Description

Setup

My two submissions are due in three days and I'm taking my family to Nashville for the long weekend. Understandably, my focus is on scouting out the best hot chicken options. 

Description (from the company's website)

Great Lakes Dredge & Dock Corporation (GLDD) is the leading provider of dredging services in the United States specializing in projects that help improve and protect our nation’s infrastructure and coastlines. GLDD is the only U.S. dredging service provider with a long history of performing significant international projects. With a robust portfolio of major dredging projects, we bring extensive experience and a strong safety record. Our diverse fleet of equipment includes hopper, mechanical and hydraulic dredges, and approximately 200 support vessels. Established in the Chicago area in the late 1800s, GLDD is a publicly traded company with corporate headquarters in Houston, Texas, regional business offices in New York City, New York, Jacksonville, Florida, and Houston, Texas, and marine yards in five U.S. locations.

Overview

We have owned Great Lakes Dredge for 17 years, trading around the position, since it was a busted spac on the tailwind of the prior spac frenzy. In that time we have experienced both the highs and lows of the business and have lived through several iterations of management teams. Whatever 'edge' we have is one of temporal longitude and, in this case, having spent time upon a working vessel. The latter showed us just how difficult the work is. Picture a large vessel 100 yards offshore in the Atlantic Ocean--tides ebbing and flowing--with an enormous pipe like structure running to the shore. From your vantage point you see a geyser of sand being expelled onto the beach with torrential force, replenishing the erosion caused by storm damage and the nature of tides. The work is difficult, made complicated by weather events, and is capital intensive through the cycle----vessels need to be maintained and new vessels built to adapt to more difficult tasks in an increasingly efficient way. It's relatively defensive in nature, witness the strong results in '20, and the government funding is in place for projects to be put out for bid. To boot, 1.5b was allocated to the maintenance of harbors and rivers in the recent Infrastructure Investment and Jobs Act.

Thesis

This is a good business. Returns on capital are 20%, it's oligopolistic in nature-GLDD has north of a 50% market share position, the largest customer (US Corp of Engineers) pays it's bills on time, climate change is an inexorable tailwind, and there is a large untapped market (offshore wind) that should provide additional business momentum. Because of the fixed cost nature of the business, when things go poorly https://investor.gldd.com/news-releases/news-release-details/great-lakes-reports-fourth-quarter-and-full-year-2022-results the optics look terrible. We think 2022 was an annus horribilis and should be viewed as an anomaly rather than indicative of future years. Dredging is a rational industry and we don't see why incremental dollars shouldn't flow to the bottom line as they have in recent memory. If that proves to be a correct assumption than we believe today's entry price will be quite favorable in hindsight.

 Valuation

We have longed believed that investors have a blindspot for captial intensive companies that have spent meaningful sums on vessels, plants, etc that have yet to be put into service. They tend to penalize the enterprise values of such companies without giving any credit for incremental profitability that should be enjoyed as a result of the investment. In the case of GLDD, they have approximately 100mm of unfinished vessels for which the money has been spent. We believe, having lived through the most recent capex cycle, that cash on cash returns should range from 15-20%----and thus we mentally add about 15-20mm of ebitda to what we believe is a more normalized 150mm ebitda figure--a number supported by recent years when port deepening projects were 100% higher than in '22 and, in our view, more indicative of what the future might hold. As such, at 6.12 the valuation is:

shares outstanding: 66.1

market cap: 405mm

net debt: 315mm (high yield note termed out to '29)

EV: 720mm

ev/ our estimate of normalized ebitda: 4.3x

ev/'19 ebitda: 4.4x

ev/ '20 ebitda: 4.2x

ev/'21 ebitda: 4.8x

 Management

One of the benefits of having lived with the name for years is we've seen what a bad management team looks like. Unsurprisingly, the SPAC sponsor back in 2005 was a financial entity, Wall Street lifer type. This is a logistics and engineering business where pricing expertise borne of experience is crucial. For years, the company lacked pricing discipline , incurred tens of millions of expenses from inefficiently positioned vessels mostly in international waters, and made numerous unforced errors. Lasse Peterson joined the company in early 2017 and immediately brought a sense of professionalism to the enterprise. The effects on the financials were dramatically apparent and occurred almost immediately----leverage decreased from 5x to 2x in the span of two years. 

 Conclusion

Catalyst

• Some of the large harbor dredging projects which were supposed to be put out for bid last year get announced in '23 and GLDD wins its share
• Results normalize in the fourth quarter