Why did I buy a bunch of PFIE today?

Investment Analysis Clubs Saul’s Investing Discussions
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Why did I buy a bunch more PFIE today? Well first of all, they had a very good earnings report.

Total revenues increased 68% to record $15.7 million.
Gross profit up 54% to a record $8.5 million.

Here’s what I thought about the earnings: “I think it’s hard to ask for better. Revenue up 68% from last year, and up 19.4% sequentially(!), and raised estimates. They are also hiring sales and R&D people to expand and solidify their lead in a previously labor-intense area which they have automated. Think of the trouble a company faces when one of their employees gets injured or killed in an explosion (forms to fill out, insurance going up, investigators coming by, etc etc.). It’s in the drilling company’s interest to install the PFIE system. Then they don’t even need the guy who comes around to check the flames. And PFIE is growing all this out and staying profitable”.

They were getting sold off because the price of oil was falling. Well, in Neil’s excellent summary of the conference call:
http://discussion.fool.com/i-finally-got-a-chance-to-listen-to-t…
he included the following observation: Management doesn’t think lower oil prices will have any noticeable impact. They’ve been through price swings before and never saw much correlation historically between oil prices and revenues.

They made a little acquisition today for $1.75 million. Here’s how they paid for it.

Profire paid a total of $1.75 million for the assets, comprised of $1 million in Profire’s common stock (approximately 265,000 shares) and $0.75 million in cash.

Now $1 million divided by 265 thousand shares comes out to a little more than $3.77 cents a share. That means the people who sold their entire business to PFIE, who are in the oil business themselves and know it a lot better than we do, and who probably understand PFIE’s prospects a lot better than we do, were happy to accept their “million dollars” in shares of PFIE at $3.77 per share in exchange for their entire business, their life’s work, so to speak.

Well today, I was able to buy my PFIE at an average price of $3.17. That’s down more than 23% from six days ago, down 16% from what the guys who sold their business were happy with, and was a trailing PE of 18.6.

Now I may be wrong and they may crash completely, but it is truly hard to imagine.

Just my thoughts.

Saul

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Don’t you think the acquisition will temporarily put breaks on their spectacular growth? They will have to invest in growing the new business they are getting into and with that comes a lot of uncertainty. Probably the next two-three quarters could be either bad or just average.

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I forgot to mention that the acquisition they made today is incredible. They have potentially doubled the size of their already huge potential market, and they got it for almost nothing. Here’s a summary of the press release, and my conclusion.

Saul

Acquired VIM Injection Management, an oilfield chemical-injection technology company.

Profire paid a total of $1.75 million for the assets, comprised of $1 million in Profire’s common stock (approximately 265,000 shares) and $0.75 million in cash (just 2% dilution).

What is Chemical Injection? In the oil and gas industry, chemical injection is used for a variety of purposes including inhibition of wax and stimulation of product flow. Once at the wellhead, chemical injection can be used to further process the oil or gas before it is transported. Chemical injection at the wellhead can also be used to protect pipelines from corrosion.

VIM systems monitor and manage chemical-injection during these processes. The patent-pending technology is designed to allow producers to retrofit any existing pump with an advanced management system, providing pump monitoring and management to help ensure efficient chemical injection at each well.

Inaccurate injection levels are problematic due to the cost of chemicals which, if over-injected, result in a decline in profit margin for producers. However, under-injection can be an even larger issue. Under injection can cause problems in the well bore and pipeline impeding the ability to get the product to market. Due to specific pipeline regulations, oil and natural gas require chemical treatment to ensure pipeline integrity and product quality. If oil is determined to be of low quality, additional costly and time-consuming methods are required to improve the product and meet industry standards. The chemical injection management system is designed to accurately determine how much chemical is needed not only to reach optimal production levels, but help create a greener working environment in the oilfields.

In addition, these systems are designed to improve safety for workers that would otherwise be exposed to these chemicals and increase compliance with the requirements of pipeline operators.

Market Demand for Chemical Management - Profire estimates a significant market potential for the systems, with 80% of North America’s 1.3 million producing wells qualifying as potential installations. While the system price varies, return on investment in many cases are realized within 6-12 months.

We believe the acquisition of VIM positions Profire as the strategic leader in chemical injection. By adding chemical controllers to our product line up, we strengthen our role as an oilfield technology leader by including cutting edge chemical-management systems that complement our accelerating burner-management product business.

