PSB Monthly Issue July 2014
July 2014
Well, gas prices weren’t going to stay low forever, right?
We’re used to gasoline prices going up in the summer driving season, but this is different. Of course, this time prices are climbing because of civil war in Iraq.
Of the geopolitical hot spots ready to explode into military conflict, I’m sure Iraq was pretty low on the likelihood list for most analysts. But seemingly out of nowhere, extremists in northern Iraq have been wreaking havoc in OPEC’s second largest oil producing nation.
And you know what that means…
Despite the abundance of shale oil we’re developing in the US, any disruption in the Middle East tends to send crude oil prices soaring.
And once oil prices go up, they usually hover higher for several weeks or months.
Year-to-date, crude oil is up roughly 6%, but it had been trading above the key $105 per barrel level since the Iraqi conflict took center stage.
Just this week, the price of oil dropped back below $105, but it could easily shoot higher before all is said and done.
Regardless of where crude oil trades, one thing is clear – no one wants to rely on Middle Eastern oil. However, in order for domestic oil to thrive, more efficient equipment and processes need to be integrated into the industry. Typically, the better the technology, the better the results are for oil and gas equipment companies.
That’s where Profire Energy (NASDAQ: PFIE) comes in.
Name: Profire Energy Ticker Symbol: PFIE Market Cap: $233 million Recent Price: $4.50PSB Rating System 4.9 Stars Raging Revenue: (4.9 stars) The company’s fiscal year sales increased 110% year-over-year. With just 2% market penetration, sales could keep on growing at a rapid rate. Beautiful Books: (4.8 stars) PFIE has over $4 million in cash compared to no debt. Current assets are a robust 6x current liabilities. Stellar Structure: (4.9 stars) The company has very strong insider ownership at 72%. Institutions own another 4%. It’s clear the smart money is invested in this stock. Valuation Verification: (4.7 stars) PFIE’s current price doesn’t reflect the huge growth potential for the company. As such, the stock price could realistically climb 100%. Meaningful Milestones: (5.0 stars) In March of 2014, PFIE was up-listed from the OTCBB to the NASDAQ. Whenever a company goes from OTC to a major exchange, it’s an excellent sign. The company now has access to much more analyst coverage and institutional buying. |
THE OIL AND GAS EQUIPMENT BUSINESS
PFIE develops oilfield combustion management technologies for the oil and gas industry. The company’s primary products are burner management systems (BMS), which allow the end-user to manage temperature control and burner ignitions in various combustion vessels.
Products from PFIE are used in transportation, refinement, and production of oil and natural gas – basically any part of the process using vessels. Vessels are needed for storing oil, removing chemicals, and other activities. The one thing in common is that each of these processes requires BMS.
Basically, BMS operates like a high-tech, highly-specialized oilfield thermostat. The products can be used to reignite the burner flame when it goes out and control fuel flow/temperature. Profire’s BMS can be controlled and monitored remotely.
There are several benefits to BMS products. They are economical because temperature and re-ignition can be automated and maximized. Clearly, the products dramatically increase safety as most burners have to be manually reignited. And, the products reduce emissions because gas tends to leak out of vessels when the burner goes out.
Here’s the most interesting part of the business…
Despite the obvious benefits to Profire’s BMS products, the company has penetrated less than 2% of the market.
That means there’s a huge market out there… and astronomical growth opportunity. As safety, regulations, and efficiency gains become more and more important to oil and gas companies, BMS is going to become the standard.
Even better, there are only four companies providing BMS systems to small and medium producers in North America. Of those four, Profire is the only one that’s publicly traded!
So, we have a company with a highly useful product. There’s a huge market for it which has barely been penetrated. And, there are very few players in the industry.
That’s what we call a recipe for success!
THE NUMBERS
Profire has a simple yet strong business plan. It’s operating in enough of a niche where it doesn’t have a lot of competition, yet its customers tend to have lots of money. So it should come as no surprise, the company had an excellent year financially.
PFIE’s fiscal year just ended, and the company’s growth is obvious. Revenues increased 110% to a record $35.4 million. In addition, earnings per share climbed to a record $0.12, a 300% increase. Net income increased from $1.4 million to $5.6 million.
The gains in revenues were driven by expanded US operations and an expanded product line. Meanwhile, lower operating expenses as a percent of revenues (32% compared to 39% in the prior) helped result in higher net income.
PFIE’s cash holdings are at $4.5 million. However, the company has zero debt. As such, the current ratio is a very robust 6x.
Finally, the company’s fiscal 2015 guidance shows strong growth is expected. The company expects revenues to climb to $46 million to $48 million. And, net income is projected to hit $7 million to $9 million.
INVESTMENT RISKS
As with any small cap investment, PFIE does have a few risks.
A slowdown in global economic growth could lower demand for oil which could lower oil equipment sales and impact the top line.
Changes in regulations could force the company to redesign its products, which may delay sales and income growth.
Finally, other competitors could enter the space and put pressure on sales/prices and negatively impact the top and bottom lines.
POTENTIAL RETURN OF 100% OR MORE
PFIE is one of the few companies we recommend that isn’t obviously undervalued. In fact, it’s trading at a reasonable valuation. Still, the current price of PFIE reflects a company which is projected to grow modestly.
We believe PFIE isn’t just going to exhibit modest growth, it’s going to take the industry by storm.
Since becoming public, PFIE has done nothing but grow. Yet, as I mentioned earlier, the company has penetrated less than 2% of the market! If that’s not significant growth potential, we don’t know what is.
Based on our analysis, we see PFIE climbing to $9.00 a share or more. Buy the shares now for potential gains of 100% or more!
ACTION RECOMMENDATION
BUY Profire Energy (NASDAQ: PFIE) up to $5.00 per share.
Recent price is $4.50
Use a stop-loss of $3.25 on this position.
Don’t forget your position sizing and stop-loss rules.
Here are some highlights from the past couple weeks…
- In case you missed it, on June 26th, Nevsun Resources (NSU) issued a $0.035 dividend, effectively lowering our initial buy price to $3.40.
- Nevsun Resources (NSU) and American Electric Technologies (AETI) both reached new highs since our last update.
Category: PSB Monthly Issues
