign vessel operating in the U.S. -- it was grandfathered in before the Jones Act passed in 1920. I'm not too worried about it.
The result of all this is that the U.S. market is left to U.S. dredgers, of which there are about 250. Most of those are small, inland players, though, leaving the bulk of the bidding market to four major companies. And of those four, Great Lakes, which won 47% of the total 2009 bid market, is king.
Right place, right time
On top of Great Lakes' great competitive position, the company is currently finding itself in the right place at the right time. Several tailwinds should drive sharp growth in the domestic dredging market over the next half-dozen years.
Maintenance dredging -- keeping porting and waterways at their intended depth -- is not optional. Every year, silt naturally builds up in ports, making them shallower. You can put off the job, but you cannot avoid it altogether; eventually, ships will start running aground. The federal government, however, has been putting off these jobs, and we're reaching the point where doing so is no longer a viable option. There is some considerable maintenance dredging work coming up.
U.S. ports are, on average, five to ten feet shallower than international ports. This is scheduled to become a serious problem in 2014, when the Panama Canal expansion allows larger, deeper draft ships to pass through. The Army Corps of Engineers, which makes these decisions, has a serious incentive to deepen ports especially along the Eastern Seaboard to accommodate these ships -- and that means more work for Great Lakes.
Other, smaller drivers are at play, too. The BP
Out of left field
Great Lakes has a great position in a well-defended domestic market, but the thing that has kept me from buying shares in the past is -- I bet you didn't see this coming -- Bahrain. You see, the government of Bahrain hired Great Lakes to build, well, a bunch of islands. As cool as this may be, I didn't consider this to be a stable source of revenue, but Great Lakes' stock was pricing it in. Last year, I begrudgingly put this idea on the shelf.
In the last few weeks, suddenly, the turmoil in Bahrain has made Great Lakes interesting again. Despite reporting record financial performance in 2010, the company's stock is down 13% in the last few weeks. I'm not ready to pull the trigger just yet, but if the stock keeps sliding, we could have a real opportunity on our hands. If you'd like to stay up to date with my thoughts on Great Lakes Dredge and Dock, you can follow me on Twitter or we can help you keep tabs on it with My Watchlist, our free, personalized stock tracking service -- click here to add Great Lakes Dredge and Dock to My Watchlist.
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