Flexible Solutions FSI-NYSE
Micro-cap land is littered with companies with promising tech that are long on stories and short on results.
As a long-time investor in energy I can tell you that I have seen my fair share. Nowhere is that more evident than the energy space.
Remember CUI Global (CUI-NASD) and their GasPT technology? ClearSign Combustion (CLIR-NASD), a company I wrote about but thankfully never bought, comes to mind as well.
Both are examples of intriguing technologies, but simply couldn’t get traction in sales.
While investing in these names is a mine field, if the tech is for real they are worth following. Every so often they hit a whale of a customer and its off to the races.
With that said, let me tell you a little about a company called Flexible Solutions (FSI).
FSI is a chemical company. They have solutions for agriculture, water treatment and oil & gas.
After wallowing for years between $1.50-$2, the stock had a GREAT run earlier this year – from $1.25 – $4.74, as the company posted a huge Q1… but there has been no follow through in the Q2 financials. Now that growth is in doubt, and the stock has retraced 50%.
I am not long, but I am watching. Few microcaps pay a sustainable dividend.
Trading Symbols: FSI
Share Price Today: $2.50
Shares Outstanding: 11.7 million
Market Capitalization: $29 million
Net Debt: $2 million
Enterprise Value: $31 million
2019 Revenue Estimate $32 million
2019 EPS $0.21
2020 Revenue Estimate $35 million
2020 EPS $0.33
Now let me admit it wasn’t totally fair to compare FSI to a revenue-absent name like Clearsign. FSI has a number of mature business lines and a proven track record of revenue generation. They pay an annual 15 cent dividend to shareholders. This is a real company.
They delivered revenue in the $16-$18 million range for a number of years before seeing a bump to $15 million in the first half of this year alone. The revenue jump this year is in part due to acquisition and in part due to newly renewed organic growth.
I’ll talk about that growth a bit later. Suffice to say there is a real business here. But first let me tell you about the promising tech and the moonshot potential – if they could just get a customer.
WaterSavr Technology – The Big Product
The moonshot product is called WaterSavr. The product is a granulated blend of 90-per-cent hydrated lime and 10-per-cent extract of palm and coconut oil.
The chemical blend has long been used in swimming pools to prevent evaporation (the company markets a companion product HeatSavr for this application). A thin film floats on the surface of the water and acts as a barrier to evaporation.
Source: Flexible Solutions Product Brochure
Swimming pools have been a small market for FSI, generating a few hundred thousand dollars of sales. The potentially huge application would be using Watersavr in municipal reservoirs.
The case for using WaterSavr in municipal reservoirs appears sound. The company performed a trial with the municipality of San Diego in 2017 and published the results, which were quite positive:
- The trial reduced evaporation losses by 46% (San Diego reservoirs lose 5 feet or more per year through evaporation)
- On the City’s 8,000 acres of water surface, $14 million worth of water per year would be saved at the recorded 46%
- If the reduction was only 20%, $6.4 million worth of water would be saved per year. 6000 gallons per minute!
- The breakeven point is 4% savings based on San Diego’s costs for water
The revenue from securing a contract from one of these big city reservoirs would be significant. On their 2018 second quarter conference call CEO Robert O’Brien noted the following:
“Using WaterSavr on the Salton Sea for 6 months a year would save 320,000 acre-feet of water per year. This is more than 100 billion gallons. It’s not just the water; WaterSavr can have huge effects on city water budgets. Delivered water costs now exceed $1000 per acre foot in many California cities while the total cost of saving an acre foot using WaterSavr is less than $200.
WaterSavr can reduce annual losses from reservoirs by up to 2 feet per treated acre… In terms of the size of the market, the one I mentioned, the Salton Sea in California would be in the range of $35 million per year contract.”
So what gives? WaterSavr appears to be economic for the municipality. It appears to produce excellent results. The savings are substantial. But orders are elusive.
The fact is, FSI has been marketing Watersavr since 2002. Since that time, they have only had sales to a few small customers. They admit that no municipality has ordered Watersavr so far. This even after a decade of successful trials.
According to the company, stalled sales have been because of a combination of bureaucracy and reluctance to change.
In the case of San Diego, FSI went through an extensive trial that proved both the effectiveness of the product and quality of the water. San Diego did further follow-up research. The last we heard about San Diego was on the April 2018 conference call:
“The city of San Diego has finished the extra research they decided to do after our very successful trial together, which we reported earlier this year. The results reconfirm that WaterSavr does not change water quality. This was already known from research done by the South Nevada Water Authority and published in the World Renowned AWWA Journal.
Regrettably, several individuals inside the San Diego water bureaucracy still refuse to issue the PO we were promised last February. Every year that the city of San Diego does not use WaterSavr, the city is wasting $12 million to $14 million of taxpayer funds. We will continue to push these individuals to do what is right for the people who pay their salaries.”
What I see is a common theme as so many other stories I’ve watched: Trying to sell into a big entity, be it a municipality or large oil major, is an uphill struggle for a tiny company. Getting advocates is hard, getting to the decision makers is hard, and getting budget is hard.
