Seeking Alpha Certified

Enter your email address to subscribe to Stock Researching and receive notifications of new posts by email.

Archives

August 2013
M T W T F S S
« Jul   Sep »
 1234
567891011
12131415161718
19202122232425
262728293031  

Hornbeck Offshore Services: Fundamental Analysis $HOS

In the article we will analyze aspects of Hornbeck Offshore Services (HOS) past performance. From this evaluation we will be able to see Hornbecks profitability, debt and capital, and operating efficiency and free cash. Based on this information, we will look for strengths and weaknesses in the company’s fundamentals. This should give us an understanding of how the company has fared over the past few years and will give us an idea of what to expect in the future.

Profitability

Profitability is a class of financial metrics used to assess a business’s ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: net income, operating cash flow, return on assets, and quality of earnings. From these four metrics, we will establish if the company is making money and gauge the quality of the reported profits.

  • Net income 2010 = $36 million
  • Net income 2011 = $(3) million
  • Net income 2012 = $37 million
  • Net income 2013 TTM = $49 million

Over the past couple of years Hornbecks net profits have increased. They have increased from $36 million in 2010, to $49 million in 2013 TTM. This represents a 36.11% increase.

  • Operating income 2010 = $(85) million
  • Operating income 2011 = $53 million
  • Operating income 2012 = $121 million
  • Operating income 2013 TTM = $158 million

Operating income is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three and a half years, the company’s operating income has increased from $(85) million to $158 million in 2013 TTM.

ROA – Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company’s net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as “return on investment.”

  • Net income growth
    • Net income 2010 = $36 million
    • Net income 2011 = $(3) million
    • Net income 2012 = $37 million
    • Net income 2013 TTM = $49 million
  • Total asset growth
    • Total assets 2010 = $1.878 billion.
    • Total assets 2011 = $2.136 billion.
    • Total assets 2012 = $2.632 billion.
    • Total assets 2013 TTM = $2.921 billion.
  • ROA – Return on assets
    • Return on assets 2011 = 1.92%.
    • Return on assets 2012 = (0.001)%
    • Return on assets 2013 = 1.41%.
    • Return on assets 2013 TTM = 1.68%

Over the past three and a half years, Hornbecks ROA has decreased from 1.92% in 2010 to 1.68% in 2013 TTM. This indicates that the company is generating less income on its assets than it did in 2011.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2010

  • Operating income 2010 = $(85) million
  • Net income 2010 = $36 million

2011

  • Operating income 2011 = $53 million
  • Net income 2011 = $(3) million

2012

  • Operating income 2012 = $121 million
  • Net income 2012 = $37 million

2013 TTM

  • Operating income 2013 TTM = $158 million
  • Net income 2013 TTM = $49 million

Over the past three and a half years, the operating income has been higher than the net income in all years. This indicates that Hornbeck Offshore is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company’s financial risk by determining how much of the company’s assets have been financed by debt.

  • Total assets
    • Total assets 2010 = $1.878 billion.
    • Total assets 2011 = $2.136 billion.
    • Total assets 2012 = $2.632 billion.
    • Total assets 2013 TTM = $2.921 billion.
    • Equals an increase of $1.043 billion
  • Total liabilities
    • Total liabilities 2010 = $1.037 billion.
    • Total liabilities 2011 = $1.063 billion.
    • Total liabilities 2012 = $1.466 billion.
    • Total liabilities 2013 TTM = $1.713 billion.
    • Equals an increase of $676 million

Over the past three and a half years, Hornbecks total assets have increased by $1.043 billion, while the total liabilities have increased by $676 million. This indicates that the company’s assets have increased more than the liabilities thus adding shareholder value.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm’s financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current assets / Current liabilities

  • Current assets
    • Current assets 2010 = $216 million.
    • Current assets 2011 = $469¬†million.
    • Current assets 2012 = $732¬†million.
    • Current assets 2013 TTM = $810 million.
  • Current liabilities
    • Current liabilities 2010 = $54 million
    • Current liabilities 2011 = $67 million
    • Current liabilities 2012 = $344 million
    • Current liabilities 2013 TTM = $353 million
  • Current ratio 2010 = 4.00
  • Current ratio 2011 = 7.00
  • Current ratio 2012 = 2.13
  • Current ratio 2013 TTM = 2.29

Over the past three and a half years, Hornbecks current ratio has declined. It has declined from 7.00 in 2011 to 2.29 in 2013 TTM. As the most recent current ratio is well above 1, this indicates that Hornbeck would be able to pay off its obligations if they came due at this point.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The Gross Profit Margin is a measurement of a company’s manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross margin 2010 = $224 million / $421 million = 53.21%.
  • Gross margin 2011 = $170 million / $382 million = 44.50%.
  • Gross margin 2012 = $257 million / $513 million = 50.01%.
  • Gross margin 2013 TTM = $301 million / $563 million = 53.46%.

Over the past three and a half years, Hornbecks gross margin has remained steady. The ratio has ranged from a low of 44.50% in 2011 to a high of 53.46% in 2013 TTM. A gross margin in the 50% range is very strong in the offshore service business. This is well above the industry average of 30.3%.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company’s income statement and the denominator shows total assets, which are found on a company’s balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth
    • Revenue 2010 = $421 million
    • Revenue 2011 = $382 million
    • Revenue 2012 = $513 million
    • Revenue 2013 TTM = $563 million
    • Equals an increase of 33.73%.
  • Total Asset growth
    • Total assets 2010 = $1.878 billion.
    • Total assets 2011 = $2.136 billion.
    • Total assets 2012 = $2.632 billion.
    • Total assets 2013 TTM = $2.921 billion.
    • Equals an increase of 55.54%.

Over the past three and a half years the revenue growth has increased by 33.73% while the assets have increased by 55.54%. This is an indication that the company from a percentage point of view has been generating less revenue with more assets.

Based on the information above we can see that Hornbeck has produced good results over the past three and a half years.¬† Revenues have increased by 33.73% and the gross margin has remained strong at the 53.46% range. This mix has resulted in earnings picking up since the low in 2011. Hornbecks assets have increased more than liabilities thus increasing shareholder value while the company’s ROA has decreased from 1.92% to 1.68. Based on the results above we can see that the company has produced good results over the past three and a half years but has only produced a slight increase in earnings.

4f76044de268b68839e13a07772a4faf Hornbeck Offshore Services: Fundamental Analysis $HOS

HOS Net Income TTM data by YCharts

The past three years have represented a turnaround for the company. As Capex spending in the offshore drilling sector is expected to increase over the next 5 years, this will create significant demand for Hornbecks services thus improving the company’s fundamentals.

Leave a Reply