(Image: Zen Buddha Silence, by Marilyn Barbone)
May 24, 2020
We continue with examples of Boole’s quantitative investment process in action.
Last week, we looked at TravelCenters of America (TA): https://boolefund.com/travelcenters-america-ta/
The week before last, we looked at Teekay Tankers (TNK): https://boolefund.com/teekay-tankers-tnk/
Previously, we looked at Ranger Energy Services (RNGR): https://boolefund.com/ranger-energy-services-rngr/
Before that, we looked at Macro Enterprises (Canada: MCR.V): https://boolefund.com/macro-enterprises-mcr-v/
This week, we are going to look at Tidewater (TDW), the largest OSV (offshore service vessel) owner globally. Tidewater has 198 OSVs and is the most geographically diverse OSV operator. Also, the company has become the most cost efficient OSV operator. Tidewater has a young, modern fleet with high-specification tonnage. Moreover, the company has a strong balance sheet, with $188 million in cash and $282 million in debt.
Step One
First we screen for cheapness based on five metrics. Here are the numbers for Tidewater:
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- EV/EBITDA = 3.85
- P/E = 2.95
- P/B = 0.21
- P/CF = 2.06
- P/S = 0.43
These figures make Tidewater one of the top twenty cheapest companies out of over two thousand that we ranked. (The current market cap is $206 million, while current enterprise value is $308 million. Normalized earnings is approximately $70 million.)
Step Two
Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company. For more on the Piostroski F-Score, see my blog post here: https://boolefund.com/piotroski-f-score/
Tidewater has a Piotroski F-Score of 7. (The best score possible is 9, while the worst score is 0.) This is very good.
Step Three
Then we rank the company based on low debt, high insider ownership, and shareholder yield.
We measure debt levels by looking at total liabilities (TL) to total assets (TA). Tidewater has TL/TA of 23.4%, which is excellent.
Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders. At Tidewater, insider ownership is approximately 3%.
Shareholder yield is the dividend yield plus the buyback yield. The company has not bought back shares, but has instead issued shares. The company pays no dividend. Thus, shareholder yield is close to zero.
Each component of the ranking has a different weight. The overall combined ranking of Tidewater places it in the top 20 stocks on our screen, or the top 0.8% of the more than two thousand companies we ranked.
Step Four
The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items, hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.
Here is the company’s investor presentation: https://s25.q4cdn.com/923634175/files/doc_presentations/2020/Replacements/Tidewater-IR-Presentation-111120-(1).pdf
Offshore oil drilling—which is what Tidewater supports—has slowed significantly due to a drop in oil demand caused by stay-at-home orders to deal with the coronavirus. In response, OPEC+ has cut oil production by a record amount. Eventually, a vaccine for the coronavirus will be found. In the meantime, widespread testing plus contact tracing will allow the world economy to gradually return to a more normal existence.
OPEC+ will maintain supply cuts until oil is at least $50 to $60, if not higher. Countries including Saudi Arabia and Russia (the two largest producers in OPEC+) need oil to be at least $50 to $60 to fund their states.
In sum, oil should return to at least $50 to $60, if not higher, within a few years. Offshore oil drilling will gradually recover. Offshore service vessel operations will be needed more and more. Tidewater will be a survivor due to its high cash balance and low debt, whereas some other OSV operators may go bankrupt (like Hornbeck Offshore). Also, as noted earlier, Tidewater is the lowest cost OSV operator.
Intrinsic value scenarios:
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- Low case: Tidewater is probably worth at least 50% of current book value (which is understated) of $24.77 a share. That’s $12.39, which is over 140% higher than today’s $5.12.
- Mid case: Tidewater is likely worth at least book value (which is understated) of $24.77 a share. That’s over 380% higher than today’s $5.12.
- High case: Tidewater may be worth 150% of book value (which is understated) of $24.77. That’s $37.16, which is 625% higher than today’s $5.12.
BOOLE MICROCAP FUND
An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: https://boolefund.com/best-performers-microcap-stocks/
This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.
There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
If you are interested in finding out more, please e-mail me or leave a comment.
My e-mail: jb@boolefund.com
Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.