I am taking another look at BOLT due to the lower trading prices and the recently announced share buyback. I'm trying to determine if the drop in price is an overreaction or is there a significant risk that a portion of BOLT's revenues will be gone for a while.
The entire industry is impacted due to BP and potential drilling moratorium. Yes, the latest is that a federal judge blocked the moratorium, but I am operating under the assumption that there is a reasonable chance of some sort of deepwater drilling exploration pause (6months or more). Additionally, although shallow water drilling is not targeted for the moratorium, there may be extra red tape imposed on the companies wanted to drill, meaning everything will take longer and become more expensive, so companies like BOLT may need more time from hiring by the clients to completing contracts and getting paid.
Would you mind sharing your opinion on the following:
- Have you done any analysis on the short term (this and next qtr) impact on the company revenues and its ongoing ability to create FCF if the gov't presses on with a moratorium for deep drilling? How about long term? What percentage of BOLT's revenues comes from deep drilling in the USA waters vs shallow water drilling activities?
- Does BOLT count BP or anyone else involved in the Gulf disaster (RIG, etc) as a customer? If yes, what percentage of their revenues come from these entities?
- What is your assessment of BOLT's position in the 'life cycle' of drilling activities, ie if exploration of deepwater drilling is banned for the time being, would companies still need BOLT's equipment and services or is this a mute point because the moratorium does not impact the part of drilling that BOLT makes money on?
- Are there any scenarios where BOLT makes more money because of the new regulations (b/c it's equipment and services make the oil wells safer, for example)?
Thanks in advance!
Gordon
10:19 pm June 19, 2010
Jae Jun
Admin
posts 1336
30
At this point, BOLT and the entire industry is being hammered.
But I think that 2009 numbers may be too high.
I'm working on an update that will be very similar to what you see.
The new version is completely changed and Im sure people will like it so much better.
9:45 am June 18, 2010
infinitee00
Member
posts 30
29
Jae,
Very good writeup. I agree with your valuation although I am not sure how long it will take for BOLT to reach that valuation (I have had BOLT in my portfolio for almost 2 years so you can imagine :-)).
Although, I am still keeping my valuation based on 2009 numbers and haven't yet reduced it based on the last few quarters. From what I understand, I think BOLT has a lot of potential/upside and I don't want to sell it off just when it starts to take off. However, if it's business prospects deteriorates in comparison to it's competitors, I would rethink my valuation and would look for an exit path. At this point, I am not convinced that BOLT is doing any worse than it's larger competitors.
-Ranajit
Btw, that's a very cool stock snapshot !! Can we expect to see it in later versions of the OSV spreadsheets ;-) ?
11:43 pm June 16, 2010
Jae Jun
Admin
posts 1336
28
On another note, I haven't been writing much about BOLT because I wrote an exclusive article for Complete Growth Investor.
The last one I wrote was in Feb so I think it is ok to republish one here. The numbers are not the latest, but I wanted you guys to see my rationale from a few months back.
Let me know if you think things have materially changed.
Again, keep in mind that I think BOLT is worth $14-$15 now.
============================
Spider Graph and Business Valuation Overview
My assessment of BOLT is summarized by the spider graph above.
Low Risk: The company financial statements 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. Even if an acquisition is announced soon, it won't raise any red flags on the balance sheet.
BOLT is down purely affected by oil prices rather than fundamentals. When I first looked at BOLT, crude oil was around the low $70 mark and as of Feb 22, it is now $80.
High Growth: BOLT being in a niche market isn't expected to have high growth. It grew substantially during the oil bubble, but with oil flattening above the $70 mark, growth to stabilize to a consistent level which is why I assigned a 2/5 for this.
Undervalued: From the valuations that you will see, BOLT has a margin of safety of 50% or more.
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 BOLT is no talk but all walk.
Good Financial Health: No debt, plenty of cash, liquid assets. No worries.
Strong Moat: Within a niche where there aren't too many competitors. It's hard to pinpoint the moat exactly but the outperformance compared to peers and the higher returns suggests a moat does exist.
Financial Statement Analysis
Balance Sheet Analysis
$4 cash per share which makes up 37% of the share price
The lowest level of accounts receivables since 2006. Shows the company can collect money in hard times.
Inventory decreased from the prior year by 18.5% but what is so great about BOLT is that they are a custom shop so all the inventory is made up of raw materials and not finished goods. Work in progress make up 10% of total inventory only.
I'm never a fan of intangibles so it's very good to see that intangibles only make up 1.5% of total assets, however goodwill represents 10% due to the acquisition of AG and RTS.
Income Statement Analysis
Gross profit is above 40% has been increasing since 2003 so the top line has been managed very well even before the oil boom.
Despite a big drop in revenue, expenses were cut to which produced consistently high net margin above 20%. A very profitable company.
Tax rate is consistent at the 32% mark so earnings is not inflated by paying less taxes compared to previous years.
