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TISI ($23.91) - Up almost 60% in a week. Given the weak balance sheet, I think this one is nearing fair value ($25-$30) at the moment, incorporating a discount due to the risk of the capital structure. I trimmed 10% here as my cost basis was a touch north of $10. I still think there is potential upside to be made over the next 2-3 years, but the really easy money has been made. They have a focus on the energy and infrastructure markets, which are seeing a bit of a renaissance in the US as energy independence and infrastructure modernization are key tenets to both party agendas. Using conservative growth of 3% over the next 2-3 years and EBITDA margins increasing to 9% (still short of the 10% target), I think an EBITDA multiple in the 7x range puts the share price north of $70, which is still a nice 3x return from here, or over 50% annualized.
The risk remains the high leverage, though with the refinancing that risk has come down. The energy markets are volatile, though with the geopolitical environment the way it is, I expect energy investment in the US will remain strong for the foreseeable future. All that being said, I still feel the risk / reward is attractive at this price.
SIF - And there is the 8-k providing an update. They’re waiting on Italian government approval and will close shortly thereafter. Also extended maturities on existing debt a few months. Will likely use proceeds and a new facility to refinance out their existing debt after close as well. The debt picture will look much improved post close.
No news that I can find, which may be why it’s dropping. The C-Blades sale was scheduled to close in late September, but no announcement on the close. No 8-k filed yet, and given the size of the deal, I would have expected one. So we’re left to wait for an update.
Interesting to see another well tenured and senior aerospace exec named to the board of such a small company.
Perhaps something larger is brewing?
TISI ($15.25) - Up nicely in the last month, announced this afternoon the refinancing of their debt and extension of the maturity date for an additional 2 years. This removes some of the near-term credit risk. They mention a reduction in the spread on the debt, but until the 8-k is filed, we won't know by how much. Either way, I view this as a positive for the equity and look forward to the next two quarterly reports to see more progress on the turnaround. I still view fair value to be in the $25-$30 range, which incorporates a discount for the weak balance sheet. If they are able to continue to improve their balance sheet and add to their income statement turnaround, I think there is potential to see the stock north of $50 over the next 2 years.
SIF - nice pop indeed, I’ve been added up until $4 this morning. I have growing confidence that the sale of CBlades will result in a much improved balance sheet. That should reduce some of the valuation discount it trades at relative to its peers.
$TISI - bought a full size position in Team these past two weeks, most shares purchased in the $10’s. This is a turnaround situation with high leverage, so there are some risks. But with that risk comes the potential for a nice reward.
Team is in the industrial inspections business, with a higher level of exposure to the energy and chemical sector, 72% of revenue in the U.S. There is a nice investor presentation on their IR site with a good overview of the business.
The company is undergoing a pretty significant turnaround over the past 2 years, with new management at the helm leading the changes. They have gone from -$6.3 million of EBITDA in 2021 following lower energy related activities post-COVID to an estimated $58-$68 million of EBITDA for 2024. New management has cut cost, improved efficiency and is now focusing on returning the business to steady growth, while operating at higher margins. The 2024 guide is for EBITDA margins in the 6.5%-8.0% range and management has goals to hit 10% over the next few years.
The balance sheet is a mess, which is likely why the company trades at a significant valuation discount. But that mess has been improving over the past 2 years. First, they sold off their Quest Integrity Business in 2022 for $270 to pay down debt, and refinanced some debt in 2023 to provide for more runway on the turnaround. That debt is not cheap at 12%. But with the improved financial performance expected in 2024, they are in active discussions to refinance the debt again, but at a lower total cost.
The enterprise value at a $13.50 share price is only $365 million, and which is about 5.5x 2024 EBITDA. Mistras Group, $MG, which is similar sized and is the midst of its own turnaround, though further along, trades at about 7x 2024 EBITDA. Mistras has a very similar business and I’ve done well over the past year there as a shareholder from the $5-$6 range.
At 7x 2024 EBITDA, Team’s share price would be $35 per share, or roughly 3x higher…
While the balance sheet is likely contributing to the discounted multiple, the expectation would be that as they refinance and make progress on the balance sheet, that valuation discount would shrink. And as they move closer to their 10% EBITDA margin target over the next few years. Those cash flows would allow them to delever further.
