LAYN

[David Randolph]

The following analysis was written on October 3rd, 2007:

David,
Could you pls relook at LAYN? Its done pretty nicely for me since we last discussed it..i think it goes higher..

http://www.3stocksonfire.org/trading/index.php?topic=9240.0

Thanks,
Nick

1. Profile

Layne Christensen Company (LAYN) provides drilling and construction services and related products to water and wastewater infrastructure and mineral exploration markets. It also produces unconventional natural gas for the energy market. The company operates in four divisions: Water and Wastewater Infrastructure, Mineral Exploration, Energy, and Other. The Water and Wastewater Infrastructure division provides a range of water-related services and products, including hydrological studies, site selection, well design, drilling and well development, pump installation, and well rehabilitation. It also offers design and construction of water treatment facilities, and the provision of filter media and membranes to treat volatile organics and other contaminants, such as nitrates, iron, manganese, arsenic, radium, and radon in groundwater. This division also offers environmental drilling services to assess and monitor groundwater contaminants. The Mineral Exploration division provides a range of drilling services for the mineral exploration industry. Its aboveground and underground drilling activities include various phases of core drilling, diamond, reverse circulation, dual tube, hammer, and rotary air-blast methods. The Energy division focuses on the exploration and production of unconventional gas properties. The Other division offers specialty energy services. The company operates in North America, as well as Africa, Australia, Europe, Canada, Mexico, and South America. As of January 31, 2007, the company had 361 net producing wells. Its customers include municipalities, investor-owned water utilities, industrial companies, global mining companies, consulting and engineering firms, heavy civil construction contractors, oil and gas companies, and agribusiness. Layne Christensen was founded in 1981 and is headquartered in Mission Woods, Kansas.

2. Stock Price History



I think the video analysis I made in April 4, 2007, explains fairly well LAYN's history between 1992 and 2004:

A video Analysis from 3StocksOnFire.org

In my forecasts I expected LAYN to rise about 20%, on average, for the next 10 years. However, the stock is up 43% over the last 6 months, that is, since I made the analysis, so why the stronger pace?



Before I try to give a plausible explanation, let me give my congratulations to nicknite20 for buying and holding LAYN, it has been a great investment. His posts at the Stock Picking board have some motives for the steep bull trend.

One plausible explanation could be that I used to work under a 10 year valuation model, instead of the current 3 year model, which I believe can capture medium term fundamental swings better. If, instead of the 10 year calculus I had made a three year forecast, since the last three years average revenue growth was 39% (not 25% as I have in the video analysis), the model would return a higher than 20% share price CAGR.

Also, when I made the initial analysis I didn't pay enough attention to the business model, I was more concerned about the fundamental trends. I still didn't get as far as trying to understand the true nature of the business. Today, when I make an analysis, I'm much more dedicated to understanding the business and its potential. I look to the future in a more subjective way, instead of just extrapolating the past financial trends into the future.

Or else I would have probably seen that drinkable water is a scarce good and it would be in high demand for years to come. The market has been paying a high price for companies in this industry, because it understands the value of drinkable water and its scarcity.

The following article, posted by ravenquork, explains this quite well:

An Arid West No Longer Waits for Rain

But enough of that analysis, what to think of LAYN now?

We've already seen that the business sector is quite appealing. The company is a $938 M market cap company, and it is expected to have revenue of $842 M in 2007 and $916 M in 2008. EPS estimates are $1.99 in 07 and $2.18 in 08. This means the stock is trading at about 26 times next year earnings. Did I say the market is paying a high price for this type of companies?

Let me make a new valuation model, this time for the next three years:



I've derived these estimates using my sensibility and some of the available information. I see about 21% annual return for 2008, 2009 and 2010, on average. I would like to put a higher revenue CAGR number, but since analysts are forecasting just 8.8% growth for 2008, probably that's because they see some of the company's businesses with softening demand (the CEO himself mentioned that). 30% seems the maximum we can hope for. The positive surprise could come from a larger than 5% net profit margin in the future, net profit margin is hard to predict though. Much easier to grasp the demand factors (revenue) than how a specific company will handle its costs.

3. Conclusion

I still think LAYN is an attractive long term investment in more or less the same way as I did before. I probably should have bought it earlier, but now I'm not willing to pay 26 times next year earnings for this type of company, even though I understand the appeal of the "find drinkable water" industry.

Continuation of a good investment nicknite20

[David Randolph]

Valuation was a bit stretched in my latest analysis of LAYN:

I've derived these estimates using my sensibility and some of the available information. I see about 21% annual return for 2008, 2009 and 2010, on average. I would like to put a higher revenue CAGR number, but since analysts are forecasting just 8.8% growth for 2008, probably that's because they see some of the company's businesses with softening demand (the CEO himself mentioned that). 30% seems the maximum we can hope for. The positive surprise could come from a larger than 5% net profit margin in the future, net profit margin is hard to predict though. Much easier to grasp the demand factors (revenue) than how a specific company will handle its costs.

3. Conclusion

I still think LAYN is an attractive long term investment in more or less the same way as I did before. I probably should have bought it earlier, but now I'm not willing to pay 26 times next year earnings for this type of company, even though I understand the appeal of the "find drinkable water" industry.

... but since then the stock is down 40% or so. So maybe it's attractive now?

I'll study some more about LAYN later.

[BigSully1]

Layne Christensen beats by $0.13, beats on revs (LAYN) 36.07 : Reports Q4 (Jan) earnings of $0.50 per share, $0.13 better than the First Call consensus of $0.37; revenues rose 15.8% year/year to $223.6 mln vs the $214.5 mln consensus.