huibs and thermostats

First of all, I’m going to set my thermostat to make sure my reply does not overheat! :wink:

huibs’s contention that anyone could make thermostats is true. They could also make hamburgers and soda pop and furniture and grow lettuce, rent out rooms, and dozens more economic activities. But they don’t. Why don’t they?

There is a good reason why the oil and gas service industry is so highly fragmented, from Schlumberger with a market cap of $119.43B to Profire with a market cap closer to 180 million. That’s a three order of magnitude difference, a thousand fold difference.

For Schlumberger to sell thermostats the income would probably not cover their overhead. Put another way, each supplier has to concentrate on their core competence. A new player cannot go head on against an established supplier, he must find an undeserved niche.

There is a classic example when in 1984 Steve Jobs tried to take on IBM. Apple almost folded and he got himself fired. Why? Because IBM is the business computer in most people’s minds. The Seven Dwarfs were not able to beat IBM, what chance did Apple have? But look what success Apple had in under-served markets. Same company, same technology, different markets.

Or Tesla. Any incumbent could make a battery powered car. They are bigger, etc. But they haven’t - yet.

If it is true that the market for Burner Management Systems has only a 5% penetration then it is an under-served niche waiting for someone to serve it. That’s Profire. Is it a guarantee of success? No. But the odds are good. Should a larger player want to enter the field, it makes a lot of sense to buy out an existing player, like Profire just bought VIM Injection Management. It would not be a bad outcome for PFIE investors at the right price.

Denny Schlesinger

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There is a good reason why the oil and gas service industry is so highly fragmented, from Schlumberger with a market cap of $119.43B to Profire with a market cap closer to 180 million. That’s a three order of magnitude difference, a thousand fold difference.

For Schlumberger to sell thermostats the income would probably not cover their overhead. Put another way, each supplier has to concentrate on their core competence. A new player cannot go head on against an established supplier, he must find an undeserved niche.

Sorry but this is like me arguing there is a good reason the transportation business is so fragmented and then claim that is why Boeing doesn’t sell bicycles.

As for niche products I haven’t seen where they have interfered with someone like 3M, nor has it interfered with Honeywell.

https://customer.honeywell.com/en-US/Pages/department.aspx?c…

And yes I understand that Honeywell appears to be focused on refiners and such, for now anyway.

B

PS The oil and gas service industry is so highly fragmented in part because in the end many of the services have commodity like aspects and the industry continues to have an incredible amount of mom & pop or at least very small (relatively speaking) companies.

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huibs’s contention that anyone could make thermostats is true. They could also make hamburgers and soda pop and furniture and grow lettuce, rent out rooms, and dozens more economic activities. But they don’t. Why don’t they?..

For Schlumberger to sell thermostats the income would probably not cover their overhead. Put another way, each supplier has to concentrate on their core competence. A new player cannot go head on against an established supplier, he must find an undeserved niche…

If it is true that the market for Burner Management Systems has only a 5% penetration then it is an under-served niche waiting for someone to serve it. That’s Profire. Is it a guarantee of success? No. But the odds are good. Should a larger player want to enter the field, it makes a lot of sense to buy out an existing player, like Profire just bought VIM Injection Management. It would not be a bad outcome for PFIE investors at the right price.

Thanks Denny. Excellent, excellent, discussion! Agreed, it’s no guarantee of success, but it seems to be working at present, witness their rapidly growing revenues.

Saul

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Should a larger player want to enter the field, it makes a lot of sense to buy out an existing player, like Profire just bought VIM Injection Management. It would not be a bad outcome for PFIE investors at the right price.

At the risk of being accused of being disagreeable just to be disagreeable I find this to be a weak argument as well. Awful lot of difference between between spending a million and spending 200 million.

As an example let’s say a company with a larger existing footprint selling into the patch wished to get into this niche. Does anyone here actually believe they couldn’t knock on Honeywell’s door with a 50 million dollar check and get them to design and contract manufacture a competing product of equal or better value?

You can’t argue with their success to date, I’m far less convinced they have a secret sauce that couldn’t be easily duplicated, nor would I guess first mover status will matter much over the long haul.

B

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huibs’s contention that anyone could make thermostats is true. They could also make hamburgers and soda pop and furniture and grow lettuce, rent out rooms, and dozens more economic activities. But they don’t. Why don’t they?

…well, I was asking about more about the propriety of their systems, or in “Fool speak” what sort of ‘moat’ does the company have?..

http://discussion.fool.com/thats-some-thermostat-indeed-but-my-3…

…when I visit the website, I see a nifty chart that explains the difference between a warming system with “BMS” (burner management system) and without…

http://www.profireenergy.com/role-of-bms/

…ok, let’s see what it does…

Auto relight The BMS quickly detects the flame absence in the combustion application, and can quickly reignite the burner flame.

