Aside from Bolt’s rapid price acceleration and my fear of an imminent pullback, I hesitated to blog about Bolt because it was at the top of Investor’s Business Daily (“IBD”) weekly list of top 100 stocks. Its high ranking on the IBD list captured the interest of the highly caffeinated “IBD crowd” and momentum traders that often times suffer from A.D.H.D. As I have only blogged about a handful of stocks since starting my blog in early 2007, I didn’t want to blog about such a highly followed stock and come across as a bandwagon investor.
Recently, Bolt experienced a significant pullback that took it nearly 48% off its high from early July. Because of the steep pullback, Bolt was booted from the IBD list. With Bolt well of its highs and nowhere to be found on the IBD list, I decided to mention Bolt in a blog entry last week. At the time, shares of Bolt were trading at $33.70 and I wrote that I was accumulating additional shares and that I would post a complete blog entry in the coming week.
It is now one week later and my blog entry is complete. My timing has never been all that great but in the last week shares of Bolt are up 18.7%. I didn’t know I had such a following. I am kidding of course. Anyways, here it is………..
Seismic Exploration
Higher energy prices have led to a substantial increase in spending on oil and gas exploration, development and production. Given the underlying fundamentals in the energy market, higher energy prices will likely persist for years to come and, in turn, spending will continue to grow.
Spending on oil and gas exploration, development and production has risen at such a rapid pace in recent years that it has pushed up the cost of associated labor and equipment. With the higher cost of labor and equipment, the cost of drilling a well is significant. Add opportunity cost into the mix and it is not surprising that oil and gas companies are willing to go the extra mile on the front-end to avoid drilling a dry well. To this regard, seismic exploration plays an important role in minimizing exploration risks.
Seismic exploration is the use of reflection seismology to identify and evaluate subterranean formations that are favorable for the accumulation of hydrocarbons. There are three basic systems at work in reflection seismology: the source, receiving, and processing systems (Ref.). The source system is responsible for sending elastic waves that travel deep into the earth. As the waves travel through the earth, some of the waves reflect off subterranean formations. Reflected waves are then captured or received as signals by geophones (land) or hydrophones (marine) and sent to a special recorder that converts the signals to a digital format (the receiving system). The processing system, consisting of powerful computers and highly complex software programs, manipulates and processes the data to produce a subsurface profile or map. Geologists interpret the data to determine if and where there are formations favorable for the accumulation of hydrocarbons.
The source, receiving, and processing systems are interactive systems. As interactive systems, an advance in one system enhances the utility of the other systems. In recent years, there have been a number of enhancements across all three systems. Today, advanced survey techniques (3D and 4D) provide clearer and more reliable subsurface profiles that have substantially improved drilling success rates and the demand for seismic exploration.
While seismic exploration is an important tool in mitigating exploration risk, it is also an important tool in field development and reservoir management activities.
Bolt Basics
Bolt's Niche
Seismic exploration can take place on land, over water (marine) and in transition zones. In marine seismic exploration, seismic vessels tow streamers of air guns and hydrophones across a survey area. The air guns, which replaced dynamite several decades ago, are the main component of the marine seismic source system. Air guns use compressed air to create acoustic waves that travel through the water and beneath the surface of the earth. Working with the air guns as part of the source system are source monitoring systems (“SSMS”), source controllers, source synchronizers, cables, and electrical connectors.
Bolt designs, manufactures and sells different components of the seismic source system including the: air guns; seismic source monitoring systems (“SSMS”); source controllers; source synchronizers, cables and electrical connectors. Bolt also designs, manufactures and sells “near-field” hydrophones and pressure transducer. Near-field hydrophones and pressure transducers differ from far-field hydrophones and pressure transducers in that they measure output from the individual air guns and pressure at the air guns, respectively.
A seismic vessel with its streamers looks like this.
