Nasty article on SA. maybe cause of some weakness Out of Bulgaria, probably works for shorts
Solar Integrated Roofing Looks Bad From A Fundamentals Point Of View
Mar. 24, 2021 3:03 PM ETSolar Integrated Roofing Corporation (SIRC)1 Comment
Summary
The company’s revenues are growing fast, but this could be mainly due to acquisitions and not organic growth.
The business is loss-making and the operating margins are deteriorating.
As of November, the shareholders' equity and working capital positions of Solar Integrated Roofing were negative.
It seems the company is popular on social media platforms and there could be a significant retail investor interest at the moment.
I don't think the business of Solar Integrated Roofing is worth much in this current state.
Investment thesis
According to the Boston Consulting Group (BCG) growth-share matrix, a "dog" is a product of a company that has a low market share and is at a low rate of growth and should be sold, liquidated, or repositioned. I've seen the same definition applied to companies as a whole and not just products.
Solar Integrated Roofing (OTCPK:SIRC) is a solar power and roofing systems installation company. Looking at the latest available financials, I think that it has a weak balance sheet and its business looks next to worthless. The company needs a gross margin of at least 60% to break even and it's far from this level. It's true that the business is growing fast, but I doubt this is due to organic growth since Solar Integrated Roofing has been making a significant number of acquisitions over the past years. Its soaring valuation seems to be fueled by promotion on social media platforms.
Overall, I think this one is a sell and could be a dog.
Overview of the business and financials
Solar Integrated Roofing focuses on the installation of solar panels on roofs of residential and commercial buildings and it recently announced its entry into the electric vehicle (EV) charging station business through the purchase of a company named Pacific Lighting. The focus of Solar Integrated Roofing in the EV business is on personal chargers at residential properties as well as on public charging infrastructure for network operators.
Looking at the financials for the quarter ended November 30, 2020, we can see that the business is growing fast, but that the operating margins are deteriorating. The company's net operating margin went to negative 37% in the quarter, compared to 31.4% a year earlier.
(Source: SEC)
In November 2020, the company announced that its revenues for September and October had grown by over 50% year-on-year to more than $3.3 million. It added that the gross margin was around 40%. However, you can see from the results for the quarter ended November 30 that the gross margin needs to be above 60% for the business to reach break-even.
And about that growth, a significant part of it seems to come from the acquisition of several small companies that are likely loss-making. As stated in this financial report, Solar Integrated Roofing acquired Narrate, McKay Roofing Co, Milholland Electric, and Montross Companies in the span of a year. It doesn't stop there. In January 2021, Solar Integrated Roofing completed the acquisition of residential solar installer Enerev and in February, it bought roofing and solar solutions provider Cornerstone Construction.
It's unclear what part of the growth is organic if any. This trend is set to continue in FY22 as Enerev alone is expected to add up to $2 million per month to the revenue run rate. To prove my point about the organic growth issue, check out the revenue growth rate from a period without acquisitions.
(Source: SEC)
Turning our attention to the balance sheet, we can see from the financial report for the quarter ended November 30, 2020, that both the shareholders' equity and working capital positions were negative. Looking at the assets, almost two-thirds of them were goodwill and operating leases.
(Source: SEC)
Also, the cash flow from operating activities was negative for the nine months ended November 30.
(Source: SEC)
To be fair, the balance sheet should be in much better shape at the moment as Solar Integrated Roofing claims it had a cash balance of more than $11 million as of February 2021.
Valuation and reasons behind the share price surge
According to OTC Markets, Solar Integrated Roofing currently has 138,674,132 shares outstanding and its market capitalization stands at $129.1 million as of March 19.
So, if we assume that Solar Integrated Roofing is a dog, how come the valuation is soaring? The company's share price started rising around the end of November and more significantly around the start of February 2021.
(Source: TradingView)
November was a busy month for Solar Integrated Roofing and it's hard to pinpoint which news was the catalyst for the share price increase. The February share price surge is close to the time the company announced a podcast that discussed its business and future plans.
I think the main reason behind the impressive share price performance over the past four months is popular among retail investors. The latter could be rooted in social media promotion.
Solar Integrated Roofing is currently popular on platforms such as twitter and StockTwits. Every several minutes, there's a new tweet with the $SIRC hashtag. On YouTube, the company is being covered by several channels such as The Laptop Legend, Moon Market, Stock Curry, Alpha Status Stocks, and Corns Investing.
It seems that more frequent posting of videos on Solar Integrated Roofing started around the beginning of February. Several of the videos of The Laptop Legend have attracted over 10k views, so I think that retail investor interest could be significant.
The company's own subreddit was created on February 1, and it has 818 members as of the time of writing.
Investor takeaway
Solar Integrated Roofing is a small and unprofitable solar and roofing installation company, which has been growing its revenues at a rapid pace thanks to acquisitions. It seems to be currently popular with retail investors and there has been a relatively significant amount of promotion of its shares on social media platforms over the past two months.
In my opinion, the business of Solar Integrated Roofing is close to worthless from a fundamentals point of view and the company is a sell. Investors can take advantage of this by shorting the shares. According to data from Fintel, the short borrow fee rate currently stands at 6.21%.
There are two major risks I see for the bear thesis. First, the company's business is set to expand significantly through the purchase of Enerev and it's possible for the latter to improve the margins and even make it profitable. Second, the share price could soar again due to high retail investor interest.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.