In my model, if one assumes 3% top line growth and EBITDA margins hitting 9% in 2026, at a 7x EBITDA multiple, the share price is closer to $75….
While there is a good amount of risk here, and work for the company to do, I like the progress they’ve made thus far and am willing to make a 5% of my portfolio bet that they can pull it off.
SIF - Great point on the gain on sale that they will book in Q4, likely to be over $1 per share. One-time in nature, but sometimes that doesn’t matter….
What I will like is the debt coming down to $10-$12 million post-transaction. That should take cash interest expense down to under $1 million annually. I was also waiting for EBITDA to clear $2.5 million quarterly, and they did much better at $3.4 million this quarter on $29.3 million of revenue, or a ~12% margin, which is well above where they’ve been the last 2-3 years, but still below where they operated in 2010-2014.
With debt at a more manageable level, I would think the stock should re-rate higher, especially with the strong backlog, improved profitability, and increasing build rates on their largest platforms.
SIF - Posted solid earnings with Adjusted EBITDA of $3.4 million, operating at an annual run-rate of ~$14 million.
They are in process to sell their Italian operations for net proceeds of $15 million, which will reduce their debt position by roughly $25 million ($9.7 million of debt goes with the Italian operations in the sale). That will leave roughly $10-$12 million of debt on the balance sheet if all the proceeds are used to pay down debt. I expect that to be the case given their status with the current lenders. I would expect they should be able to refinance this amount with new lenders.
They have not disclosed financial information for the Italian operations, so unknown as to what portion of EBITDA will go away in the sale.
But with backlog near record highs, production rates for the 737 and 787 expected to increase next year, and the improved balance sheet, I’ve decided to add to my position here this morning. They also own their Cleveland facility outright, which is likely worth well above what it’s listed at on the balance sheet.
I will potentially add more once we get some clarity on the earnings going away as a result of the sale of the Italian operations.
AYSI - For all those wondering, it appears as though the settlement was approved. This is from the fund that pursued the legal action:
https://www.barelkarsan.com/2024/04/alloy-steel-court-settlement.html
CNRD - Looks like they're getting hammered on a few fixed priced contracts with several options yet to be exercised, so there may be some additional losses to come in 2024 as those options get exercised. I've kept my eye on this one as I think there is value there, though it looks like it may take another year for them to get fully past these pre-inflation contracts. On the positive side, they've got a lot of cash, no debt, some tax refunds coming and a potential $7+ million judgement coming their way in 2024.
The company used to operate with 10%+ EBITDA margins and they've invested at lot in their yards over the past 5-7 years. Could be interesting under $7 and as they get these awful contracts out of the way...
SIF - Another disappointing quarter from a profitability perspective. Backlog remains solid at $130 million, but they need to get to profitability, and quickly, to have the chance to successfully turn this around. I will not be adding or selling based on this quarter, but time is ticking and patience is wearing thin...
SIF - I share other's disappointment in the bottom line for the 4th quarter. It was positive to see revenues increase to about a $100 million annual run rate, though I was anticipating better profitability. It's certainly possible that it was a "kitchen sink" type quarter, looking to start a clean slate for fiscal year 2024, but that is just speculation on my part. I have not sold any of the shares I have, but at the same time, I will not be buying any more until we see some improvement to the bottom line.
The company's balance sheet continues to be a problem, with the elevated debt levels, they need to operate profitably quickly if they have any chance of digging out. While I am not a fan of the Silk $3 million loan given the high interest rate and closing fee, it was likely needed in order to get the senior lender to amend their credit agreement further and extend the maturity date until October 2024. It looks like Mr. Silk also needed to personally guarantee the senior debt, in exchange for a guarantee fee of $760k.
I'm willing to give them another quarter or two to show progress towards achieving a $5 million EBITDA year. With the backlog they have in place, its certainly possible to see $105+ million in revenue in FY 2024. A 5% EBITDA margin is certainly achievable (they averaged 9%+ in 2010-2020).
If they're able to generate that level of earnings, it should put them in position to refinance the debt when it all comes due in October 2024. They also own their 280,000 square foot facility in Cleveland. which could be worth as much as $40-$50 per sq foot, or $11-$14 million. I'm surprised they haven't looked at potentially monetizing this asset to help improve the balance sheet.