Business Segments
Bolt operates two business segments. The geophysical equipment segment consists of two operating units: Bolt Technology Corporation, a manufacturer and seller of air guns and replacement parts; and, A-G Geophysical Products, Inc., a manufacturer and seller of underwater electrical connectors and cables, seismic source monitoring systems and hydrophones.
In 2007, Bolt acquired Real Time Systems (“RTS”). RTS develops, manufactures and sells controllers and synchronizers for marine seismic energy sources (air guns). RTS products are designed to control and synchronize up to 96 air guns in a single seismic exploration vessel. RTS will operate in the geophysical equipment segment but it is not clear whether it will remain a separate operating unit or if Bolt will roll it into Bolt Technology Corporation or A-G.
The second business segment is the industrial products segment. Custom Products Corp. is the only operating unit in the industrial products segment. Custom Products designs, manufactures and sells miniature industrial clutches and brakes and sells sub-fractional horsepower electrical motors. In this blog post, I focus mostly on the geophysical segment because I see this segment as the main driver of past and future growth. Nonetheless, at 7% of revenues in fiscal 2007, the Custom Products division is not insignificant. Furthermore, management is optimistic about this division going into 2008 because of anticipated sales to new customers and higher pricing.
History
Bolt has decades of experience in the seismic source business. The timeline below outlines the major milestones in Bolt’s history that have made Bolt what it is today.
1962 –Bolt organized as a corporation.
1963 –Bolt invented the Marine Air Gun. Before Bolt invented the Marine Air Gun, offshore seismic acquisition crews generated seismic waves using dynamite.
1993 – Bolt introduced the Long-Life Marine Air Gun. Bolt’s Long-Life Marine Air Guns extended the period between routine air gun maintenance cycles. These guns also provided improved high peak sound pressure levels and improved frequency spectrum as compared with older models. These improved characteristics were advantageous to geoscientists in designing 3-D surveys. Bolt’s still sells its Long-Life Air Guns and they range in price from $10,000 to $20,000. The majority of air guns are sold in the $12,000 range. According to Bolt’s website, Bolt’s Long-Life guns have become the most widely used air gun for marine seismic exploration.
1998 – Bolt acquired Custom Products Corp. The acquisition of Custom Products was a deviation from the company’s core business but, in a June 1998 article in Investors Business Daily (“IBD”), Mr. Soto said, “This is a basic business with (manufacturing) operations similar to ours. It's also a big cash generator.”
1999 – Bolt acquired A-G
2003 – From fiscal 2000 to fiscal 2003, Bolt was developing its Annular Port Air Gun (“APG Gun”). Bolt received its first order for its APG Gun in 2003. The configuration of APG Guns offered significant improvements in reliability, operating efficiency, and acoustic output compared to the configuration of all traditional air guns. APG guns typically range in price from $26,000 to $32,000 with the majority of the APG guns sold in the $28,000 price range.
2005 - In fiscal 2004, the Company completed its stage one development of its digital SSMS. SSMS is utilized by marine seismic contractors to measure air gun depth, air pressure, and “near field” energy output for each gun array to enhance the accuracy and therefore the usefulness of 3-D seismic survey data. Subsequently, Bolt developed stage two of SSMS to provide high pressure air flow control to the air guns. The first sales of SSMS were made in fiscal 2005 and amounted to approximately $300,000. SSMS sales increased to over $2,000,000 in fiscal 2007.
2007 – Bolt acquired RTS.
Demand
Seismic exploration contractors are rapidly expanding their seismic fleets through the construction of new vessels and the conversion of existing vessels (i.e. cable layers and fishing boats). According to a survey in the March issue of Offshore Magazine published in March of 2007, there were 140 vessels in the global seismic fleet. For several reasons, the global fleet of seismic vessels is poised to grow at a rapid pace over the next several years.
