P. Ross Taylor III, a Partner with ARS Investment Partners
Perma-Fix (NASDAQ:PESI) has a strong advocate in P. Ross Taylor III , a Partner with ARS Investment Partners.
“We figure all good things come eventually out of cash flow.
The skill set I use in our small-cap area — and also in our all-cap area — is very similar to that which people I know in private capital managements use.
We’re trying to see what a business can produce in the way of free cash flow, what catalysts are out there, what things we see.
For example, in our small-cap area, we own shares in a company called Perma-Fix (NASDAQ:PESI).
It’s basically a nuclear cleanup company.
They actually have a business with Hanford nuclear reservation, probably the most polluted place in the western world. The government’s been looking at cleaning up for decades, but Perma-Fix (NASDAQ:PESI) has a unique capability to pull low level nuclear waste out of water.
Hanford has to separate the waste into high- and low-level waste.
Perma-Fix (NASDAQ:PESI) can literally just pipe the water that comes out in a process called vitrification.
They can pull the low-level radioactivity out of the water, make the water good, and recycle the water back into Hanford and get rid of the low-level wastes.
That’s a unique player in that space. There’s really no one else who does that. That’s a real control choke point.
We look at that as a company that’s trading now around $12. We think from that one project the company will earn a run rate or $3 a share a year, and it will grow from just that one project.
If I’m a private capital, I would love to own all of that business. And that’s the other thing.
We’re always saying, “Would I want to own the whole business?” Would I own a business at $12 a share right now that’s like that? All day.
If I can buy it on 50% to 75% levered, that means I can turn around and as a private capital guy, I can buy from that one project $3 a share in earnings, and that’s just that project. Other projects that make them higher.
What’s that going to be worth?
Well, I don’t think they’ll ever run out of nuclear waste at Hanford, honestly.
But let’s just say they talk about it being 40 to 60 years’ worth of work that needs to be done. That’s well beyond most investors’ horizons, but I would love to own that.
If I’m a private capital guy, I’m interested in owning that entire stream of business, because if I paid $20 or $30 for that stock, I’m going to make a really nice cash-on-cash return over the life of that investment.
So that’s kind of how we’re looking at it.”
The well regarded professional looks at the Perma-Fix (NASDAQ:PESI) stock financially.
“If I pay $20 and I put up 40% of that in cash, put up $8, that $8 is going to generate me $3 a share in earnings power, which should be free cash flow.
You think about, that’s 37%, 38% annualized return at a 70% premium to the current stock price.
And they do have other business that I think could earn another $1 to $5 a share.
So that’s why the inefficiencies are so great. And it’s also why we work with management.
Frequently, these companies aren’t as sophisticated.
Oftentimes, a major corporation will have more people on IR than these people have in the entire administration of a company.
And they don’t always get the best advice frequently.
I have a friend who used to head investment banking at a place, and he used to say, “I can tell you three things about investment bankers. They know nothing about investing. They know nothing about banking. They know everything about their comp package.”
They go to an investment banker and think, “Wow, these guys are smart. These guys are interested in a transaction.”
They’re not interested in maximizing the value of the company.
So we’re trying to find places where we can work with management.
We have at times helped lead to management changes. Through my career, I’ve done a lot of that.
But we’re not an activist.
What we’re looking at is how we get this story realized.
How we get it put out there.
So we talk to companies, and we will say, this is how you need to message.
We just say this is what from our perspective on our side of the street, the buy side, this is what we think the issues are…Something like a Perma-Fix (NASDAQ:PESI) — what we’d be saying is, “OK, our work says you can earn $3 a share out of this one particular business.”
Last quarter, they were trading at nine.
That’s inefficient.
How are we going to close the inefficiency gap?”
The ARS Investment Partner sees value in various small cap stocks besides Perma-Fix (NASDAQ:PESI).
“We have a micro-cap name in the defense space, TechPrecision (NASDAQ:TPCS).
They make key components for attack and ballistic submarines, as well as for certain aircraft programs.
We know the United States has a bunch of nuclear submarines of both varieties.
The attack submarines are the ones that go into war.
They do what you think submarines do.
They hunt other subs and ships and attack land targets.
And then, the ballistic missile subs are basically sitting quietly underwater waiting for Armageddon.
And both of our fleets are well past age.
The cool thing about a nuclear reactor is that it runs forever.
But the bad thing is when the fuel goes bad, then you have to take it into the harbor and fill it up with uranium.
That generally means you have to cut the hull open and pull the reactor, all sorts of things — which, by the way, benefits Perma-Fix (NASDAQ:PESI) because there’s the chance to clean that waste up.
There’s a circle here. But we’re watching here.
There was an editorial in The Wall Street Journal where a senator said, “We need to be able to build more than two attack submarines a year.”
The House Republicans in their version of the Defense Appropriations Act put a rider that says we need to build more than two attack submarines a year.
There’s a group of senators who have said the same thing.
Right now, we’re building 1.2 a year, where the Navy has said we need 66 total, I think it is. They see us in seven, eight years being down to like 46.
That’s a lot of subs but you can only usually get about a third of your subs at sea at any time.
About a third are being fixed, a third have just come off patrol, and a third are on patrol.
So, 66 means you effectively have 22 boats at any time.
If you’ve got 45, 46, you only effectively have 15.
So, you’re actually operating well under capacity.
And then, if we’re worried about China doing anything with Taiwan, the first line of defense, the one that the Chinese cannot knock out, is attack submarines.
And so, you’re seeing that pressure build up.
We’re looking at TechPrecision.
It’s a $7, $7.50 stock. In our math, we go, “OK, it’s a micro-cap.”
But we see where they can earn $1.50 to $1.80 a share run rate in free cash flow, when the DoD gets these submarine programs up.
We’re not even counting on them winning new business.
And we know that will have to happen.
We need to invest in the industrial base, but we’re seeing all that pressure now to do that.”
Get all the small cap and micro cap picks from P. Ross Taylor III , a Partner with ARS Investment Partners, only in this exclusive interview in the Wall Street Transcript.
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