Statement of Cash Flows Analysis
Cash flow statement is clearn
BOLT has been collecting receivables and selling inventory to bring in cash
Small purchases of equipment has been purchased
For such a small company, BOLT throws off huge amounts of FCF and with all the cash generated by operations, no need for debt
Intrinsic Value Calculations
Discounted Cash Flow (DCF)
The DCF 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 the business and industry in order to assign a growth.
For the past 10 years, BOLT has always been FCF positive with no debt or one time extraordinary items. The company is extremely consistent and has grown FCF at a rate of 80% over the past 5 years and 20% over the past 10 years. But if I were to use this type of FCF growth in the DCF, the valuation would be astronomical and completely off.
Over the past 5 years, by taking a rolling median, i.e. comparing multiple timeframes rolling across different time periods and then taking the median, the CROIC (Cash Return On Invested Capital) is 21.5%. This means that for every $1 of cash invested in the business, BOLT has been able to return $0.215. This is an outstanding achievement by management.
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, about $0.20 is converted to 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 $9m
14.8% 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: $20.17. This is currently a 48% margin of safety based on conservative assumptions.
Benjamin Graham’s Formula
This valuation is based off Graham's formula from "The Intelligent Investor" which I have made modifications to as shown below.
Using a growth rate of 14% based off the median of normalized earnings and an EPS of $0.93 to more than price in the slowdown, the value comes out to be $18.57 which is at a 43% discount.
Earnings Power Valuation
Based on Bruce Greenwald's EPV method, the asset reproduction cost comes out to be approximately $5.20 per share. This is the value that a competitor will need to at least copy the assets in order to run a business similar to BOLT.
However, by calculating EPV, I get a value of $17.01 which is significantly higher than the reproduction value. This means that BOLT does in fact have a moat as 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 net working capital is the approximate value the company would fetch in a fire sale or liquidation and can be considered as the floor of the stock price.
You can see the performance of NNWC and NCAV stocks from a backtest study I performed for more details.
For BOLT:
NNWC is $5.07
NCAV is $6.11
This means that half the value of BOLT is made up of highly liquid, tangible assets while the other remaining half is what the market is valuing as the future business. A crazy lowball valuation.
Competitor Comparison
Competitors compared against include:
IO – ION Geophysical Corporation
MIND – Mitcham Industries
DWSN – Dawson Geophysical
GOK – Geokinetics
BHI – Baker Hughes Inc.
By comparing the competitors side by side, you can see how welll BOLT stacks up fundamentally against each one regardless of how big the competitor is. From an earnings standpoint, it's on par with the other companies as BOLT earnings dropped quite a bit, but earnings are always temporary setbacks. Compare this to the fundamentals of cash flow, FCF, margins, debt, current ratio and effectiveness and BOLT beats every competitor hands down.
IO and GOK has been the best performer but remember that in 2009, the low quality stocks were hit the hardest but also rose the fastest while the quality and sound investments rose steadily. BOLT Competitors
I had always read that you measure accounts receivables vs revenue as a check against any red flags. That is, to make sure that accounts receivables is not growing at a faster rate than revenue.
To me, comparing against change in revenue and change in AR is also another form of showing the company has been selling products without collecting money. If the % change is similar, then my understanding is that management is consistent in their selling principles.
What do you think?
11:31 am June 16, 2010
infinitee00
Member
posts 30
26
Post edited 11:41 am – June 16, 2010 by infinitee00
Jae,
Although, I think BOLT's financials have deteriorated from previous quarters. I also checked the financials of BOLT's competitors and they have seen similar declines as well. So, I am quite certain that this is due to macro-economic factors and not due to BOLT's business outlook in particular.
Btw, I don't quite believe that acct receiveables have dropped due to the company being well run or the management suddenly becoming more efficient. It is very common for companies to see an increase(decrease) in receivables when they see an increase(decrease) in revenues.
As for BOLT, here is the plot of how their receivables have tracked revenues over the last 50+ quarters (in millions of $).
So I think, a better way to measure management effcy would be to measure % change in revenue vs % change in recevables.
When I tried to plot that for the last 30+ quarters (using your spreadsheet), I didn't see anything that convinced me about management's improved efficiency.
Let me know your thoughts.
-Ranajit
P.S. 1 represents most recent quarter in both plots. I forgot to reverse the X-axis for the 2nd plot. Sorry for any confusion.
10:00 am June 16, 2010
Daballerand1
New Member
posts 2
25
I agree.
I believe a majority of oil/drilling related stocks will be affected due to Mr. Market and cotinue to dip. It will be interesting to see how low they could dip and if they still hold the value.
9:35 am June 16, 2010
Jae Jun
Admin
posts 1336
24
Their last quarter was nothing worth writing about. Margins went up, so did cash balance. Accounts receivables drastically reduced means the company is being well run.
However, business is clearly in the down cycle and the halt in deepwater drilling in the Gulf if going to affect business in the short term.