In a Reuter’s article dated June 13, 2007, Det Norske Veritas (DNV), a ship classifier, said it classified five conversions seismic vessels to date in 2007 and had another eight vessels in the process of being converted and awaiting classification. Furthermore, DNV had another 20 seismic vessels under construction and awaiting classification. According to the article, DNV has been experiencing a tenfold increase in classification requests. Keep in mind that DNV is only one of three large ship classifiers and 50 ship classifiers worldwide (Ref.). The fleet of seismic vessels has been growing at a rapid pace and it appears that this trend is likely to continue into the future. In the article, DNV described the demand for seismic vessels as “booming.”
So what is driving the demand for seismic vessels?
Higher energy prices have led to an increase in exploration activity around the globe. Seismic exploration is the primary method of exploring for hydrocarbons. Furthermore, seismic surveys have improved significantly over the last decade. These improvements have increased success rates of drillers. Finally, new survey techniques require more data and often times multiple vessels in one survey zone or more time per vessel in a survey zone. The combination of increased exploration activity, higher success rates, and more vessels time per survey zone is driving the demand for seismic vessels and Bolt’s geophysical products.
The growing fleet of seismic vessels is not the only factor driving demand for geophysical products. Changes in streamer configurations and new technologies have had a positive impact on the demand for geophysical equipment.
Improved computing capacity and more complex software programs for analyzing seismic data has given birth to advanced survey techniques (3-D, 4-D). These advanced survey techniques provide greater visibility of the subsurface but require significantly more data than traditional surveys. As such, advanced surveys require more vessels, larger streamers, more streamers and more air guns, hydrophones, electrical connectors, etc, per streamer.
Bolt has added new products and made enhancements to existing products that specifically address the requirements of advanced surveys. These enhancements and additions have created an opportunity for Bolt to sell its products for use on existing seismic vessels. Most recently, Bolt has completed the development of its SSMS and APG Gun.
Customers
Bolt’s principal customers for geophysical equipment are worldwide marine seismic exploration contractors, who operate seismic vessels for collection of seismic data in accordance with their customers’ specifications or for their own seismic data libraries, and foreign national oil and gas companies.
During fiscal 2007, 2006 and 2005, approximately 72%, 71% and 48%, respectively, of the Company’s sales were from shipments to customers outside the United States or to foreign locations of United States customers.
A significant portion of Bolt’s sales are attributable to a small number of customers. The loss of any one customer would be significant. Ten percent customers are listed below:
| ----2007---- | ----2006--- | |
| CGG-Veritas | 19% | 15% |
| SeaBird Exploration | 11% | 4% |
| WesternGeco | 10% | 22% |
| Wavefield Inseis | 10% | 4% |
While Bolt’s geographical diversification of revenues is a positive, the customer concentration is a negative. Nonetheless, new customers have replaced old customers on the 10% customer list over the course of the last couple of years.
Competitors
Bolt competes with Sercel, a division of CGG-Veritas, and ION Geophysical Corporation, formerly known as Input/Output. While Sercel is a competitor, its parent company is a large customer of Bolt. ION Geophysical is a manufacturer of onshore and offshore seismic equipment. Several years ago ION Geophysical acquired two seismic source companies to build up its offshore seismic source offering. Both Sercel and ION Geophysical are significantly larger than Bolt and offer a wider array of geophysical products.
Bolt has been in the offshore seismic source business for several decades and they have been at the forefront of the industry with new and innovative products. Bolt’s intense focus on air guns and related products has enabled Bolt to produce high quality products and compete effectively in terms of technology, quality and durability. According to Bolt’s website, Bolt’s Long-Life marine guns are the most widely used air gun for seismic exploration. Furthermore, Bolt sells its products to the largest seismic exploration companies in the business. As evidenced by the success of Bolt’s products and its impressive customer list, Bolt carries a strong reputation in the marketplace.
I don’t know Bolt’s current percent of global market share but in a 1998 IBD article, Mr. Soto, President and CEO, was quoted as saying Bolt guns were on 80% of all seismic vessels.
Financials
Bolt’s fiscal year ends on the last day of June. When I reference a year, I am referring to the fiscal year unless I specify otherwise.
