I spoke with management this morning and here's what I learned:
- The BOV (Bottom Outlet Valve) and VRV (Vacuum Relief Valve) trials will most likely get fast tracked, but it's not 100% certain. They are currently doing a 20k mile testing (components are equipped on tanker cars which must travel 20k miles to ensure product reliability and performance) which takes approximately 2-3 months. Afterwards, they will go with the data from the trials to the FRA in order to seek approval for immediate commercialization.
- With the Oct 1st regulation compliance deadline tomorrow, I asked them how the order book is looking. I, like most investors, though it would be immediately spike, but I was told it would be more of a gradual increase. The end-users and manufacturers are large companies, and will take time to make purchasing decisions. What's more, approximately 20% of their business is from the crude oil sector which isn't doing too well.
- I'm thinking revenue growth for 2015 will be flat and EPS down slightly due to the declining margins. I estimate Q3 will come in around 6mil and Q4 around 7mil. In light of this, it may be worth waiting before adding shares as the stock could drop. At the end of the year, if my estimates are correct, the stock would be trading at 4x revenue and a p/e of 40-50. It's possible investors will ignore the context behind the numbers and just sell, thereby contracting the p/e ratio and p/s ratio.
- Even if the fast tracking of the BOV and VRV occurs, there's still a material lead time from commercialization to revenue generation. To reiterate, the end-users are mainly large companies, e.g. Exxon, so they need to be educated on a new product, then pass it through engineering for a seal of approval and finally pass it through budgeting -- bureaucracy is ever-present in large companies. Additionally, manufacturers make their budgets in Q1 and won't interrupt their product lines on command to integrate a new component, there's a significant delay. Therefore, if a new product is commercialized by Q3, Q4 or early Q1 at the latest, it can start generating revenue in the year. However, if it commercialized in late Q1 or Q2, it won't generate revenue till Q1 of the next year. In short, lead times can be anywhere from 3-6 months. The flip side is when the products catch on with customers, it becomes an annuity -- hence why I love this business so much.
- Have a person working full time on trucking efforts. They are confident they will see monetary results in 2016, and there's a chance we see some in late 2015.
- Manway continues to gain traction. It takes time for products to gain adoption, but once they do, the growth is parabolic (see my previous post on Kelso where I show growth rates from 2012 to 2014).
- They think the 80mil projected by an analyst is overly bullish. They are expecting $20-25mil in PRVs (pressure relief valves). I think overall they can do $35-40mil with the PRVs and KKM (Kelso Klincher Manway). Should both other products in trial become commercialized by 2016, then we could easily see more. $35-40mil in sales would still be very impressive and almost a double from 2015 estimated levels.
To recap, I don't see any reason to rush in the stock at these prices. I think the stock will stay around these levels for a while, especially in light of the current market conditions. If my estimates are correct, then it's possible the best entry time would be in April when the financial statements are released and the stock potentially becomes re-priced. In the case of a re-pricing, I'm thinking it will be a minor one, but who really knows. Some people who are margined at $2.00 by their brokers may go into margin call and may cause a chain event of selling. Either way, the long-term prospect are still intact so I would suggest to anyone to buy by the end of April if they don't already have a position.