Profire Energy (PFIE) (pre-earnings write-up)

Investment Analysis Clubs Saul’s Investing Discussions
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Some notes on Profire Energy (PFIE) before their earnings come out tomorrow (Nov. 11) after the market close.

The main issue that started me writing this (it’s my first full write-up on any company) was my concern about PFIE’s use of a small-cap stock PR firm. A successful investor in the TMF community red-thumbed PFIE, b/c of this PR company, stating they support “pump and dump” stocks that are losing money and it’s been a reliable indicator for companies to thumb down. So I emailed the company about it. A slightly edited version of their response (to protect the potentially innocent), which I find to be encouraging and thoughtful, is included at the end of this post below (I removed the name of the firm they used).

Bottom line: I’m starting to like PFIE . . . a lot. Still need to be cautious given the relatively small size of the market and short period of time I’ve followed them, but well worth at least some investment for me.

Super helpful info about PFIE is available in the posts from Saul and others linked below. I have no idea what will be reported or how the market will respond to earnings tomorrow, but I expect to see the company continue to grow well over the next several years.

Pros to keep watching:

  • No debt (but using stock for funding)
  • Strong growth in both revenues and profits over the last few years (If I’m looking at the right numbers: 25%+ (from '13-14: rev increased 87%, NI increased 37%, net cash from ops only increased 11%, with a big uptick in A/R due to sales in the recent quarter), reasonable P/E (30))
  • Ethical and reputable leadership (co-founders own 50+% of company and run the company, BYU alumni, board has strong experienced leaders of companies I trust, recent leader awards, reasonable compensation)
  • Needed niche product that provides safety and reduces costs for customers
  • Thoughtful reply and sound reasoning behind using an investment PR Firm that raised concerns for me–good indicator of transparency, concern for shareholders, and humble leadership style

Questions/Concerns to keep researching:

  • Dilution due to stock issues for funding–how much more is needed/expected?
  • Moat: Beyond the company’s primary products, does does it have an inimitable ability to innovate and stay ahead of competition in its industry?
  • Market size: PFIE has a large share of the market; will that continue to grow through int’l expansion and greater adoption in the U.S.? How big is the market overall? (some discussion on this on Saul’s boards linked below)
  • May be cyclical and move with the gas/oil industry, although it could be counter-cyclical as it saves customers money by reducing their costs
  • I would like to see a glassdoor rating on them in the future. (I’ve been started using this as a factor in evaluating companies and so far have found it to be a reliable metric.)

Profire news and investor page: http://www.profireenergy.com/press-releases-sec-filings/

Saul’s Investing Discussions on PFIE:

Profire CAPS Page: http://caps.fool.com/Ticker/PFIE.aspx

The co-founders and chief officers still run the company and own significant shares. Ownership % is a bit of a moving target, as they use shares, instead of debt to fund the company, but it appears the top 3 shareholders (the CEO, COO and CFO) together own 50%+ of the company. (they’ve been selling some shares, but still own significant amounts of the company and appear to be well-aligned with shareholders).

Profire’s Brenton Hatch named as a top CEO by ExecRank: http://www.nasdaq.com/press-release/brenton-hatch-of-profire… (I wasn’t familiar with execrank, so I looked into it to see how legit it is, and it appears to be an independent firm, which also names many other companies familiar to Foolish investors (vs. investment PR firms and other companies that give honors based on fees and applications).

Several Brigham Young University (BYU) alum. (I’m an alum and BYU focuses a lot on ethical leadership; though I recognize my affiliation can lead me to be irrationally biased in their favor).

From Google/finance page on profire: Profire Energy, Inc. is engaged in the business of developing combustion management technologies for the oil and gases industry. The Company manufactures, install and service oilfield combustion management technologies and related products, such as train components and secondary airplates. The Company’s primary products are burner management systems. The Company’s Profire 2100 burner management system allows the end-user to manage a variety of combustion vessels. Its Profire 1300 is a flare-ignition system that provides fundamental ignition capabilities for combustor and open-flare vessels, and can relay flame-status. Its Profire 1800 is a mid-range burner management system option that provides fundamental burner management functionality, such as burner re-ignition and temperature management. (https://www.google.com/finance?q=NASDAQ%3APFIE&ei=v9RgVI…)

TMF news on drop due to share offering: http://www.fool.com/investing/general/2014/06/27/why-profire…

Clean balance sheet with no debt, but issuing new shares regularly. Compensation thru shares to employees is (if I’m counting correctly) well under 5% per year, which is not too bad given their small size and growth and executive compensation appears to be reasonable as well (CEO makes just over $300k/yr).

Strong past growth (25% last quarter yoy), PE of 30 (based on google/finance and yahoofinance), and good continued growth in both rev and profit (30-35%) estimated through 2015.

10-Q for the quarter ended on June 30, 2014: http://google.brand.edgar-online.com/displayfilinginfo.aspx?..

14A Proxy Statement with director compensation info http://www.sec.gov/Archives/edgar/data/1289636/0001096906140…

Email correspondence with profire’s Nate McBride, VP of Strategy and Finance (very helpful “giver”):

From my email:
I have a few questions I hope you can answer for me:
• What is Profire’s reasoning and purpose for using [PR firm]?
• What support can you offer to suggest that Profire could possibly be among the small % endorsed by [PR firm] that isn’t just out for short-term gains?

Profire’s response:
Appreciate the question, and–more importantly–your role as a shareholder.

Your colleague’s concerns are understandable–many [PR Firm] clients are not profitable, and may need a paid-for service to attract attention. We engaged [PR Firm] at a time when we had no analyst coverage, were not NASDAQ-listed, but were very profitable and growing quickly (which made us a very unique client, compared to typical [PR Firm] clients). Their media platform presented a low-cost vehicle for multi-faceted IR outreach (e.g. videos, [paid-for] research, and email distribution to shareholders). [PR Firm] quickly proved to us that they were productive and could actually set up meaningful connections for us–something that, in my opinion, most IR firms cannot do.

While a [PR Firm] client, we continued to grow and reach out to banks and analysts, and began to get traction with larger and more reputable investors. Independent coverage was initiated by a number of analysts, our Board of Directors was filled out with extraordinary members, we uplisted to NASDAQ, and–upon completing our recent raise–we’ve found ourselves with much more institutional interest and connections to reputable investors (both institutional and retail). Such is our IR environment today.

So in an effort to summarize, we engaged [PR Firm] knowing a) we were a uniquely profitable and growing company for their platform, and b) we would move on from [PR Firm] when our investor relations efforts were more institutional-focused, which they are now. Client- and owner-reputation aside (though these are significant), we found [PR Firm] to be hardworking, while offering a unique IR product with media collateral and other proactive outreach. However, [when] our agreement with [PR Firm] is . . . over . . . we intend to move on from that engagement at that time. We feel this move is best for our shareholders, will cut unnecessary costs, and will enhance our reputation among certain investors–especially some retail investors (like your colleague).

Overall, I think the best support for the type of Company that Profire is can be found in our financial results (e.g. gross and net margins, cash management, etc.), growth strategies and execution (e.g. market penetration rate, market share), and management’s ability to capitalize on the industry opportunities ahead of us–and I think our historical results speak for themselves.

Have a great week. Thanks for the questions, and hope this helps.

Best, . . .

I welcome your counter-points, thoughts and questions.

Fool 'em!
Denton

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