This is amplified when you sell a product that does not generate revenue and where the cost savings is not seen directly on the bottom line. Getting a capital outlay and past the perceived risk of a new product is tough.
Other Business Lines
What sets FSI apart from some of the other stories I’ve passed on is that:
- Even absent WaterSavr sales, there is a real business here
- FSI its not an expensive stock.
FSI did 8c EPS in the first quarter. They had a weaker second quarter due to weather, leading to break-even performance. But the company should bounce back some in third quarter.
I can only find one analyst covering the stock, and he’s calling for 21 cents EPS in 2019 and 33c EPS in 2020. I think there’s a bit of sell-side bullishness in that number – though if FSI does achieve that, it puts the company at a very reasonable 7.6x forward P/E.
This year revenue growth should exceed 50% (both from acquisitions and organic growth) this year, and the one analyst estimates 12% growth in 2020.
The organic growth is coming from their Nanochem division where much of the revenue comes from thermal polyaspartic acid products (TPA).
The biggest market for TPA products is agriculture. When TPA is applied to the soil it prevents fertilizer from leaching away. It works by slowing crystal growth between fertilizer ions and other ions in the soil. The result is fertilizer is available to plants for longer A$40 application of FSI’s TPA product can have several hundreds of dollars payback per acre.
TPA compounds are also used for removing scaling from produced water in oil wells. This is steady but low growth business.
FSI also sells are nitrogen conservation products, SUN 27 and N Savr 30.
Nitrogen is subject to loss through bacterial breakdown, evaporation and run-off. SUN 27 is used to conserve nitrogen from attack by soil bacterial enzymes, while N Savr 30 is directed towards nitrogen loss through leaching and evaporation.
TPA, SUN 27 and N Savr 30 represent 50-60% of revenue. Growth this year has come from new customers and an expansion of existing customers. In January the company acquired membership in an LLC engaged in international sales of fertilizer additives. The investment is expected to engage new international customers and expand the reach of the TPA products.
The second trigger to growth has been the recently acquired ENP business. ENP manufactures and markets fertilizers and nutrients for ornamentals gardens and golf courses. FSI acquired 65% ownership in ENP late last year.
The ENP acquisition is expected to deliver ~$8 million of revenue in 2019 and generate greater than $1 million of pre-tax operating income for their 65% stake.
Cross-selling opportunities should emerge between the agricultural based Nanochem products and the turf and ornamental products of ENP. These two verticals are distinct and have not had much overlap in the past.
ENP had a weak second quarter which FSI attributed to poor weather in their selling areas. The third quarter is expected to see a step back up for the Nanochem division but the ENP sales they lost in the second quarter won’t come back – you don’t spray a golf course green more just because you missed a spray in May.
One Man Show
Insider ownership is significant but concentrated. The CEO Dr. Robert O’Brien owns 4.5 million shares or 39% of the company.
O’Brien is also the founder of FSI and was the inventor of the Watersavr/Heatsavr product lines.
O’Brien is clearly the head-liner here. He takes a big salary, over $900,000 per year at last count. FSI is a 36 employee operation with a single officer – O’Brien. The rest of the team are sales, customer support and manufacturing personnel.
FSI estimates that 70% of their sales ex-ENP are international. ENP sales are almost entirely US based. Total sales are about 50% international.
Raw material is seeing 10% tariffs from China and these costs are being passed on to customers. In the third quarter the tariffs on these raw materials increase to 25%, which will again be passed on. They increased inventories to combat the chance of higher tariffs. They estimated that tariffs hurt profitability by $200k in the second quarter in terms of international sales that will receive rebates in the future that will go against cogs at the time they are received.
The rebates can take anywhere from 9-16 months to receive. This has been a headwind so far but will be a tailwind to cost of goods sold as those rebates are received.
The company noted that they haven’t received any push back on price increases and are successfully pushing through the full tariff.
The stock had a huge run-up beginning in early 2019 after the company put out a stellar first quarter.
The second quarter didn’t follow-through and the short-term money bailed. The stock is now back to $2.50, where it may be putting in a bottom.
But even with the pullback the stock is still up over 100% since the beginning of the year – which gives me pause.
I would like to buy the Flexible Solutions if/when there is some market adoption of WaterSavr – but I just I can’t see the evidence that WaterSavr adoption is around the corner.
Without WaterSavr, what does FSI look like? Growth this year is stellar, but now it appears that said growth is unlikely to be repeated next year. Using average estimates of 21 cents per share, the stock trades at 12x earnings. The dividend is 6%.
That could be enough of a reason to buy for some. In an easier market, it might even be enough to tip the scales for me. But not in this market.
As the second quarter showed, earnings can be fleeting for their business lines. We’ve really only had one quarter to show that the business has made a step change. I remain cautious.
Instead I am going to sit back and keep an eye on the stock. If the right catalyst comes around, I will be ready to act.
EDITORS NOTE – there is ONE stock I’m willing to act on RIGHT NOW… a company doing $100 million in revenue, with positive EBITDA, and I expect a barnburner Q4 to give investors an early Christmas present. Click below to get the name and symbol of this stock – before this gift disappears!