Sales
Over the last three years, Bolt’s sales have grown at an annualized rate of 50.5%. Sales increased 58.3% to $50.46 million in 2007 after increasing 73.4% in 2006. In the most recent quarter, sales increased 60.9%.
Bolt’s sales growth is attributable to the factors mentioned in the Demand section of this analysis. Furthermore, it is important to note that a significant portion of Bolt’s revenues come from replacement parts for its air guns.
The majority of the increase in sales from 2006 to 2007 was attributable to the sale of complete energy source systems. At the end of 2007, Bolt acquired RTS. With the acquisition, Bolt will not only benefit from the unit sales from RTS but also from the ability to provide customers with a more complete energy source system that meets the needs of advanced survey requirements.
Margins
Bolt has posted impressive margins across the board and margins have increased significantly in the last year.
| ----2007---- | ----2006--- | |
| Gross Margin | 45.93% | 41.55% |
| EBITDA Margin | 31.29% | 23.29% |
| Operating Margin | 30.60% | 22.38% |
| Profit Margin | 21.02% | 14.87% |
Gross margins improved in 2007 over 206 as a result of manufacturing efficiencies associated with the increase in sales volume. This benefit was partially offset by higher labor and material costs along with sales of third party auxiliary equipment, which carry lower margins.
Research and development spending was down in both percentage terms and dollar terms from 2006 due higher sales levels in 2007 and the completion of certain improvements to its SSMS. While Bolt’s R&D spending in dollar terms has been relatively flat over the years, the level of spending has been adequate enough for the company to continue to provide innovative new products and important enhancements to existing products. At the same time, the company has made a few strategic acquisitions in the last decade, with RTS being the most recent acquisition. In my opinion, the money spent on these acquisitions was acceptable uses of cash that may have otherwise been earmarked for R&D spending. Furthermore, it could be argued that the company was able to acquire certain products, technologies and intangible assets that would have been more expensive to develop in-house.
Selling, general and administrative expenses were 14.79% of sales in 2007 compared to 18.28% in 2006. In percentage terms, SG&A expenses were lower mainly as a result a disproportionately smaller increases in SG&A expenses relative to sales. In dollar terms, SG&A expenses increased due to increased compensation expenses (commissions, staff and bonuses). Given the companies growth, these increases appear more than reasonable. The company also experienced higher professional fees to become compliant with Sarbanes-Oxley.
The effective tax rate in 2007 of 32.24% was lower than the effective tax rate in 2006 of 34.79%. The lower tax rate was the result of tax benefits from export sales and the manufacturer’s deductions.
Net Income/EPS
Over the past three years, Bolt has increased net income at an annualized rate of 131.68%. Net income increased 118.93% to $10.61 million in 2007 after increasing 197.2% in 2006. In the most recent quarter, net income increased 101.69% after increasing 112.69% in the prior quarter.
Bolt has done little to dilute shareholder’s interest over the years. Last year, actual shares outstanding increased by 2.38%. Weighted average diluted shares outstanding increased only 0.91%. In the last three years, total shares outstanding have increased by a very modest 5.66%.
| ----2007---- | ----2006--- | |
| Q4 | $0.60 | $0.29 |
| Q3 | $0.50 | $0.23 |
| Q2 | $0.42 | $0.16 |
| Q1 | $0.35 | $0.18 |
| FY | $1.87 | $0.86 |
Balance Sheet
At the end of 2007, Bolt had no long-term debt, nearly $10 million in cash (compared to $4.58 million at the end of 2006) and a current ratio of 5.29. Assets totaled $47.51 million including $10.96 million in goodwill. Bolt’s balance sheet is very solid and I don’t see any areas of major concern.
At the end of the quarter, Bolt completed the acquisition of RTS. The initial purchase price was $3.5 million plus the net book value of the acquired assets, estimated to be approximately $1 million. Additional payments will be due at the one and two year anniversary provided RTS reaches certain performance objectives. Bolt will fund the purchase of RTS with cash and this purchase will reduce cash on the balance sheet accordingly.