SIF - hweb, I added some more this morning under $4, which are shares I sold over $4.70. With the backlog increase, I'm hoping it isn't just a one-time bump and they're able to hold this level of production. They certainly have the capacity and relatively new equipment to do so and with the upcoming ramp in commercial aerospace build rates, the table is set for them to significantly improve their financial position.
PLPC - Buying back the PLPC that was sold in the $140's, $150's, $160's and $170's under $110 here. Quarter came in weaker than expected, customers inventory levels elevated, backlog down. A small position currently to keep track. Long-term I like their prospects, but short term there may be more weakness until their customer buying patterns stabilize.
At under 5x EBITDA and a solid balance sheet, I'm happy to wait and see here.
BELFB - I do have about 33% of my position left uncovered by calls. BELFB is my second largest position, so I'll be keeping those shares uncovered to maintain exposure if it keeps climbing higher.
CVNA, VRM, JOBY, AUR, EOSE - A lot of these are down 40%-50%+ over the last 3 months. Had short positions on a few of these, but should have been more aggressive... hindsight 20/20
BELFB - I took the opportunity here to sell some Mar $55 calls, buy back some $40 puts. I agree the quarter was great and the company is performing very well. My main concern is more macro based, as I see a general macro slowdown coming now through the first half of next year. I think the fed is again behind the curve and will push things until something breaks. I'd bee happy to sell some $40 puts again if the price falls and sell stock at $55 if I'm wrong and the economy somehow stays resilient...
SIF - I was able to get ~9,500 shares at $3.40 avg. I have sold down to about 7,500 today all the way up to $4.35. If it keeps running higher, I'll keep selling some off to re-buy if it moves lower. At $5.00, a lot of the turnaround will be priced in.
SIF - Agree on everything you wrote, we will see if the new revenue flows to the bottom line…. If they get back to historic margins, it could be a great return. Added a starter today as well, and now we wait…
SIF - Worth taking a flyer? Backlog has grown from ~$60 million a year ago to ~$90 million at 3/31 and now up to $122 million as of 6/30! Filings state that they expect to ship a majority of the backlog in the next twelve months, which would be a significant improvement to the ~$80 million revenue generated over the last twelve months. Last time they had backlog levels this high was in late 2019 and the following year were able to deliver $12 million of EBITDA, which would translate to about $0.60 EPS today. Stock ripped up into the mid-teens. Tangible book value per share here is $5.28, so some cushion there relative to the current $3.30 price.
The balance sheet is challenged though, with high levels of debt and their facility is coming due in December. They indicate they have term sheets in hand to refinance, but might be safer to wait until the refinance is in place.
CVNA, VRM, JOBY, AUR, EOSE and the lot of highly speculative names have blown 2x,3x, even 4x higher the past 1-2 months as speculation seems to be reaching a fever pitch. I don't typically short, but a lot of these money losing growth names look very tempting on the short side... Anyone else dipping their toes on the short side?
BELFB - I've apparently been too early to sell calls on my position as this continues to move higher and closer to fair value. I'm now selling Sept $55 calls for premiums in the $2 - $2.50 range and will soon be 75% covered on my shares. I may look to sell my 25% uncovered position in the low $50's.
Frankly, I've been generally lightening up across my portfolio on this latest run-up. A bit surprised we've moved up the way we have as I think the impact from all the Fed rate increases is bound to catch up with the economy at some point this year. Time will tell...
POWL is another I’ve trimmed here after results. I still like these two companies long-term, but a lot of the opportunity is now priced in. Then again, I thought the same of HUBB, and that just keeps running…
I’ve moved some proceeds into BDC, some oil and gas companies that have fallen (SBOW, CPE, NINE, etc). Rest is parked in cash for future opportunities.
PLPC - in the high $140’s, I think we’re near fair value, so I’ve trimmed my position further, though still holding a quarter of my original position started on the $80’s. Backlog comment was not surprising, given the huge quarter.
I think the easy money has been made and returns moving forward will be significantly more muted and in line with the market. This was one of a few overweight positions, so I’m happy to trim down to size.
PLPC - Reports another monster quarter. Sales up 32%, EPS of $4.28!
Should have kept all my shares, this should be at $150+
MG - This has run up nicely to the low $8's. Still trades at a discounted multiple. Earnings out Thursday next week. I'm expecting a top and bottom line beat and hoping they raise their FY23 revenue estimate range of $710M - $740M.
