After taking a year and a bit off, I am back! Life with a little one is quite an adventure and takes a lot out of you. With things settled down a bit and into a routine I want to get back to writing again.
The stock I want to talk about today is not the value/dividend investment I usually talk about. Pyrogenesis (TSXV:PYR) in addition to having a really cool sounding name has some awesome tech and would best be described as a startup/growth technology company. Personally I believe that at it’s current price this stock represents the best opportunity for making lots of money in a short time frame that I have ever seen and I have put a good chunk of my portfolio into it.
Now for the background: Pyrogenesis is a technology company that uses plasma to transform materials. I have not researched the company’s early history, but as of a few years ago it achieved commercial success by making a system to destroy waste that has now been included into the design of the current U.S. aircraft carrier. This business really showcases the capabilities of the company as getting your technology into the U.S. aircraft carrier is no easy feat and would have subjected the company to a serious vetting process. To date they have sold two systems and as of right now the U.S. Navy is building two more aircraft carriers which Pyro will be selling into very soon. If this was the company’s only line of business though it would likely never be profitable. The systems sell for a few million dollars each and come with some recurring revenue in parts and service, but there are only so many aircraft carriers and so Pyro has made a decision to use it’s expertise in plasma to branch out into other lines of business.
The number of new technologies Pyrogenesis has been developing is quite impressive. The PowerPoint slide titled Business Lines in the 2018 AGM meeting presentation lists them nicely. Since that presentation Pyro has also sold a system for iron ore pelletization adding a new business line into the mix. In fact it seems that Pyrogenesis opens up a new line of business every 6 – 9 months or so. The business line that seems to be catching on the most quickly is DROSRITE and together with the aircraft carrier business is the major reason why I think this is such a good short-term money making opportunity. In it’s 3rd quarter earnings report Pyrogenesis reported $29.5 million dollars in backlog which includes $20 million from a major DROSRITE deal in Saudi Arabia. Additionally it is expected that the order for two systems for aircraft carriers totaling $13.5 million is coming soon which should give the company a total backlog of $43 million dollars. The company expected to start receiving revenues from those orders in Q4 2019, but as of January 25, 2020 the revenue has not arrived and the U.S. aircraft carrier order has not come in and so the share price of Pyrogenesis has plummeted creating the opportunity we see today.
To gauge just how much money this backlog means to Pyrogenesis let’s do some quick back of the envelope math. Pyrogenesis typically makes gross margins on it’s revenue in the mid 40% range and has a annual SG&A expense of around $6.5 million. That means Pyrogenesis can break even at about $14.5 million of revenue. The CEO said at one point Pyro could break even at about $12 million in revenue which may be possible as SG&A expense has likely been higher lately with all the major deals the company has been inking. I will use the more pessimistic number of $14.5 million. When Pyrogenesis gets rolling on it’s backlog it is projected most of it will clear in a 12 months time frame except for the aircraft carrier order which will take 18 months. So from the current backlog and 2/3 of the aircraft order we can project 12 months revenue of $38.5 million which after gross margins and SG&A should give $10.8 million in earnings, which I will round down to $10 million. The current market capitalization at a share price of $0.40 is $56 million giving a really low P/E ratio of 5.6 times!
For a company like Pyrogenesis that for the last several years has only earned around $6 million in revenue per year and has had no profit to speak of, I understand some investors may be skeptical that such great results are just around the corner. Though as soon as those revenue and profit numbers start showing up on the quarterly reports I think a 20 times P/E ratio is a very conservative estimate. This would give a market capitalization of $200 million and a share price of $1.40 for a total return on investment of 250% in a year’s time frame.
Now with all this great news why is the share price so low? The only reason I see as a cause for this is the CEO has been aggressive in his communications in projecting timelines for when then money from the DROSRITE deal and aircraft carriers will arrive. It is a few months past when this money was projected to arrive and I think a certain about of weariness and nervousness has settled into the investor base causing a selloff. Combined with the fact that the shares are not super liquid (the CEO owns more than 50% of the company) and even a modest amount of selling can move the stock price very quickly in one direction or the other. Although delays are never nice, honestly the share price is way to low as the delays don’t mean the money isn’t coming in and I think have been misinterpreted to mean the deals are falling through. On the aircraft carrier side of things the Trump administration has told all the departments to watch how they spend money, so the U.S. Navy is waiting to order the systems only when they are needed and not in advance. On the DROSRITE side dealing with international clients can always take extra time and add delays. The major source of delay is that the customer has asked last minute to pay using a letter of credit rather that just wiring the money and so that needs to be setup before payment can arrive. A letter of credit is good though as it de-risks the payment for Pyrogenesis and moves the risk of payment from the client to the client’s bank.
In summary Pyrogenesis at it’s current price allows you to buy the shares of a high-tech growth company just transitioning from pre-profit to earning very good money at a very low valuation. This low valuation is due to short-term delays and misunderstandings and should all be cleared up soon. Pyrogenesis is the company I have by far done the most research on and I could write so much more, but I like to keep my blog posts short and to act just as a starting point for giving people ideas rather than being an exhaustive source of info. I just want to end by saying that the CEO of Pyrogenesis, Photis Peter Pascali, is a major reason I have such a great deal of confidence in this investment. Through his constant communication I find him to be a CEO that is not only well aligned with his shareholders but takes lots of time out of his day to address questions, concerns and communicate the companies direction. If his fault is that he over-estimates how fast things can get done, that is not such a great fault to have and simply shows his eargerness to move things forward.
Disclosure: I own shares of TSXV:PYR
6 thoughts on “Pyro is on fire!”
Hope things are well. Great article on Pyro. I was planning to increase my stake in Morguard. Are you concerned at all on the Office and Retail exposure of the company? What NAV do you arrive at i.e. do you include the asset management business at an assumed multiple in your calculation?
I am invested now in Morguard REIT rather than the parent Morguard Corp for the dividends. I would look at Tyler’s article on Morguard to get a value of the asset management business. I think his assessment on it is very good: http://www.canadianvaluestocks.com/
Did you have a look at the balance sheet of Pyro? Out of cash & current liabilities much larger than current assets. Unless they get financing, they are in danger of going concern. How do you see this resolved?
I forgot to mention it in my blog post, but yes the balance sheet is another reason investors are concerned and might be expecting another capital raise. The CEO has gone on record though saying that another raise is not in the cards and I believe him. The company got short-term financing here: https://web.tmxmoney.com/article.php?newsid=7774625397460929&qm_symbol=PYR . Also Pyro’s parter Drosrite International just released this news release today that the money is coming in the next few days! https://www.globenewswire.com/news-release/2020/02/05/1980526/0/en/Drosrite-International-LLC-Provides-Update-on-First-Payments.html