This is a significant milestone, one that bolsters our product portfolio with another innovative management system for a new, but related, market.

Conclusion: This is a great acquisition, which may double their business, and an acquisition which they acquired for a song.

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Don’t you think the acquisition will temporarily put breaks on their spectacular growth? They will have to invest in growing the new business they are getting into and with that comes a lot of uncertainty.

Hi Chandra, I figure they can go out and sell these new systems to all the people who are already customers, and for new customers they can sell both systems at the same time, thereby improving margins. But what do I know?

By the way, the little company they bought couldn’t do this because they were too small and no one would trust them, and no one could be sure they’d still be there next year. Profire has a lot of credentials by now which will make sales much, MUCH, easier.

Saul

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I agree Saul this acquisitions has one of the most clear cut cases of cross selling upside I have seen for a long time. To answer another poster’s question, no this is a pretty small outlay that is highly relevant but complimentary to the existing business. I can’t see this being a distraction but instead a very very easy bolt on assimilation of an adjacency that increases the addressable market and helps give PFIE some diversity in its product range and de-risks its profile.

A

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Now I may be wrong and they may crash completely, but it is truly hard to imagine.

Hi Saul,
True but it sure looks good.

Any resistance to buying a stock that is under $5? Not a leading question, but I had heard or read somewhere that’s a way to minimize the downside, though, how this company can go lower with all that money in the bank, cash flow and no debt, is also beyond me.

What size % is this charmer of your portfolio?

Thanks Saul, I missed you and the board but still digging out of hurricane issues, moving, visas for my wife, etc
Mykie

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By the way, the little company they bought couldn’t do this because they were too small and no one would trust them, and no one could be sure they’d still be there next year. Profire has a lot of credentials by now which will make sales much, MUCH, easier.

Saul and Chandra,
Did you read in the earnings transcript that they believe they have 80% of the market and with only 3% of the industry penetrated? That blew me away and when comparing the facility of the CEO’s language versus other CEO’s I was quite impressed. He’s a clear sharp thinker.
Just saying,
Mykie

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What size % is this charmer of your portfolio?

Hi Mykie, PFIE is now 5.6% of my portfolio. but take into account that I just have 15 positions at present, so that’s still slightly less than an “average” position, which comes out to 6.7%. If it goes back to $4.13 where it was a week ago, that 5.6% will grow by a third.

Saul

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Now that a transcript is out, here is what management actually said about a historical lack of correlation between Profire’s revenue and oil prices:

Additionally, bear in mind that there are numerous reasons why someone may purchase a Burner Management System, one of which is efficiency, so even when oil and gas prices are down, we can remain relevant for producers by improving their operations’ efficiency, safety, and compliance. So, although we are sometimes lumped in with oil and gas companies and their trends, our revenues have not historically been correlated with oil and gas prices. We feel optimistic that our revenue growth will continue to be fairly impervious to the changes in asset prices.

And then later:

Well Rob, one of the things, we’ve tracked this from the beginning of time, as it were, in the 12 or 13 years we’ve been in existence and when we first felt the fluctuations years ago we were really quite concerned. But, one of the things that we found was that not only is there a huge market out here and we have many, many wells yet to cover, but we found that when there’s lots of money—that is, high oil prices, companies are quite willing to spend their money.

But, when things are a little bit tight they start to focus more on efficiencies and as such, they become very interested in what these products can do for them and so typically we’ve—we, at least in years past, seen little to no—in fact, no significant change in our growth patterns as prices have gone up and down, and some of those have been a lot more significant than what we’re presently experiencing.

And:

The second factor to think about, too, is that our products will also work on natural gas and, as you know, natural gas has been increasing lately. I think it was about 4.3 as of today and so, we’re diversified against different energy sources and energy types and so, as you recall, the heating process of dehydration is something that Profire generates revenue from, as well, so we’re somewhat diversified there. But, we feel that, if you look at the oil deficit that the country’s running, you’re still looking at eight, nine, 10 barrels—million barrels a day that we have to import and so the demand domestically is very strong and robust and so we’re pretty excited about the prospects with those factors.

So management sounds pretty confident to me that lower oil prices will have minimal impact on the company.