EFXT is another energy play that appears to be priced attractively priced. Their business should benefit from more natural gas movement and power generation, which I believe are macro trends that will be with us for the next several years.
BELFB - Sold some Sept $45 calls today on the run-up. Still holding about 80% of my position uncovered by calls, haven't sold any actual shares. Bought back some of my sold May $30 puts, will let the rest expire.
I may start selling some Sept $50 calls if it keeps moving higher up to a 50% covered position. Will look for premiums in the $2.50 range there to sell.
The multiple here is 6.2x trailing EBIT, so still relatively cheap. Fair value is closer to 8.0x - 8.5x in my opinion ($53 - $58 per share).
BELFB - Big beat on both the top and bottom line. I'm holding a full position and sold more May $30 puts when my April $30 puts expired. I continue to believe fair value is closer to $50 than $30 and was pleased with the report. It will be interesting to hear their conference call, as a cautious tone at Q4 drove the price lower, though with the big beat this afternoon, one has to wonder why management sounded so cautious during the last earnings call.
I plan to continue to hold my core position, sell $30 puts as they expire and potentially sell $45 calls if the opportunity presents itself.
MG - I've been buying MG this morning on what I thought were strong results and good forward guidance. 2023 revenue projected to increase 5.5% at midpoint with adjusted EBITDA projected to increase 25% at midpoint.
The business had a few tough years, exacerbated by high leverage that come on as a result of a few acquisitions in 2017 and 2018. They've been slowly paying off that debt ($70 million repaid over the past 4 years) even as results have been pressured due to lower activity in their oil & gas business. But that business is coming back, along with growth resulting from efforts to diversify from their oil & gas business.
They've also hired Alix Partners to perform operational consulting to find additional margin improvement initiatives. I'm optimistic that they can grow the top line ~5% here for the next 3-5 years and move margins higher by 150 - 250 bps. If they can achieve these improvements, with cash flow being used to continue to delever, I could see this trading in the $15 - $20 range in 2025 - 2026.
Some wood to chop for certain, but I think the risk / reward looks good here in the $5.70's. This used to trade in the 8x-9x forward EBITDA range back in 2015 - 2018, and appears to be a solid buy here at about 5x forward EBITDA.
BELFB - Since that post, I've sold 10 April $30 puts ($0.85 avg), 5 April $40 calls ($0.90 avg.) and 15 Sep $45 calls ($2.50 avg.). I like their long-term opportunities and see a lot of similarities to PLPC, but there are certain aspects to BELFB's business I like better (lower capex and working capital requirements, higher margin opportunities). I think the new management has done a great job of consolidating operations allowing for higher operating margins, and thus improved cash flow.
Valued at ~7x EBIT, I think shares are roughly 30% undervalued, with a 9x EBIT multiple closer to market for this business. So personally, I'm not surprised to see the stock recover. I'll look to sell some more $45 / $50 calls on further strength to cover a greater % of my position.
Speaking of PLPC, I lightened my position further today over $124.
BOIL / KOLD - The swings on NG the past 4 -8 weeks have been severe. I've attempted to play both sides by selling calls on both BOIL and KOLD (~2 week forward calls), but the magnitude of the movements of late have been above expectation and frankly has provided for an unprofitable trading strategy. Perhaps looking at 1 month forward calls may be more effective in this environment? (Longer time horizon for decay and lower delta)
That said, I continue to believe that the magnitude of the swings will subside and that there will be more "chop" in the price here as the supply picture here remains robust with a 15-20% surplus in inventories relative to 5-yr avg. I plan to stick with my strategy, perhaps extending terms to 3-4 weeks on a rolling basis. The drop in BOIL tomorrow will help my existing positions, but could use a week or two of price bouncing between $2.50 - $2.90...
PLCP - Sold a touch at $110 myself, was approaching my top position. Would buy back if it fell back to the $100 level. Moved some of those proceeds over to HCCI under $35 on what I thought was a decent quarter and harsh move lower.
PLPC - Another solid quarter for PLPC with revenue growth of 29% and EPS of $3.28. For the year, EPS came in at $10.88, a new record and now trading at a P/E of 8x. I think growth will slow to ~10% this year, but at this multiple, it’s still an attractive opportunity.
