Delivery Of Galveston Island And Amelia Island Will Increase Capacity And Diversify Revenue Sources

Key Takeaways

• New vessels and a large dredging backlog are set to increase capacity, supporting revenue growth and strong net margins through 2026.
  
• Strategic project focus and international market expansion aim to diversify revenue sources and enhance earnings through high-margin projects.
  
• Regulatory and geopolitical challenges in key markets, alongside increased capital expenditures, pose risks to revenue growth, project backlog, and financial margins for Great Lakes Dredge & Dock.

Catalysts

Provides dredging services in the United States.

• The delivery of new vessels, Galveston Island and upcoming Amelia Island, is expected to increase operational capacity, enabling Great Lakes to undertake more projects and enhance revenue streams.
  
• The $1.2 billion dredging backlog, with a significant portion from high-margin coastal protection projects, is poised to support sustained revenue growth and strong net margins through 2025 and into 2026.
  
• The successful award of the Sabine-Neches contract and strategic focus on large and complex projects provide future revenue visibility and potential for margin expansion due to high project margins.
  
• Expansion into international markets for the Acadia vessel, including offshore wind, oil and gas, and telecom projects, is anticipated to diversify revenue sources and capitalize on the growing global demand for subsea infrastructure protection, which could enhance overall earnings.
  
• Upgraded credit rating and robust liquidity position, enhanced by operational cash flow and credit facilities, support the completion of the newbuild program and potential acquisition of new projects that contribute to revenue and earnings growth.

Great Lakes Dredge & Dock Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Great Lakes Dredge & Dock's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.5% today to 7.3% in 3 years time.
• Analysts expect earnings to reach $67.5 million (and earnings per share of $0.96) by about April 2028, up from $57.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from 10.5x today. This future PE is lower than the current PE for the US Construction industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.42%, as per the Simply Wall St company report.

Great Lakes Dredge & Dock Future Earnings Per Share Growth

Risks

• The pausing of new offshore wind leases and permits by an executive order, pending review of the U.S. wind generation permitting and leasing process, could impact future project opportunities, affecting revenue and backlog growth related to offshore wind.
  
• Continued reliance on approvals and appropriations from the U.S. Army Corps of Engineers and potential delays in the bid market due to government resolutions could affect backlog replenishment and future revenue generation.
  
• The reliance on international markets for growth, particularly in offshore wind, entails exposure to geopolitical risks and market uncertainties which may impact the expected revenue from these new target markets.
  
• The impact of court rulings related to the Jones Act on non-U.S. vessels handling rock installation could challenge the competitiveness of the Acadia vessel, potentially affecting utilization and revenue.
  
• Increased future capital expenditures related to fleet maintenance and upgrades, including regulatory dry dockings, may strain cash flow and reduce net margins, particularly if project execution is delayed or costs overrun expectations.

Valuation

• The analysts have a consensus price target of $14.5 for Great Lakes Dredge & Dock based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $923.3 million, earnings will come to $67.5 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 9.4%.
• Given the current share price of $8.91, the analyst price target of $14.5 is 38.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.