Definitely worth up to $15. I revised my estimate down from $20.
8:21 am June 16, 2010
Daballerand1
New Member
posts 2
23
Well this forum doesn't get much action, I am new and will try to spark it up…
Most of these posts were in the Sep/Nov 2009 area and the stock has regressed since than. Financially, the stocks earnings also regressed from the 08 numbers, including its EPS and ROE. However, its gross margin% went up… overall, not to worrisome numbers IMHO.
What is interesting, with the recent spill and oil prices at a low, BOLT could be even more discounted?
All in all, I see BOLT at a 15-16 price stock in 5 years, 12-15%, money could be elsewhere IMO.
1:35 am March 22, 2010
Jae Jun
Admin
posts 1336
22
Yes very cheap. But I bet it will take a while for BOLT to reach intrinsic value.
11:59 am March 20, 2010
Sid
Member
posts 33
21
This was a great find Jae, I wish it was under $10. I've turned over so many rocks lately and for once to see a company with such high quality fundamentals is refreshing. Really hope this stock gives me an opportunity to buy.
4:35 am March 20, 2010
Jae Jun
Admin
posts 1336
20
Well Buffett is closing in on 80 :) and good ol Munger is older still. :):)
Can't really say whether management should be replaced with younger folks.
Could be a plus or minus but that's just guessing.
2:02 pm March 19, 2010
Sid
Member
posts 33
19
Any concern with the age of management? CEO is 70, two other executive officers are 67.
1:10 pm February 12, 2010
Jae Jun
Admin
posts 1336
18
I dont base my intrinsic value targets on just one. Bolt is to me a $18 stock.
As long as the acquisition is smart and the conditions aren't ridiculous, we could see an addition to the top line with the acquisitoin target included in the income statement.
12:29 am February 12, 2010
zehua
Member
posts 96
17
Jae Jun said:
I do agree that mergers isn't the best way to grow. Of course we all want a company to grow organically but there are instances where acquistions make sense, as long as it is smart.
This is what the CEO wrote in the annual report.
"During fiscal 2009, we continued and intensified our search for suitable acquisition opportunities. Our searc is focused on strong oil field service companies that manufacture and sell proprietary products and whose acquistion would be accretive to out stockholder value. Our senior management has spent considerable time reviewing and assessing opportunities and we continue to do so. We believe our strong financial position, including our cash balance, shoud facilitate our ability to capitalize on a acquistion opportunities."
So you are probably right that an acquisition is coming.
BUT..
how much of a red flag is an acquisition? I know of companies that just try to acquire anything in order to inflate EPS and these companies all have terrible historical records of both operational and managerial performance. But there are many companies where smart acquisitions have led to increased shareholder value.
e.g. MHH is a current holding of mine that seek to grow by making smart acquisitions. It still doesn't make the company risky at all because from what management has been doing for the past 10 years, I can see that they don't jeopardize shareholders.
Another would be KTII which I recently sold. Great company, great management and they made great strategic acquisitions which increased the intrinsic value.
From what I see with BOLT, management seems to be capable and knowledgeable. They don't acquire anything too often and they haven't screwed anything up so far.
For me, acquisition hungry companies should be avoided but most companies will need to acquire in order to grow once they start filling their niche.
I guess what I'm saying is that KO or PEP wouldn't be the same company today had they not acquired other brands. Once they filled their market, they needed additional reach and so they got into the water, juice and other niche markets.
KO and PEP may not be the best example though.
I called BOLT today, and asked about that S3 form. It sounds like an acquisition is indeed coming. They said they take about 75% of the market share, that is a very good sign.
One concern is that they have 5 major customers that make up to 50% of their sales. If they lose a customer, they will be hit hard. But they have had relationships with those customers for 20 years.
I think this is a relatively safe bet.
Jae Jun: Do you feel a bit concerned about the MOS for EPV, as it is just $11 right now. The MOS is pretty low.
4:04 am February 3, 2010
Jae Jun
Admin
posts 1336
16
Similar but I dont think it is cheaper. BOLT has better numbers all round while DWSN has only recently been profitable. BOLT has proven that it is a capable company. They can convert sales to FCF at a much higher rate, have no debt and their returns have been much better.
8:37 pm February 2, 2010
john_allen
Member
posts 46
15
Jae,
Is there a reason you went for BOLT over DWSN? They seem like similar companies, but DWSN looks cheaper to me?
thanks,
John
2:29 am January 31, 2010
zehua
Member
posts 96
14
Their recent S3 form shows that they are going to issue more shares, or possibly bonds. They already have a pile of cash, and they are still trying to get more cash. Isn't this a worriesome sign?
11:08 pm December 14, 2009
Jae Jun
Admin
posts 1336
13
Thanks for the link but I disagree on many accounts.
You limit too many opportunities if you stick to "stable" industries. After all, what is a stable industry? I don't believe it exists.
Home
