Modernizing Fleet And Diversifying Into Offshore Wind Fuels Robust Growth Prospects

Key Takeaways

• Strategic fleet modernization and diversification into the offshore wind market are poised to enhance operational efficiency and open new revenue streams.
  
• Secured additional liquidity and a focus on capital port deepening, and coastal protection projects are expected to drive revenue and earnings growth.
  
• Dependence on large projects, fleet modernization costs, and regulatory challenges risk impacting revenue, profit margins, and operational costs.

Catalysts

Provides dredging services in the United States.

• The record 2024 U.S. Army Corps of Engineers' budget of $8.7 billion indicates robust opportunities for capital port deepening and coastal protection projects, likely leading to revenue growth as the company secures more projects in these areas.
  
• The commencement of new capital LNG projects in the third quarter will ensure heightened activity and increased utilization across their fleet into 2025 and 2026, contributing positively to revenue and earnings.
  
• Great Lakes Dredge & Dock's strategic efforts in modernizing their fleet, highlighted by the addition of new vessels like the Galveston Island and the under-construction Amelia Island, are set to enhance operational efficiency and project performance, impacting gross margins positively.
  
• The diversification into the offshore wind market, backed by the construction of the Jones Act compliant inclined fallpipe subsea rock installation vessel, the Acadia, opens up additional revenue streams from a high-growth, high-margin sector.
  
• Secured and pending additional liquidity through financial instruments provides the financial flexibility required for future capital expenditures, aiding in fleet modernization and expansion activities, which in turn supports revenue and margin growth.

Assumptions

• Analysts are assuming Great Lakes Dredge & Dock's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 7.8% in 3 years time.
• Analysts expect earnings to reach $76.3 million (and earnings per share of $1.09) by about October 2027, up from $44.1 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 16.0x on those 2027 earnings, down from 17.6x today. This future PE is lower than the current PE for the US Construction industry at 34.9x.
• Analysts expect the number of shares outstanding to grow by 1.26% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Risks

• The dependence on specific large projects, such as LNG-related dredging, exposes the company to risks if these projects face delays, cancellations, or reduced scope, potentially impacting revenue and profit margins.
  
• The ongoing need to modernize the fleet to remain competitive involves substantial capital expenditures, which could strain financial resources, affecting net margins and free cash flow.
  
• Fluctuations in the bid market and aggressive competition could lead to reduced project wins or lower-than-expected profit margins on new contracts, impacting revenue growth and profitability.
  
• Regulatory and environmental challenges, including the Biden administration's policies on LNG export licenses, could influence project timelines and viability, affecting the company's ability to secure new work and maintain revenue streams.
  
• The potential for increased operational costs, including maintenance capex and employee benefit costs, could erode net income margins if not offset by revenue growth from project performance and market expansions.

Valuation

• The analysts have a consensus price target of $14.0 for Great Lakes Dredge & Dock based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $972.1 million, earnings will come to $76.3 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 8.0%.
• Given the current share price of $11.53, the analyst's price target of $14.0 is 17.6% 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.