BELFB - after listening to the call again, you’re correct in your statements. Those additional one-time customer charges contributed to revenues, but were dilutive to margins. So while revenue is expected to potentially decline on a reported basis, profit excluding restructuring costs may come in above 2022.
I continue to believe the opportunities in front of them are longer-term in nature, with aerospace still operating below potential, mobility in early innings, magnetic working through a short term blip and strong backlog/orders in their Power solutions segment. I believe their restructuring actions to consolidate operations should also provide further operating leverage and efficiencies.
At this multiple, I think the risk / reward is attractive and that there are significant long-term opportunities beyond this upcoming year. It certainly may bounce around this year, and I’ll be selling $45/$50 OTM calls on rallies and $30 puts on dips around my core position.
BELFB - I have built an overweight position here at 7.5% of my portfolio with purchases as low as $34. There were some softer comments overall on 2023 indicating a flat year from a revenue perspective as the magnetic solution business declines and OEM customers look at de-stocking some of their elevated inventory levels across all segments.
The company continues to focus on improving margins and I anticipate 2023 will show continued improvement on the bottom line. The aerospace and mobility segments will continue to grow rapidly in 2023 and contribute more high margin sales, improving mix. Power solutions remains strong and will continue to perform well. I anticipate a reacceleration of growth in the back half 2023 into 2024.
At under 7x EBIT, I think it is still mispriced, though fair value is likely closer to $45-$50 than the $55 I wrote before the conference call.
BELFB - I am and will be buying more this morning. This still has a few more years to play out, along with my other plays on reshoring, electrification and infrastructure.
I think fair value is closer to $50-$55 at the moment. Think it can get to $100 in the next 3-4 years as the broader macro trend plays out.
KOLD / BOIL - I've been writing a modified straddle strategy, where I write calls on KOLD and corresponding calls on BOIL. Given the leverage and inherent decay on both, my theory is over a longer period of time, and days with up and down movements, it may be advantageous relative to just writing a straddle on KOLD solely.
This is all predicated on the notion that the option prices don't otherwise reflect the impact of decay given the leveraged structure, and periods where the price of each doesn't only move in one direction (which has not been the case of late).
So far the jury is out, in a net positive position, but moves like today don't help.
WIRE has been a great winner for those who've held on. WIRE and others are benefitting from a return of manufacturing to the US (reshoring), as well as the resulting need to invest in infrastructure and the electrical grid for an electric world. I've built a portfolio with exposure to these trends, which I think will be in force for the next 5+ years. WIRE, ATKR, ETN, ABB, BDC, NVT, HUBB, BELFB, POWL, TEL, DCI, SSD, PRIM, MRC are some of those companies. My top positions are PLPC and BWMN within these trends.
PLPC has no analyst coverage and trades at a 6.5x trailing EBITDA, where the majority of the companies in their space trade at north of 10x EBITDA. I think it will only be a matter of time before they are discovered and viewed similarly to the other companies in the space. I think fair value for PLPC is closer to $135 today, or 8.5x EBITDA. If they continue to execute over the next 2-3 years, my models suggest they could reach a valuation of $250+ in 2025 with a 9x EBITDA multiple, still below where their comps trade. 40% IRR and 2.5x MOIC from here.
BWMN is my other favorite play which is more tied to all of the engineering that will need to take place to support the investments needed to upgrade infrastructure and the electrical grid and support reshoring. The stock has performed much stronger than I imagined and actually ran away from me a bit as I was building a position in the low $20's. Even here, it appears to be an attractive opportunity. They trade at 8.5x forward EBITDA, which is lower than most of the other engineering comps (NVEE at 14x, TTEC at 16x, Stantec at 13x, ACM at 14x). They're growing both organically and through rolling up smaller engineering practices at lower multiples. I see them as an early version of where NVEE was 5-6 years ago employing the same strategy. NVEE went from $20 to over $125 today over that time frame.
I am going through the process of pursing the appraisal rights option. Currently exploring whether I want to have the company file a petition with the courts. I think it's in everybody's best interest to keep it out of the courts, but we shall see how things go.
There is also no majority of the minority vote requirement, further making this vote moot, except of course, for those that plan to dissent and pursue appraisal rights.