Statement of Cash Flows
In 2007, cash flow from operations totaled $4.67 million compared to $10.6 million in net income. Normally, I like to see a cash flow to net income ratio of one or better. Nonetheless, there are instances where I find a lower ratio to be acceptable and Bolt happens to be one of those instances. In a lot of cases, this ratio will be sub one when a company is going through a period of rapid expansion that results in growing receivables and inventories.
In the case of Bolt, the change in receivable and inventories was the biggest factor in the lower operational cash flows relative to net income. The increase in receivables and inventories was reasonable considering Bolt’s rapid sales growth from quarter-to-quarter and management’s anticipation of future growth. Receivables increased 39.01% and inventories increased 45.45% compared to the 54.84% increase in sales. Nonetheless, the cash conversion cycle looks a little slow at roughly 155 days (calculated off of Q4) and might require additional investigation. Intuitively, I believe this is partly due to replacement parts that are kept in inventory for extended periods and Bolt’s dependence on larger customers that are capable of negotiating favorable credit terms.
The company spent just under $1 million in capex in 2007. The spending went towards the purchase of new and the replacement of existing equipment. Some of the capex spending in 2007 went towards the replacement of equipment that was lost in an explosion at one of the company’s manufacturing facilities. In 2008, the company expects to spend $750,000 on capex for the purchase of new and replacement manufacturing equipment. The $750,000 in capital spending doesn’t seem like a whole lot of money and this is something I hope to discuss with management. Capital spending is important to maintain and expand capacity or earnings power.
Operational cash flows have been more than adequate for Bolt to fund its growth. As such, the company has not had to tap the debt or equity markets for financing. Nonetheless, the exercise of stock options and the tax benefit of stock options exercised had a positive impact on cash flows in 2007. At the same time, I consider Bolt’s compensation structure and options practice to be very reasonable. Furthermore, I consider the company’s compensation plan to be appropriately structured to align managements’ interests with that of shareholders.
In 2007, Bolt generated enough cash from operations to fund not only its capex needs but also the initial purchase price of RTS. In 2008, I expect Bolt to continue to generate more than adequate cash flow to fund expenditures and build upon its cash position. I would also expect operational cash flows to net income to improve with some moderation in growth.
Return Ratios
| ----2007---- | ----2006--- | |
| ROA | 25.83% | 15.65% |
| ROE | 30.74% | 18.85% |
| ROIC* | 41.80% | 31.47% |
Bolt has exceptional return ratios and the increase in these ratios over the last year are noteworthy. Bolt’s ROE is especially impressive considering the company does not employ any leverage. The high ROE is attributable to Bolt’s high margins and sales relative to assets.
* My calculation of ROIC takes after tax operating income divided by (tangible assets less non-interest bearing current liabilities less goodwill). Sort of a Foolish approach.
Comparables
OYO Geospace Corporation (“OYOG”) designs, manufactures and sells instruments and equipment used in the acquisition and processing of seismic data and in the monitoring of producing oil and gas reservoirs.
ION Geophysical Corporation (“IO”) provides seismic products and services primarily to the oil and natural gas industry worldwide.
OYOG and IO are probably the best comparables for Bolt.
