How to invest

Written by

Jae Jun

You Don’t Want to Miss Big Profits by Ignoring BOLT

Part 1: The Business and Risk of Bolt Technologies

Quick Overview of BOLT as an Investment

My assessment of BOLT is summarized by the spider graph shown here.

Low Risk: The company financial statement is very easy to read and analyze. There aren’t any hidden derivatives or tongue twisting jargon to confuse you. The balance sheet is very strong with plenty of cash and liquid assets. The Seabotix acquisition was easily consummated for with the cash on hand and has not weakened the balance sheet.

When I first looked at BOLT, crude oil was in the low $70’s mark and as of July 22, 2011, it is now at $100. Like I mentioned in the first BOLT post, BOLT is a seller of equipment to help detect oil and so their profits do not increase in line with oil prices, but the increase in activity as oil prices increases is the catalyst for BOLT’s profits.

High Growth: Operating in a niche market, BOLT is not expected to have high growth. It grew substantially during the oil bubble in 2007 and oil is consistently near the $100 per barrel range which implies that the upside is still there. In terms of physical growth, BOLT grew its tangible book value by 17% from 2008- 2010. Going through multiple rolling time frames, this is the slowest rate that BOLT has grown over a 3 year period.

Undervalued: From the valuations that you will see below, BOLT is being priced at around a 30% discount.

Well Managed: People complain on the Yahoo boards that the management team is senile and out of touch. The numbers from my analysis suggests otherwise. Management could be all talk and no walk, but the numbers disprove this complaint.

Good Financial Health: No debt, plenty of cash, liquid assets. No worries.

Strong Moat: Within a niche there are not many competitors. Going through the financial statements, the numbers reveal that BOLT does indeed have a competitive advantage.

Financial Statement Analysis

Before going further, here are some links to help you master analyzing each of the financial statements and how to bring it all together.

• Master the Income statement
• Master the Balance sheet
• Master the Cash flow statement
• Detected competitive advantages through the income statement, balance sheet, and cash flow statement

Moving on, here are some noteworthy points from the latest 10-Q.

Balance Sheet Analysis

• $3.52 cash per share, which makes up 28% of the share price.
• Inventory increase of 22% from prior year, but if you analyze the inventory, most of that build up has come from purchasing raw materials. Because BOLT creates products once orders come in as well as supply parts to previous customers, BOLT does not hold much completed inventory. Work-in-progress makes up only 10% of total inventory. One way you can analyze inventories quickly is with the financial statement analysis spreadsheet you get with the premium package.
• The one bad thing that I see resulting from the SBX acquisition is the big jump in intangibles. It has from from approximately 12% of total assets to 30%. Looking at the results for SBX, BOLT seems to have overpaid.
• On the liabilities side, short term debt is $6.9m. Long term debt is zero. With a quick ratio of 5.7 and current ratio of 7.8, no need to even worry about the health of the company.

Income Statement Analysis

• Gross margin of 50% for the past two years, and an average of 45% for the past 10 years is extraordinary and unheard of for most companies. But BOLT being the leader it is and being recognized for it, can increase prices. Definitely has a competitive advantage in its industry.
• The clean structure of the company allows BOLT to enjoy net margins above 15%.
• Tax rate is consistent at the 32-34% mark, so compared to previous years, earnings are not inflated by paying less in taxes. This is a point you want to take note of when analyzing the quality of earnings.

Statement of Cash Flows Analysis

• Clean Cash flow statement
• Only number that sticks out is the acquisitions figure under cash flows from investing activities

How Much is BOLT Worth?

Discounted Cash Flow (DCF) Stock Valuation

The DCF stock valuation method requires some assumptions and while it isn’t the perfect method, it is a very reliable and accurate tool if you keep it on the realistic to conservative side. The reason people get into trouble is because they fail to understand both the business and the industry when assigning a growth rate. Feel free to download a free copy of the DCF spreadsheet today.

For the past 10 years, BOLT has always been FCF positive with no debt or one time extraordinary items. The company is consistently profitable and has grown FCF at a staggering rate of 122% over the past 5 years and a blistering 57% over the past 10 years. Obviously, no matter how small and profitable a company is, this kind of number is impossible to duplicate year after year. Using this type of FCF growth in the DCF would produce astronomical valuations and be completely off.

Over the past 5 years, by taking a rolling median (ie, comparing multiple timeframes rolling across different time periods and then taking the median), the CROIC (Cash Return On Invested Capital) is 11.5%. This means that for every $1 of cash invested in the business, BOLT has been able to generate returns of 11.5c . I like to see this figure in the 15% range, but 11.5% is still no laughable figure.

Another metric I like to use the FCF/sales. It shows how much of sales converts directly to the bottom line. In BOLT’s case, for every $1 of sales, 10% is converted to FCF. A company that has a FCF/sales above 5% can be considered as a good generator of FCF.