Temperature Control The BMS will manage temperature setpoints that are set by the user, ensuring that the burner flame is on only when needed.

Remote Monitoring & Control Our Burner Management Systems are compatible with remote monitoring and control technologies (i.e. telemetry). This allows the user to monitor and manage the BMS from the comfort of an office.**

Emergency Shutdown The BMS can detect when certain application inputs (e.g. high/low pressure, level, etc.) indicate a potential problem, and can shut down the application safely.

…now, even my Mother’s house, built in 1958 does all of that, although the “remote monitoring and control” is attached to a wall…

**I’m wondering just how they manage to keep the the office “comfortable”?..perhaps a thermostat?..

:slight_smile: huibs…

…all kidding aside, I think this is engineering: https://www.youtube.com/watch?v=ZwwS4YOTbbw

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…well, I was asking about more about the propriety of their systems, or in “Fool speak” what sort of ‘moat’ does the company have?..

huibs, the difficulty we are having is in our understanding of “moats.” The expression comes from a strong metaphor: “How to defend a castle? With a wide moat filled with water and hungry alligators.” Depending on our tolerance for risk, investors are willing to live with stronger of weaker defenses. The moat need not be patents or trade secrets, it could be a brand name. Brand names are often dismissed as non-moats but that is a matter of opinion only. But I do grant that a brand name is not as strong a moat as a network effect, a brand name (Coke) will not create “increasing returns” the way a network effect (PriceLine) does. A network effect is something quite intangible, hardly an earthworks moat.

“Core competence” is one of these intangible moats that a lot of investors ignore. Geoffrey Moore wrote about it in: Living On The Fault Line. From an Amazon book review:

Chapter 2 explores the second important idea, the CORE-CONTEXT distinction. Here Core is defined as those activities which are central to the company’s marketplace differentiation: effective action here directly impacts the share price. Context activities are those which need to be done, and done well, but which the market gives you little credit for. [emphasis added]

http://www.amazon.com/review/R28WYI1IA7PUSN/ref=cm_cr_rdp_pe…

My favorite example is that clean restrooms are core for Fuller and context for MacDonald’s. BMS is core for ProFire but context for most other oil and gas service providers. My contention is that ProFire found an under-served niche and made it their core business. Only time will tell how well they do but revenue growth indicates that they are on the right track.

What is an economic moat?

The term economic moat, coined and popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Remember that a competitive advantage is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, outperform those competitors in profits. A good example of a competitive advantage would be a low-cost advantage, such as cheap access to raw materials. Very successful investors such as Buffett have been very adept at finding companies with solid economic moats but relatively low share prices. (To read more, see Competitive Advantage Counts.)

One of the basic tenets of modern economics, however, is that given time, competition will erode any competitive advantages enjoyed by a firm. This effect occurs because once a firm establishes competitive advantages, its superior operations generate boosted profits for itself, thus providing a strong incentive for competing firms to duplicate the methods of the leading firm or find even better operating methods. (For further reading, check out the Economics Basics Tutorial.) [emphasis added]

http://www.investopedia.com/ask/answers/05/economicmoat.asp

The issue of competition is an important one. A product or service that has a network effect protecting it can endure for a long time and belongs to the category of “increasing returns.” BMS is not in that category, it belongs in the “decreasing returns” category because its moat is not truly excluding. Don’t expect the share price of PFIE to rise like PCLN. But for a time it will outperform the market, for the time it takes competitors to get on the bandwagon. A great example is International Rectifier Corporation (IRF). They sell electric components that are essentially commodities. But from 1997 to 2000 you could have made a killing, from $5 to $50. Not only had the price collapsed but they came out with some advanced components that took the competition some time to duplicate.

http://invest.kleinnet.com/bmw1/stats25/IRF.html

What does all of the above add up to? That PFIE should make a great investment for a time, depending on how they execute and how competitors react. Sorry, it’s not rocket science!

Denny Schlesinger

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…awesome post Denny!..

…huibs may be pickin’ me up a thermostat on monday!.. :slight_smile:

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huibs, I want to thank you for your persistence, it forces one to critically review one’s position and opinions. It helps prevent false narratives and self reinforcing fallacies. IRF, which I mentioned in my previous post, is an example. I watched it go from 5 to 50 not believing it because they sold commodity goods, the higher it went the more I kicked myself for missing the opportunity. Then it tanked and gave me a second chance. So I bought and lost money! By now my original narrative was right on the money and it should have prevented me from buying. But having missed a ten bagger got the better of me.

Quality discussion keeps us honest with ourselves.

Denny Schlesinger

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Exciting video, Huibs, thanks,
Mykie