With more than 240,000 water main breaks per year in the United States, it’s easy to see why today’s pick has tremendous potential. Adding in its exposure in the mining, oil and gas industries, investors have an opportunity to participate in two rapidly-expanding industries.
Layne Christensen Company (LAYN)
from The Turnaround Letter
Operating for 130 years, Layne Christensen has evolved from a domestic water company into a global provider of services to governmental and private entities in the water infrastructure, mining and oil & gas industries.
Since the 2008-09 downturn, Layne has encountered a variety of headwinds. Overly-aggressive bids in its Heavy Civil division a couple of years ago have led to losses on several large projects. And its Mining division has suffered from the global slowdown in the mining sector as commodity prices have fallen.
While the red ink may continue to flow for a few more quarters, Layne has a number of the features that we like to see in a turnaround: A strong market position, a new CEO, a catalyst for change, a decent balance sheet and exposure to a growing market.
Layne is a major player in most of its lines of business. In the U.S. water sector, it is the largest driller of wells, number two in trenchless pipeline rehabilitation, and one of the top five in sewer repair and construction. In the mining sector, it is the third largest provider of drilling services.
In 2011, the company brought in new CEO Rene Robichaud, who has a strong resume as a turnaround leader. Robichaud has already realigned business units to make executives more accountable, divested non-core assets, and created a culture of more disciplined budgeting.
The most immediate catalyst for improved results is the completion of most of the poorly-bid, unprofitable projects.
The balance sheet is decent with a manageable debt load of about $100 million. Cash flow is improving, with many of the recent losses coming from non-cash write-downs.
In addition to improved prospects in its traditional business lines, Layne has strong growth potential in the newer parts of the oil & gas services sector. Layne’s water management expertise is likely to be in high demand in the fast-growing and water-intensive hydraulic fracturing (or “fracking”) area.
We believe that water-related issues will continue to grow in importance around the globe, and we think this bodes well for Layne. We recommend buying Layne Christensen stock up to 26.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, November 2013