ORN, a marine construction contractor, is a watchlist company. Subscribers to Top 20 will recognize the name as one of my mistakes in 2010. I am staying on top of it because I like the long-term outlook - the stock is a leading play on the widening of the Panama Canal, which is scheduled to be completed in 2014. Last year, the economy finally caught up, as margins were impacted by competitive pressure. The dynamic is that land-based contractors are so desperate that they have been encroaching on things like over-the-water bridge construction.
The company reported 90mm in sales, slightly ahead of expectations, to produce consensus-matching EPS of .11. The challenges are quickly seen in these numbers, as 90mm is staggering growth of 27%, but EPS were down about 28%. This happened despite the operating expenses being unchanged. The problem is all in the gross margin (pricing). Gross profit fell $1.9mm on a 19mm increase in sales. Yuk!
The company, which reiterated what should hopefully prove to be conservative 2011 guidance (flat sales or better, similar margin), highlighted a lot of things that could improve their outlook, and I will be monitoring those factors. The stock is very attractive in terms of valuation, but it's hard to be confident in this management team after they were blind-sided throughout 2010 by the changing environment. I met with these guys last June and liked them and their story, but this is a "show-me" stock now. The chart appears to be neutral at best. The balance sheet is in fantastic shape, so we might see them make another acquisition. I also think that these guys could be acquisition fodder if they don't right the ship (pun intended).