So not only is the business a money generator, management adds to the equation to make it even better.

Here are the assumptions to get a DCF intrinsic value.

• Starting FCF of $9 million even though 2010 brought in $12m
• 14% growth rate for the next 10 years with a terminal rate of 3%. Considering the strength and size of the company, these are very conservative numbers.
• 15% discount rate

DCF intrinsic value: $17.19. This is currently a 27% margin of safety based on conservative assumptions.

A reverse DCF valuation shows with the assumptions made above, the market is pricing BOLT with 6% growth.

Benjamin Graham’s Formula

This valuation is based on Graham’s formula from The Intelligent Investor, which I have made modifications to as shown below.

• Using a growth rate of 14% based on the median of normalized earnings
• EPS of $0.68 for the TTM EPS

the value comes out to be $19, which is a 34% discount from current prices.

Earnings Power Valuation

Based on Bruce Greenwald’s EPV method, the asset reproduction cost comes out to be approximately $6.29 per share which is an increase from $5.20 when I first wrote about BOLT. This is the value that a competitor will need in order to at least copy the assets to run a business similar to BOLT.

By calculating EPV, I get a value of $16, which is significantly higher than the reproduction value. This means that BOLT does in fact have a moat—the value of the business is worth more than the assets. If a company had no moat, the EPV would be roughly the same as the asset reproduction cost.

For more information on how EPV works and how to calculate it, be sure to read my EPV articles.

Asset Valuation

Net working capital is the approximate value the company would fetch in a fire sale or liquidation and can be considered to be the floor of the stock price.

A backtest on NNWC and NCAV stocks has shown how profitable net net stocks can be.

Use this free net net spreadsheet to calculate the net net value of BOLT.

• NNWC is $3.92
• NCAV is $5.19

Based on NCAV, the market is valuing the future of BOLT to be worth $7.44 (12.63-5.19=7.44).

Fair Value PE Model

In order to find a fair value PE using the absolute PE model, I’m deriving the number based on the earnings growth rate, dividend yield, business risk, financial risk and earnings visibility.

• Expected Earnings Growth: 14% (based on the values I’ve been using so far)
• Dividend Yield: 0%
• Business Risk: 0.9 (giving BOLT a 10% premium over competitors in this category)
• Financial Risk: 0.9 (giving BOLT a 10% premium over competitors in this category)
• Earnings Visibility: 1.1 (inconsistent EPS due to cyclic nature of the industry)

Compared with the current PE of 18.7, the fair value PE of 17.5 isn’t that far off, suggesting that BOLT could be fairly valued.

Comparing against 5 Competitors and Still on Top

Competitors compared against BOLT include:

• ION Geophysical Corporation (IO)
• Mitcham Industries (MIND)
• Dawson Geophysical (DWSN)
• Geokinetics (GOK)
• Baker Hughes Inc. (BHI)

By comparing the competitors side by side, you can see how well BOLT stacks up fundamentally against each one regardless of how big the competitor is. Compare the fundamentals of cash flow, FCF, margins, debt, current ratio and effectiveness, and BOLT beats every competitor hands down. It simply doesn’t get the love it deserves.

Time to Add it to the Watchlist

A lot of the times when I start writing an analysis for a company, I come across some glaring issues during the writing and I end up throwing the company in the rubbish pile. But every time I review the analysis for BOLT, I’m more than convinced that BOLT is an excellent company.

I sold back in April, but give the chance to add BOLT i nthe $10-11 range, I’ll be doing it in a heartbeat.

Disclosure: None.

Written by

Jae Jun

Back in early 2010, I started writing for Complete Growth Investor with my first article highlighting Bolt Technologies. Here is the link to the original BOLT analysis that started my investment in the company.

Bringing you up to date, I sold my entire position back in April of 2011, and while I wait for BOLT to fall back into the $10 – $11 range, here is an updated version of the investment thesis.

Focus on the business and value and you’ll realize what a gem of an opportunity BOLT could be despite the small market cap.

The analysis will be broken up into two articles. The first part will focus on the business and the risks. The second part will look at various quantitative analyses and comparisons.

Who is Bolt and How do they Make Money?

Aside from some technical terms, BOLT is very easy to understand and has the aura of a typical Buffett company.

An overview of the business can be found in the 10-K or the website, but to briefly sum it up, the company is broken down into three operating units (now four); Bolt Technologies (BOLT), A-G Geophysical Products (AG), Real Time Systems (RTS), and the recently added Seabotix (SBX).