| -----IO----- | ----OYOG--- | ----Bolt--- | |
| PPS | 15.19 | 88.37 | 40.00 |
| Shares Out. | 80.93M | 5.82M | 5.72M |
| Market Cap | 1.23B | 514.49M | 228.84M |
| LT Debt | 87.61M | 11.20M | N/A |
| Cash | 11.54M | 3.65M | 9.99M |
| EV | 1.31B | 522.04M | 219.64M |
| Current Ratio | 2.29 | 3.96 | 5.28 |
| LT Debt/Equity | 0.226 | 0.119 | N/A |
| Sales (TTM) | 606.42M | 136.40M | 50.46M |
| Sales Growth | 38.84% | 43.80% | 54.84% |
| EPS (TTM) | 0.31 | 3.00 | 1.87 |
| EPS Growth | 57.14% | 128.30% | 117.40% |
| Gross Margin | 27.53% | 37.12% | 45.93% |
| Operating Margin | 6.58% | 20.42% | 30.60% |
| Profit Margin | 4.70% | 13.68% | 21.02% |
| ROE | 7.20% | 21.99% | 30.74% |
| ROA | 4.01% | 14.76% | 23.51% |
| EV/EBITDA | 14.10 | 16.92 | 13.92 |
| PE Trailing | 48.69 | 29.43 | 21.42 |
| PE Forward | 18.30 Dec '08 | 20.31 Sep '08 | 12.05 Jun '09 |
| FY End | Dec 31 | Sep 30 | Jun 30 |
Notes to Table
OYOG’s fiscal year ended September 30 and the company has reported results through the third quarter of its fiscal year. As such, I calculated sales growth and EPS growth by comparing the first nine months of 2007 with the first nine months of 2006. I calculated margins based on the first nine months of fiscal year 2007.
IO’s fiscal year ended December 30, 2006 and the company has reported results through the second quarter of its fiscal year. I was going to take the same approach with IO as I did with OYOG but IO’s profit growth was negative through the first six months of the year. As I do not know the reason for the decline in profits in the first half of 2007, I elected to calculate IO’s sales growth and EPS growth by comparing the full year 2006 to 2005. I calculated margins based on 2006 full year results. This approach makes IO look a little better than it would have otherwise.
Bolt’s fiscal year ended on June 30 and Bolt has reported results for the full fiscal year. Sales growth and EPS growth were calculated by comparing 2007 to 2006. Margins were calculated for the full year 2007.
ROA data was taken from Yahoo. I calculated a higher ROA for Bolt but utilized the Yahoo ROA for comparison purposes.
Analysis of Table
Bolt has no debt, the highest current ratio, the highest rate ofsales growth, second highest rate of EPS growth and by far the highest margins, ROE and ROA. At the same time, Bolt has the lowest EV/EBITDA, trailing PE multiple and forward PE multiple. Note the different dates being used to calculate the forward multiple as this makes a difference.
Based on the information in the table above and all the other information I presented in this blog, I believe a trailing PE of 25 to 30 to be reasonable. Prior to the recent correction, Bolt was trading at a PE above 30 and just yesterday OYOG was trading at a PE of 30.95. A PE of 30 on trailing earnings would equate to a share price of $56.10, an increase of 40.25% over today’s closing price.
Analysts’ estimates for fiscal 2008 are for $3.13 per share, a 67.38% increase over 2007. Given, Bolts recent growth rates, its acquisition of RTS, and the current market conditions, I think analysts’ estimates are well within reason. At a PE multiple of 25 one year out, I get a one year price target of $78.25 for an increases of 95.63% over today’s closing price. Maybe Bolt doesn’t hit the $3.13 estimate or maybe investors will only be willing to tag Bolt with a PE of 20, with a potential gain of 95.63% over the twelve months, there is a little wiggle room for some errors.
RTS Acquisition
According to management’s pro forma income statement in the 10K, RTS would have added $5.24 million in revenues and $0.27 in diluted earnings per share if the transaction had taken place at the end of fiscal 2006. The above analysis does not take management’s pro forma estimates into consideration.
Conclusion
This has been one long blog post and I think I said everything I wanted to say so I am going to forgo a conclusion. Just be sure to do your own due diligence, read the risks section of the 10K and consider other possible risks. Finally, I am just a hack blogging about stocks in my spare time, so you really can’t go by me.
Good luck,
Tuff
Sources
The company’s most recent 10K was my primary source of information for this blog. In some cases, I have copied or paraphrased information directly from the 10K. I posted links to some of my sources right in my blog post. Below are additional sources or links of interest.
2007 10K
RTS Press Release
Bolt's Website
