Searching for Profits with Geophysical Services - Analyst Blog

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Stocks priced under $5 usually don't catch my interest, but a scan of the Zacks Rank #1 (Strong Buy) and chart patterns turned up Global Geophysical Services ( GGS ).  GGS carries risk, but the combination of a Zacks Rank #1 and potentially favorable chart set up is worth exploring.  Global Geophysical Services provides seismic data solutions for exploration and production companies.

The stock seems priced more like a call option than an equity, but its value is explained by a large debt load.  The common equity is like a call option in that the company needs to be able to service and roll over is debt for the equity to have any worth.  Otherwise, the stockholders will  have to hand the company over to the debt holders.

First the chart:

The daily bar displays a two year downtrend pausing and the formation of a base between $2 and $5.  Volume has picked up in recent months and suggests a change in ownership and investor excitement about current price levels. Chart wise, a rally over $5 would confirm the base and set up a test of the $7 area (initial target).  There is also resistance off the November 2011 highs and April 2012 lows around $7.75.

The short interest ratio has built from less than 3.0 March to about 9.0 in June.  The level of short interest could provide fuel for a rally if profit estimates continue their upswing.  The high debt load may be attracting short sellers.

The base pattern would show failure if prices moved below the recent low at $3.50.  This may be a stop loss area for technical buyers.  

Second earnings revisions:

The Zacks Consensus Earnings Estimate has risen sharply over the past 90 days for both 2013 and 2014.  The 2013 EPS estimate has jumped from a loss of 12 cents to a profit of 7 cents.  Likewise, the 2014 EPS forecast has increased from a loss of $0.14 to a gain of $0.22.  Earnings growth is expected to triple from a low base between 2013 and 2014. 

There have been no earnings revisions downward over the past 90 days and one revision upward in the past 7 days.

The company is also coming off a strong positive surprise. It earned 5 cents a share in March quarter against a forecast for a loss of 9 cents.

GGS will release its Q2 earnings before the market opens on August 6 th .  The Zacks Consensus Estimate is for a loss of $0.09 per share.  The Zacks Upside suggests there are risks for a negative surprise, as the most accurate estimate is standing at -$0.11 for the quarter.  A positive suprise could be a catylyst for short covering.

Third, a bright macro backdrop with a burdensome debt load:

The company is looking for worldwide exploration and production spending to hit a new record in 2013 and rise 6% from 2012 to $644 bln.  Seismic spending is projected to increase from $6.5 bln in 2011 to $10.9 bln in 2015, and expand about 19% year over year to $9.5 bln in 2013.  

A big negative for the company is its high debt load. The debt to equity ratio has shot to over 300%, and the company has produced negative free cash flow (cash flow from operations less capital expenditures) over the past three years.   The company is not producing enough cash flow to operate and invest for future growth.  The company has a $250 mln 10.5% senior unsecured note due in 2017 which could become an issue in the coming years. 

Conclusion:

If you see a base in the daily bar chart and embrace the Zacks Rank, GGS may be worth a look.  A firm close over $5 could improve the technical set up, and the Zacks Rank is arguing for outperformance.  Default risk and a move under $3.50 are the hurdles to a rally.



GLOBAL GEOPHYS (GGS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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