Neena Mishra

Bear of the Day: GSE Holdings (GSE)

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October 04, 2013 |

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Estimates have come down substantially after ugly second quarter results, sending GSE to a Zacks Rank # 5 (Strong Sell), with an “Underperform” recommendation.
 
About the Company
 
GSE Environmental (GSE) is a manufacturer and marketer of geosynthetic lining products and services, used for environmental protection and confinement applications. Their solutions are used mainly in agriculture, aquaculture, mining, power, waste containment, wastewater, and other industrial applications. Headquartered in Houston, GSE has manufacturing facilities in the  US, Chile, Germany, Thailand and Egypt. It also has sales offices throughout the world.
 
Disappointing Second Quarter Results
 
Total net sales for the second quarter were $108.2 million, compared to $139.2 million for the prior year period. The  loss in the quarter was $6.9 million, or ($0.34) per diluted share compared to adjusted net income of $5.8 million or $0.29 per diluted share in the prior year period.
 
Declining EBITDA caused GSE to breach its debt covenant in respect of  its total leverage. The company obtained a waiver of default from its lenders and amended the credit facility.
 
According to the management, very weak European economy has left the industry with excess capacity, leading to overall margin pressure.
 
Downwards Revisions
 
Due to disappointing results and uninspiring guidance, quarterly and annual estimates have been revised sharply downwards in the past few weeks. Zacks consensus estimates for the current quarter and year are now $0.09 and ($0.69) respectively down from $0.22 and $0.47 per share, 60 days ago.
 
Current consensus estimates represent 68% and 134% year-over-year earnings’ decline for the current quarter and current year.
 
CEO Departure
 
In July, GSE announced that Mark Arnold, its President and CEO will be leaving the Company.  The Board  has appointed Charles Sorrentino, a current member of the Board, as interim President and CEO. Leadership change adds more uncertainty to the outlook for the company.
 
The Bottom Line
 
The company is trying to implement a global cost cutting plan but they still expect continued margin pressure until supply and demand conditions normalize. With its global footprint, the company may benefit in the longer-term when the global economy improves, provided they are able to execute their initiatives on cutting costs and streamlining operations properly.
 
Further, there are uncertainties related to the leadership change and the balance sheet. But in view of near-term challenges, it is safer to stay away from the stock for the time being. 
 
GSE is currently Zacks Rank # 5 (Strong Sell) stock and it has a recommendation of “Underperform”.  Further, Zacks Industry Rank of 205 out of 265 also indicates some weakness in the short- to mid- term. As such investors should like to avoid this stock for the time being.
 
Better Play?
 
Investors seeking exposure to the industry could look at Energy Recovery (ERII) or Ceco Environmental (CECE); both are Zacks Rank #2 (Buy) stocks.
 
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