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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Thursday, June 12, 2014

ESWW: A $7M Mkt Co Trading at 1x EBITDA Substantially Growing Revs and EBITDA

On a dreary overcast day in NY, there's nothing like a new stock idea to get me excited. Found this company ...

http://finance.yahoo.com/q?s=esww

... while running a screen for small cap companies growing revenues and margins and with net cash representing a significant portion of MktCap.

Environmental Solutions Worldwide (ticker ESWW) makes emissions control retrofits for medium and heavy duty diesel (MHDD) trucks, both on and off-road.

The overall market for on/off road trucks benefits from increased pollution control regulations by state and federal EPA. The trend towards increased pollution control regulations are well documented here ...

http://www.arb.ca.gov/msprog/mailouts/msc1325/msc1325.pdf
http://www.dieselnet.com/news/2013/08meca.php
http://www.dieselnet.com/standards/us/ld_t3.php

The company has a market cap of roughly $7M.
In 2013 it did $17.5M in sales and was breakeven.
In 1Q14 it did $7M in sales and $1.9M in EBITDA.

It trades at 0.3x annual sales, 1x EBITDA and has a pedigreed board of directors including what appears to be two of Leon Black's kids. Unless he's Cronos-like who ate his children, why would he saddle his kids with a crappy company?

The Apollo connection isn't just in the board of directors but how the company operates. Much of the growth in sales corresponds to its "stalking horse" acquisition of Cleaire out of bankruptcy auction in 2013 for $1.4M.

There are only 125,000 shares outstanding (yes, thousand) and the company is authorized to issue up to 250M, which simply reflects the recent 1:2,000 reverse stock split and re-listing without terminating shares.

Also, the bulk of the $2.5M in l/t debt is in the form of convertible notes that would be dilutive. But the opportunities I see in buying a profitable cash flow positive company in a regulated growth market offsets my fears of dilution to shareholders, especially since it seems at least that everyone's goals are aligned towards long term growth and profitability.

I haven't nearly done as much work on this as a normally do and I will write more on this later, but the world cup is starting and I need to prepare dinner for my staving kids. Such are the travails of the outofworkanalyst.

Disclosure: I own 200 shares that I acquired today.

5 comments:

  1. A few articles relevant to the company.

    Best overview yet on the LongMile filter recall, the fire it started, the ARB, the new regulations, who is effected by the regulations and how much consumers hate these things. Oct 2011.
    http://sacramento.cbslocal.com/2011/10/18/on-the-money-diesel-filter-recall/

    Longmile product recall. Sept 2012. "During this recall, Cleaire is either replacing the LongMile’s existing metal filter with a certified silicon carbide core or a certified catalytic Cleaire Muffler Module over a prescribed recall schedule, or removing the entire system from the vehicle"
    http://www.arb.ca.gov/msprog/mailouts/msc1220/msc1220.pdf

    Ooops. The LongMile DPF (diesel particulate filter) causes brush fires.
    http://www.landlinemag.com/Story.aspx?StoryID=24384#.U5pMJvmwLYg

    Cleaire ceases operations. January 2013. One of its products, the LongMile filter, had been recalled.
    http://www.government-fleet.com/channel/green-fleet/news/story/2013/01/dpf-provider-cleaire-closes.aspx

    Aha. Apparently sparks from the recalled Cleaire filter started a few forest fires in WA and CA. January 2013. A few tidbits worth noting here ...
    Cleaire was owned by Newworld Capital Group, a prvt equity group that invests in companies that provide solutions for clean energy, energy efficiency, environmental svcs, etc. A bit ironic, of course. Also, that each filter costs in the range of $20K.
    http://www.truckinginfo.com/channel/aftermarket/news/story/2013/01/dpf-maker-cleaire-shuts-down-following-fires-and-recalls.aspx

