Tuesday, February 10, 2009

Insituform Technologies (INSU) with Favorable Mention in Investor's Business Daily

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Have to say this is a very strange period - we mentioned a few weeks ago the potential for a 'rotational' correction; stocks that have been hit hard in January rally while stocks that had held up in January get hit and this seems to be taking place. A lot of our names are getting hit to the tune of 3-4% quite often, nothing spectacular in one day but a lot of paper cuts. Maybe it is just a case of 'safe havens' being abandoned as people go chase more speculative near term highly volatile names. Whatever the case it has me scratching my head.

One of the leaders of the past few months was Insituform Technologies (INSU) - but unlike some of the other names getting hit I at least understand the rationale here. We began this name last week [Feb 2: Bookkeeping - Beginning Insituform Technologies] when an outstanding limit order I had set quite a few weeks earlier was hit. The company has made 2 large acquisitions and the stock was hit very hard. When the stock broke below a key long term support the next day I actually cut back this position in half [Feb 3: Stopped out of Half of Insituform Technologies] and we're kind of in limbo here. The 200 day moving average is around $16.60s and the stock has reached that level intraday three of the last four sessions before retreating. So I cannot commit more dollars here and a case could actually be made for shorting it until it jumps back over the 200 day.

Because the stock made such a huge run (much of it on stimulus hope) we don't have much in terms of support if we begin to break down. In fact, if $15 breaks you could see this back down to $12 to $13 in a jiffy. So we'll monitor it from that standpoint but in the meantime we have a favorable article from Friday's Investor's Business Daily on this small company. Fundamentally I am still thinking through the situation here - we have transformed a nearly pure play sewer company into a sewer/oil pipe service company. It is hard to analyze these deals without having more financial information on the acquired companies; further I don't know how competitive these niches are.
  • Insituform Technologies has enjoyed a steady flow of business as a growing number of cities pour big bucks into repairing aging sewer and water pipes. Now it's trying to tap into the strong demand for underground pipeline repair services from energy and mining companies. On Feb. 2, Insituform (NasdaqGS:INSU - News) agreed to acquire Bayou Cos. and Corrpro Cos. for a combined price of $216 million.
  • Bayou provides products and services such as pipeline coating and insulation to the oil and gas industries, mainly in the Gulf of Mexico and North America. It had sales of $125.7 million for the year ending last Sept. 30. Corrpro offers corrosion protection and pipeline maintenance services, mainly to customers in the energy and water infrastructure fields. It posted $186.1 million in sales for the year ending last Sept. 30.
  • "They would completely transform the business," said analyst John Quealy of Canaccord Adams. "It certainly gets them bigger in energy and mining," he said. "They'll be one of the larger players in the field. And they can now serve any market for pipeline services."
  • Chesterfield, Mo.-based Insituform provides trenchless technologies that repair sewer, water and other underground pipelines systems without digging or disruption. Using its technology, the Insituform Process, a customized synthetic liner saturated with resin is installed in a host pipe by various processes. The resin is then hardened by heating it using various means, forming a new rigid pipe within a pipe.
  • Once the deals close, the energy and mining segment will represent roughly 50% of revenue vs. 10%-15% now and more than 50% of earnings per share, Quealy estimates.
  • The (energy/mining) operation relines gas, oil and mineral pipelines. It relines the inside of the pipe, Quealy says, in order to avoid ripping out the entire section of pipeline.
  • Analyst Steve Denault of Northland Securities views the proposed buys as a way for Insituform to branch out. "I don't perceive it as a game-changer," he said. "It's a diversification play with the opportunity to leverage some of what these companies do in oil and gas field services across some other geographies."
  • The company operates in 36 countries. Though only 1.5% of sales through the first nine months of 2008 came from the Asia-Pacific region, Martin says it's the company's fastest-growing geographic area. "A number of large investments have been made in infrastructure within Asia-Pacific countries, wastewater primarily, but also water," the CFO said. The company tapped into a big project in India in November 2007, when it won two sewer rehabilitation contracts totaling $35.1 million. It was the company's largest municipal sewer project in its history. (I like this angle) Last October, Insituform won two more contracts in Delhi totaling $21.1 million. The work will be done through a joint venture between Insituform and Subhash Projects & Marketing, one of India's largest water, waste and power infrastructure companies.
  • The company's biggest sales generator is the North American sewer-repair market. It accounted for 64% of sales for the first nine months of 2008. Martin says the markets for sewer repair in both North America and Europe are flat. But the U.S. business may get a nice lift from President Obama's stimulus package. The $819 billion package House Democrats passed in January contains provisions that would increase the amount of money set aside for the Clean Water State Revolving Fund program. The program provides low-interest loans to municipalities to finance water and sewer infrastructure improvement projects.
  • "We would expect any funds that go into sewer and water line repair should find their way to a market leader like Insituform," Quealy said. "But it may be tough to distinguish exactly how those funds flow and in what time frame."
  • Burgess was named CEO last April. "He's been instrumental in accelerating the operational turnaround that has resulted in the vast majority of earnings growth and operating margin expansion," Denault said.
  • Analysts polled by Thomson Reuters see 2008 earnings climbing 238% to 71 cents a share, then 27% to 90 cents in 2009 and 27% in 2010.
Now with the dilution (1/3rd) from the 2 acquisitions offset by how accreditive they are, we might get a new set of numbers for the future. Impossible to tell right now - certainly the revenue increase is there; but how much eventually flows to the bottom line is key.

Long Insituform Technologies in fund; no personal position


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