Thursday, September 3, 2009

Stretched valuation at Layne Christensen (LAYN)

AlphaNinja - Layne Christensen (LAYN), a water-infrastructure construction firm, beat earnings, announcing 2nd quarter earnings per share of 23cents, 9cents ahead of expectations. The company looks extremely pricey though, and I can't even "back into" an earnings scenario that justifies the current share price. I think short-covering, rather than new investor interest, is responsible for the 11% lift in the shares Thursday.

The good and the bad, from the release:

"Activity levels in the second quarter were up across all our business segments from the extremely depressed first quarter levels. In our water infrastructure division, the more infrastructure intensive pipeline construction product line was actually up over the prior year's second quarter. I believe this is quite a feat in today's economy. The weak earnings comparison to the prior year in our water infrastructure division is coming from Layne's traditional water business where demand for additional water supply, outside of a few drought stricken markets, is still weak. At this point, across all our divisions, it does not appear we will see much appreciable change in activity in the current market environment, but we do appear to be off the bottom for now." -- Andrew B. Schmitt, President and Chief Executive Officer

So business is bottoming and they're off the low. The current EPS (earnings per share) estimate for 2009 is 48cents so lets be very aggressive and say that with this 9cent beat and an increase in the next two quarters they earn a dollar a share this year, and take next year's EPS to 1.75 (versus 95cents where it is now). Why be aggressive with these estimates? Because like I'd be conservative and err on the downside for earnings on a long bet, with a potential short/sell I'd rather give them upside benefit of the doubt and see if it's still not a good value.

$1.75 in earnings next year means $34million in net income, and certainly less in Free Cash Flow (capital expenditures have been persistently high, and won't come down enough). So maybe $20-25million in Free Cash Flow in 2010 is a 5% FCFY(Free Cash Flow Yield) based on (net-of-cash) the current market value, a much lower yield than this risky company should have. And again this is with me using much higher estimates than the street.

Below is some more previous operating data. The stock is expensive now, and I can't even stomach how anyone bought shares near $60.....I think part of the reason stocks like this get high valuations (at least temporarily) is the "story" nature of owning the "water infrastructure rebuilding" concept, which people think will be so big in the future. It may, but fundamentals like reasonable valuation still matter.

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