OMM: OMI

Date: 27 Jan 2007
Price: $21.45
P/E: 4.28
P/B: 1.6
Yield: 2.20%
Debt/Eq: 0.75
Data from Morningstar

Introduction
No prizes for guessing what drew my attention to OMM - look at that P/E ratio! I haven't started to investigate yet, but I have a suspicion that next year's P/E ratio won't look quite as good - but we'll get to that.

Company Description
OMI provides seaborne transportation services with large shipping vessels, primarily of crude oil and petroleum products.

Past 10 years
The company seems to have been formed in 1998, and has grown pretty rapidly in that time. The first 5 years saw the company making a profit, but also a lot of capital expenditure (hence strongly negative free cash flow). The last two or three years have seen a significant increase in the profit (from ~$1.20/share to $5/share) and positive free cash flow. Which all suggests that the company made big efforts to expand over the first few years, and is now starting to see the benefits of that. The book value has increased from $245m to $872m since 1998 - mostly in the past couple of years.

One interesting factor to note is the number of shares in issue, which increased from 49m to 85m leading up to 2004, but has since declined to 63m - suggesting that a share buyback program has been instigated these past two years (this is confirmed by the latest results statement). Which again fits with the theory that the first 5 years were about raising capital and building the company, and now we're starting to see the profits of that. Having said that I'm sure the high oil price has also contributed to the high profits (there are graphs in their presentations showing the correlation in oil price and the earnings they can make).

Pros
Well obviously that P/E ratio marks the company out as being ridiculously cheap - however a glance at the stock history shows that it has always been fairly cheap (5 year average P/E is 8.7, and P/Es of 3-6 are not unusual). The company is profitable, has net leverage of 35%, and is buying back shares like nobody's business. All of these are good things.

Risks
There seems to be some uncertainty about the way to calculate EPS, as I've seen 9 month financial statements saying that the company has made $3.56 in the first 9 months of the year, and yet I've also seen analyst consensus estimates of $3.12 for the year, which seems rather unlikely given that we're expecting at least $0.50 in earnings in the last quarter - giving over $4 EPS for the year, and a P/E of 5.3 rather than a P/E of 7. I suspect this year's EPS numbers are skewed by the sale of four ships (two of which will be leased back). This also suggests an expectation that the business will decline in coming years

Ignoring that, estimates for next year seem to think that 50c a quarter will be fairly typical, and so if ongoing earnings will be only $2 then the current price doesn't look so attractive.

Conclusion
I'm not sure (which equals a no). It certainly doesn't look a bad company, and I'd like to monitor it over the coming months to see what happens when the final results for the year come out, and then once we start to see some results that aren't skewed by the boat sales. If the price falls to 4 times next year's earnings (ie. to $8-$10) then I would really be interested!