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No. of Recommendations: 2
I undertook a review of TDW when it was around $20 or so a few months back. The stock jumped to $30 before I could blink, so I didn't buy, and thus never did get around to putting this post together. The analysis assumes an entry point of $30 per share, well above current levels. As a result, rate of return projections are low for an entry at the current price. Anyone wishing to adjust the rate of return projections can of course substitute their own entry point price for the $30 price.

The analysis is based on ROE based earning projections, which in turn lead to share price projections. The data I used was collected from TDW annual reports and SEC filings, Value Line, Standard and Poor's, and Microsoft Investor. All data can be verified, and thus so can the projections. The analysis is as follows:

- EPS have risen with a fair degree of consistency since 1991,

- The initial rate of return based on expected 1999 EPS is 9.8%,

- The 8 year EPS growth rate using 1999 EPS is 22%, and the 5 year EPS growth rate using 1999 EPS is 29.8%,

- The value relative to government bonds is as follows:
@ 5%: $59
@ 6%: $49
@ 8%: $37

- The return on capital is 30.4%


I projected shareholder's equity for TDW in the year 2004 using two rates of Return on Equity. I used 15% ROE and 20% ROE, which is well below current the current rate of ROE, with 15% being at the historical low and 20% being the historical average for the Company. My projections also assumed TDW retained about 75% of earnings over the next five years, which is 5% below what they are expected to retain, and 5% above their historical average. Shares outstanding are expected to decline modestly over the next five years, and I factored this modest decline in. I used P/E multiples of 4, 12, and 30 to determine share price, as these are the historical low, average, and high for TDW.

- @ 15% ROE: $1,894,000, which projects out to EPS of $4.98
- @ 20% ROE: $2,310,000, which projects out to EPS of $7.83

@ P/E of 4: $19.92 + $4.03 = $23.95, giving a R of R of -4%,
@ P/E of 12: $59.76 + $4.03 = $63.79, giving a R of R of 17%,
@ P/E of 30: $149.40 + $4.03 = $153.43, giving a R of R of 40%.

@ P/E of 4: $31.32 + $4.03 = $35.35, giving a R of R of 4%,
@ P/E of 12: $93.96 + $4.03 = $97.99, giving a R of R of 28%,
@ P/E of 30: $234.90 + $4.03 = $238.93, giving a R of R of 53%.

Summarized even further, an investment in TDW at $30 per share, using data that is conservative on both a historical and projected context, can be expected to yield a return of between -4% and 53%. The likely range of return is 17%-28% if held for five years. In order to expect a minimum rate of return of 15% in the worst case scenario using this data, one would have to purchase TDW at $12 per share.

I analyzed each line of the financial statements, but it is close to 3:00 AM PST and I am getting a bit tired. As a result, I will only summarize my findings concerning the Balance Sheet, Income Statement, and Cash Flow Statements. The financial statements I used were annuals for the past 10 years, as well as the most recent quarterly SEC filing. I saw nothing exciting in the Notes section, leading me to the conclusion that the statements were a fair representation of what's been going on with the Company.

It should come as no surprise to anyone that has followed TDW for any length of time that TDW's Balance Sheet is pristine. Cash was up, receivables are down, and the current ratio is excellent. Little and declining LTD, and little STD. No point in wasting valuable server space talking about the Balance Sheet.

Year to year on an annual basis the Income Statement is great. However, it is no surprise that recent quarter to quarter things haven't been as good. On a quarter to quarter basis EPS are down by a double digit margin, before buybacks are factored in. On a six-month basis EPS are up, however. General and Administrative costs were up 10% on a six month basis, which I don't care for. But they appear stable over the long term. While I don't expect a ton of good news going forward over the short term, I'm not a short term investor and saw nothing in the Income Statement that suggests long term trouble if investment is done at the right price.

With the Balance Sheet as strong as it is, I would expect many not to pay much attention to this statment as they otherwise would with other companies. Nonetheless, I went over this line by line anyway, just to be safe. Cash Flow is not TDW's strong point, and it did cause me some concern.

Operational cash flow was excellent, as it has been for the past decade. Cash Flow from Financing Activities was negative, but not in a particularly meaningful way. Cash Flow from Investing Activities was negative, and in a big way. Reviewing statements of cash flow for TDW over the past decade shows a pattern of heavy investment in new equipment every few years. The high ROE and EPS growth without the use of leverage makes me believe this investment has been intelligently done, and has fueled growth as much or more than it has been a maintenance of earnings power. So, while I always welcome a ton of free cash flow, I can't say I can find any reason at this point to be particularly critical of TDW's cash management.

If you're still with me after all of this, I'd like to say you have plenty of patience. Please take me to task on anything that appears incorrect. The real bottom line here is that I was not a buyer of TDW at $30, but I am a buyer at the current price.
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