Neil
Long PFIE

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Now $1 million divided by 265 thousand shares comes out to a little more than $3.77 cents a share. That means the people who sold their entire business to PFIE, who are in the oil business themselves and know it a lot better than we do, and who probably understand PFIE’s prospects a lot better than we do, were happy to accept their “million dollars” in shares of PFIE at $3.77 per share in exchange for their entire business, their life’s work, so to speak.

Saul,

Yes it is true that $1.75M is a small amount. I tried to find out more information about VIM Injection Management, Inc. Their website is very basic and doesn’t include any info on the execs or how long they’ve been in business. From the photos on their gallery, it appears to be a very small operation. Were you merely speculating on the motives of the VIM management or do you have additional information?

As far as receiving their payment in PFIE shares, the VIM shareholders could simply turn around and sell the PFIE shares on the open market (unless there was some agreement restricting such as sale). Thus, it wouldn’t matter if they received cash or shares. I think that PFIE probably preferred to use shares to preserve their cash for growing their operations.

Do you know how long the VIM management built their business? They may not have spent a lifetime building the company. Seems like a really small company and the low price suggests that they don’t have huge sales.

Also, I didn’t see any financial on VIM. it would be useful to know their revenue, their margins, and if they have any intellectual property.

It does sound like the 2 companies have complementary product offerings. And for only $1.75M, it seems like a good bet for PFIE.

Chris

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Do you know how long the VIM management built their business? They may not have spent a lifetime building the company.

I found out the info on LinkedIn.

Shawn French (VIM President) has been with them since 2012.

Todd Oliphant (VIM VP of BusDev) has been there since 2013.

I couldn’t find additional people from VIM on LinkedIn but I wouldn’t be surprised if these two guys run the show. I wouldn’t be surprised if they started the company 2 years ago.

Chris

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Chris,

A quick Google search putting in “VIM Injection management” gives you their website: http://viminjection.com

On the website , under the topic About, you discover:

VIM Injection Management established and patented in 2012 is a “Designed by Industry” solution that provides companies the ability to manage chemical & methanol injection in three easy steps. Automatically adjust target rates based off temperature, pressure, gas or liquid rates for your wellhead or pipeline applications. The “VIM Injection Management System” retrofits to all existing pumps!

Save thousands in over injection costs, by expanding the low end range of your existing pumps. Target rates down to 0.5 liters/day with your existing pump. Create Significant Capital & Operational Efficiencies.

ROI in Days……Not Years!

Sounds darn good to me for a non-material price.

They also give a list of their current clients.

Saul

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Do you know how long the VIM management built their business? They may not have spent a lifetime building the company

Chris, the press release says VIM was founded in 2012. So it’s a young company.

it would be useful to know their revenue, their margins, and if they have any intellectual property.

The have a patent:
http://www.google.com/patents/US20140196794

I’m honestly not really sure how relevant VIM’s financials are, as I would guess everything will look much different under Profire – their ability to sell, margins, etc. I suspect this was primarily about the technology and market opportunity rather than any existing cash flows.

And it looks like Profire has already begun selling them – at least, they’re on their website and you can ask for a quote:
http://profireenergy.com/product-detail/?product=PC180

Neil

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Hi Mykie, PFIE is now 5.6% of my portfolio. but take into account that I just have 15 positions at present, so that’s still slightly less than an “average” position, which comes out to 6.7%. If it goes back to $4.13 where it was a week ago, that 5.6% will grow by a third.

Thanks Saul,

So are you heavy in cash now?
Mykie
PS I doubled up on PFIE the other day and if it inches up, I’ll buy some more

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So are you heavy in cash now?

Mykie, Shame on you. You’ve read my credo and you know I’m NEVER heavy in cash. I simply don’t try to time the market.

Best wishes, and hope you are continuing to recover from that storm.

Saul

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Any resistance to buying a stock that is under $5?

Penny stocks (under $4 or $5) are not marginable and that cuts the appeal for them since they cannot be leveraged. Also, some institutions are not allowed to buy penny stocks.

Denny Schlesinger

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Penny stocks (under $4 or $5) are not marginable and that cuts the appeal for them since they cannot be leveraged.

I read this all of the time and unless I’m not understanding something I don’t believe it to be true at least with all brokers.

I actually have one margin account* (although I never use margin beyond rounding up a position) that doesn’t have a single share above $5 and yet it shows funds available for trading at 3x my existing cash level.

So how does that work?

B

*Scottrade

PS Applying the $4 cut off doesn’t appear to explain it either.