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3 big negatives were contained in CNRD's 3rd

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31set   Friday, 12/05/14 04:55:20 PM
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3 big negatives were contained in CNRD's 3rd quarter earnings report released after the market closed on 11-13-14:

(1) No $2.00 special dividend declared for December 2014 as in 2012 & 2013.

(2) Earnings came in at $0.74 per share vs $1.09 per share in Q3 of 2013. Earnings were $1.14 per share in Q2 of 2014. Conrad had been earning over $1.00 per share consistently in recent quarters until now.

(3) The order backlog dropped to $135.0 million on 9-30-14 vs. $173.0 million on 6-30-14 and $152.3 million on 9-30-13.

Of these 3 negatives, it was the last one that was the most alarming and caused me to sell out my entire position in CNRD. In each of the previous 4 quarters CNRD had revenue of roughly $80 million. The $38.0 million drop in the backlog between the end of Q2 & Q3 this year suggests new orders were only about 1/2 of normal in Q3, assuming revenues were about normal during the quarter.

Since CNRD did not include figures for either revenues or new orders in their Q3 earnings release, it's hard to know exactly what happened. Certainly it is possible new orders were lower during the quarter just due to ordinary variations in order flow for expensive products like the various ships and barges CNRD produces. What I did not expect and what was really alarming to me, though, was the timing of this event. CNRD produces various ships for the offshore oil & gas industry. Oil prices peaked in Q2 of 2014, but were still pretty high and only lost ground slowly during nearly all of Q3. If customers were already becoming concerned in Q3 about making commitments to capital expenditures, the plunge in oil prices in Q4 will almost certainly result in slashed capital budgets and a screeching halt to order flow from CNRD's most important customers.

CNRD dropped from a closing price of $39.90 on 11-13-14, the day Q3 earnings were reported after the close, to as low as $31.95 the next day when it managed to close at $34.25. The closing price today, 12-5-14, is $34.95. That's not far below where CNRD has been trading nearly all of 2014 before oil prices plunged and CNRD reported the significant drop in order backlog. Think of CNRD as at least partially an oil services company and then look at the charts for other companies in the oil services industry. There may be a reasonable explanation for what is going on at CNRD, but with only the sketchy information contained in the Q3 earnings report to go on, I believe there is justifiable cause for alarm at CNRD's current stock price.

CNRD is a great well-managed company with virtually no debt, so I'm confident it will survive and eventually prosper again, but I will not be re-establishing a position in CNRD until oil prices stabilize for a significant period of time. Capital intensive industries tend to have long cycles and it may be a long time before the outlook improves. Buy CNRD again when you hear that home prices are depressed in Williston, ND due to the collapse of the oil patch. Oil will come back. It always does, but I'm not expecting any V-shaped bottom unless OPEC really gets its act together.

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