September 9, 2008

Could Your Portfolio Use a HERO?

Hercules Offshore Inc. (HERO) is a leading provider of offshore contract drilling, liftboat and inland barge services with operations in nine countries on four continents. With a market cap of 1.5 billion, Hercules Offshore is trading at a new 52 week low at under $17.00 a share. Much of the recent sell off has to do with a second quarter earnings miss coupled with fears of equipment damage due to the recent hurricane activity in the Gulf of Mexico. However, the recent sell off may be a great time to buy stock that is poised for growth at a cheap price.

Valuation

The company is profitable, reporting earnings of $16.4 million or $.18 per share on July 29. Revenue in the second quarter rose to $270.8 million compared to $99 million in the second quarter last year. However, analysts were looking for earnings of $.25 per share.

This earnings miss coupled with fears of hurricane activity in the Gulf of Mexico has brought shares down to a historic low of around $17.00 per share. This translates into a P/E of just under 15, and a forward P/E of 5.6.

What was responsible for the earnings miss? Increased costs. Operating expenses rose from $44.4 million to $158.9 million in the second quarter. The company did not offer an explanation for the nearly four-fold increase in operating expenses, but sometimes actions speak louder than words as Hercules ousted its CEO in June.

Growth Estimates

Analysts are estimating Hercules will grow sales 30% for their next quarter ending December 2008. Hercules has demonstrated that they have the capacity to grow revenue as it nearly tripled compared to the second quarter a year ago. They are also estimating just over 30% sales growth for fiscal 2009. If management can control costs, Hercules will be able to meet or exceed analysts earnings expectations with ease.

Two analysts have recently upgraded the stock. Jesup and Lamond initiated coverage in June to Neutral but upgraded the stock to buy at the end of July. Another upgrade to Add was given by CapitalOne Southcoast. They had previously given the stock a Neutral rating at the end of March.

Look Who's Buying

The President and CEO John Rynd bought shares at $25.58 per share on July 31. Lisa Rodriguez, Vice President and CFO bought shares at $22.96 on August 4. The president of Hercules International Holdings also bought shares at $18.64 on September 4.

Geosphere Capital Management, which operates a hedge fund has also recently disclosed that it owns shares of Hercules Offshore.

If insiders and institutions thought that the stock was a bargain in the low 20's, it is certainly dirt cheap right now.

Conclusion

Hercules Offshore is the operator of the largest jackup rig fleet in the Gulf of Mexico. Clearly the stock has suffered lately due to escalating costs and fears that recent hurricane activity has the potential to affect business operation.

However, the outlook for growth still remains solid. A new CEO at the helm may also be able to cure the company's recent plaque of increased costs which will translate into higher earnings for future quarters.

Given the stock's current price, it appears that this small cap growth stock just became a value stock. Now would be a great time to add a HERO to your portfolio.

Disclosure: none

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