GEOS - Geospace: Adjacent Market Concerns (Rating Downgrade)

2024-02-12 23:49:17 ET

Summary

• Geospace's first quarter results were soft outside of a large one-time equipment sale, and management expects muted rental activity until later in the year.
• Revenue from GEOS's Adjacent Market segment has stalled in the past two quarters, which is likely having an outsized impact on the company's valuation.
• While the Company's valuation remains low, particularly when accounting for the company's cash balance and accounts receivable, stabilization of the Industrial business will likely be needed to drive the stock higher.

While the general demand environment remains solid, Geospace's ( GEOS ) first quarter results were soft outside of a large one-time equipment sale. I previously wrote about Geospace , suggesting that it offered an attractive investment opportunity as its Adjacent Market business was undervalued. From a long-term perspective, I don't believe the situation has dramatically changed but the poor first quarter performance of the smart water business was a surprise. Industrial sensing & IoT and smart water technologies are growth markets and are becoming an increasingly important part of the Geospace story. Any struggles in this area are therefore likely to have an outsized impact on the company's valuation. While Geospace has attributed lower Adjacent Market revenue to customer destocking rather than something more serious, the company will likely need to demonstrate a return to growth before the stock bounces back....

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