1. BOLT develops and sells seismic air guns to the marine seismic industry.
2. AG develops and sells underwater cables, connectors, hydrophones, and other seismic related parts and equipment, as well as BOLT air guns.
3. RTS develops and sells air gun controllers/synchronizers, data loggers, and auxiliary equipment (think remote controls).
4. SBX is the fourth operating unit and added in Jan 2011 via an acquisition. SBX is a manufacturer of underwater remotely operated robotic vehicles. With the acquisition being so recent, there isn’t enough information on Seabotix to get a full understanding of its operational impact on Bolt’s financial statement. Future quarterly reports should provide more specifics.

Oil and gas drilling is not an easy task, nor is it cheap. With BOLT’s lineup of high quality products, explorers and drillers are willing to pay for such devices to increase the success rate of their digs.

What are Seismic Air Guns and Why?

The main revenues come from air guns, so a brief understanding of how air guns work will help visualize the business, operations, industry, and potential.

The purpose of an air gun is to create a 3D or 4D image of the sea bed by firing acoustic waves.

The image below represents an excellent illustration of how the whole process works. An air gun is attached to the ship called a survey ship, and fires waves aimed at the sea bed. The waves are reflected from the contours of the sea and ocean bed to the hydrophones, which collects information on the path, distance, strength and anything else related to the reflected wave.

This information is then used to create 3D or 4D model images of the layers of the ocean floor such as the image below.

From this brief intro to air guns and how they operate, think back to the four operating segments of BOLT.

• BOLT  = air guns
• AG = cables, connectors, seismic, and air gun accessories
• RTS = data gathering and controllers
• SBX = underwater remotely operated robotic vehicles

As you can see, all four operating segments are highly synergistic yet differentiated.

Bolt originally started with air guns and then AG was acquired in 1999, RTS in 2007 and SBX in 2011. BOLT acquired three companies in a span of 12 years. This is one clear indicator that management is extremely selective of choosing the best possible match for the company.

BOLT’s Current Situation

BOLT operates in a cyclical environment and is heavily dependent on oil prices and demand. To simplify things, when the cost of oil per barrel is high, exploration companies increase their spending on searching and drilling. When oil prices are low, exploration and drilling activities drop.

As long as oil prices remain above $80 per barrel, oil explorers will be able to produce profits from the oil they drill.

What are the Risks?

The fewer variables and risks you have to work with, the smaller the field of outcomes and the more likely the investment will work out successfully. Plus, it also makes the investment much simpler to understand. Understanding and conviction in your analysis are keys to capturing huge gains.

Getting back to the point, there are five risks outlined below, but I feel that the first four are the viable risks for BOLT. However, I don’t believe any of them to be the critical “don’t-touch-with-a-10-foot-pole-type” risk.

1. Highly dependent on oil and economy

The obvious risk is the cyclic nature of the industry. It’s a pyramid effect. Low oil prices mean, less demand in producing, less exploration and eventually less orders for oil discovery products.

2. Sales Dependent on Major Customers

In 2009, the majority of sales came from the following three customers

• Schlumberger Limited: 16%
• Compagnie Generale de Geophysique-Veritas makes: 15%
• Petroleum Geo-Services: 9%

In 2010, the majority of sales came from the following three customers

• Compagnie Generale de Geophysique-Veritas: 23%
• Bureau of Geophysical Prospective, Inc. (China): 11%
• Schlumberger Limited: 7%

A single customer makes up quite a large percentage of sales. You certainly do not want to lose such a customer. However, judging by how the major customers change dramatically year over year, I don’t mind concluding that BOLT has a diverse customer base and is capable of replacing customers with new ones. Who knew that a Chinese entity could make up 11% of sales?

3. Revenues from foreign sales

Revenues from foreign sales make up 78% of revenue. This can affect profit due to currency exchange rates and with all the Euro worries going on at the moment, the dollar has been rising against the Euro which will erode profits.

4. Deepwater Horizon rig Explosion in the Gulf of Mexico

News of the Gulf oil spill is long gone, but there could be further regulation and restriction on offshore drilling which could affect the sales of BOLT products.

5. Current management team age

The management team at BOLT are at the senior stages of their lives and could possibly retire any minute. Raymond Soto, aged 71, is the chairman, president and CEO. Three of the five members of the executive team, including Soto, are 68 and older, with the youngest being the vice president at 50 years old.

You could interpret this as a team that is very experienced and knowledgeable of the industry and business. Or if you are bearish, some have labeled this management as over the hill or senile. Seeing as how the company is rock solid, I’m going for experienced and shrewd.

If you look at Soto’s history, he has been CEO since 1990 but a director of the company since 1979. In total, he has been involved with the company for a mind boggling 32 years. The only way I can interpret this is that he has some serious passion for the job.

Awesome Niche Company

BOLT operates in a niche market where it is a leader. In the industry, its products are well known and as I go through a lot of the numbers in the following post, you’ll be able to get a better picture of how solid this company is and has been.

Disclosure: None