Sometimes, an earnings miss provides an interesting opportunity to accumulate a larger position in a stock. We at Singular Research believe that to be the case with OYO Geospace Corp. (OYOG). Shares of the company have fallen almost 20 percent to just over $70 per after announcing a disappointing fourth quarter. The Houston, TX company supplies geophysical equipment for use in oil and gas exploration on land and undersea. It's a proven leader and its key product lines include geophones, hydrophones, string connectors and telemetry cables, specialized undersea streamer steering devices called “birds”, and borehole data acquisition systems.
Their Geospace Seismic Recorder (GSR) system is a land-based seismic system that is easily deployed, eliminates the need for cable-based connectivity among seismic units. It does not require a cable to connect to a central control facility. These features make it far easier to deploy, and lowers the cost of managing the equipment.
At current valuations of 14.6x our 2012 estimate of $5.30 a share, and with Japanese ownership filing a S-3 to sell its 20-percent stake, OYOG may present a compelling takeover candidate to larger energy players.
With that said, OYO Geospace did experience a lumpy quarter, which it is susceptible to doing from time to time. In Q4, the company's revenues declined 9.2 percent to $32.8 million, gross margin was 39 percent and operating margin was 18.5 percent. All of these came in below our forecast. In addition, earnings per share was $0.56, which missed our forecast of $0.98. The disappointing quarter was attributed to the delivery timing of several products, but the company's customer demand remains strong. As such, we reiterated a Buy rating on OYOG with a lowered price target of $125, down from $134.
Gregory P. Garner, a senior equity analyst for Singular, says that the company did have a weak finish to a very strong recovery year, which saw full-year revenue for 2011 grow 34.6 percent. Demand for the company's product should remain strong but lumpy quarters are the norm for OYO Geospace. He also believes that the company's innovative wireless GSR system will remain very competitive going forward. So, it's fair to say we believe that there's a lot of upside in OYOG.
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