    ESW Acquires Cleaire. May 2013 article. A few tidbits on the LongMile recall. Plus, for future research: "ESW CleanTech has established a Cleaire Product Support line, which can be reached at 1-800-398-6105"
    http://www.government-fleet.com/channel/green-fleet/news/story/2013/05/esw-group-acquires-cleaire.aspx

    CA Air Resources Board (ARB) transfers verification of Cleaire to ESW. June 2013.
    http://www.government-fleet.com/channel/green-fleet/news/story/2013/06/arb-transfers-cleaire-longview-verification-to-esw-cleantech.aspx

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  3. Bengt Odner was CEO of the company back in 2000 up until ... not sure yet. He was involved when the company was initially making catalytic converters for cars. That didn't seem to turn out very well. Here is an interview with the Wall Street Transcript all about the company way back when.

    https://www.twst.com/interview/5137

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  4. The involvement of institutional investors dates from the winter of 2011 from a bridge loan and later an investment agreement. There's some template text below. I wonder why these folks got involved with the company in the first place?

    Effective January 25, 2011 by written action and vote of
    Sedam Limited,
    Bengt Odner,
    Black Family 1997 Trust,
    Leon D. Black,
    Leon D. Black Trust UAD 11/30/92 FBO Joshua Black,
    Leon D. Black Trust UAD 11/30/92 FBO Benjamin Black,
    Leon D. Black Trust UAD 11/30/92 FBO Alexander Black,
    Leon D. Black Trust UAD 11/30/92 FBO Victoria Black,
    John Hannan,
    Orchard Investments LLC
    and Richard Ressler
    (the "Majority Shareholders") representing 66,134,887 shares of the Company's
    common stock, a majority or 51.08% of the outstanding shares based upon the
    Company's certified list of shareholders, pursuant to Title XXXVI, Chapter 607,
    Section 607.0704 of the Florida Statutes and the Company's Bylaws, Article II
    Section 5 of the Company's Bylaws was amended so that the Company shall have a minimum of one (1) director but no more than eleven (11) directors.

    The amendment to the Bylaws increases the maximum number of directors the Company is permitted from seven (7) to eleven (11). Also by a vote of the Majority
    Shareholders, each of the Company's existing directors:
    Nitin Amersey,
    Peter Bloch,
    John Dunlap, III,
    Elbert O. Hand,
    David J. Johnson
    and Mark Yung
    were re-elected as directors of the Company.

    Additionally, Benjamin Black, Joshua Black, John Hannan, Zohar Loshitzer and John Suydam were elected by the Majority Shareholders as members of the Board of Directors effective January 25, 2011. At the present time Messrs Benjamin Black, Joshua Black, Hannan, Loshitzer, and Suydam have not been nominated to serve on any of the Company's committees.

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  5. I shouldn't poo poo the dilution. As I wrap my head around it and read a few prior year 10K's, you can see that the board has been using convertible notes to lend money and accumulate shares, which is how the share count ballooned in the first place.

    With ~125,000 shares currently out, and a prior pattern of significant dilution from the converts, I shouldn't overlook the risk of further dilution. to wit: "In December 23, 2013, we filed a Form S-1 Registration Statement ... registers $4,596,929 in 10% Senior Secured Convertible Promissory Notes due 2018 (the “New Notes” and, together with the Existing Notes, the “Notes”) and the potential 152,899 shares of common stock issuable upon conversion of the Notes and, if applicable, as payment of interest on the Notes by the Company."

    On these "new notes", the accrued interest can be paid with stock valued at up to $80 / share - below that depending on current market value - so buying below $80 and assuming stock appreciation (as a shareholder should) better aligns interests.

    If cash flow improves and the need for this lending diminishes dilution becomes less of an issue. But currently, investors should expect the share count to at least double. On a presumed diluted basis this now trades at 2x EBITDA. Still a fair discount.

    Outofworkanalyst needs to attend SLT meeting at kids school to figure out what the new NYC teachers union contract means for next year's school day.

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