Seeking Alpha • Feb 18
Tourlite Capital - Perimeter Solutions: Checks All Our Boxes For An Investment
Summary
Perimeter Solutions is a significant position in the fund which experienced an ~50% drawdown since we made our initial investment.
Perimeter’s shares sold off over 10%.
Based on our 2023 projections, at the current share price of around $9, Perimeter is trading around a 6% free cash flow yield.
We see a path to near $1 per share of free cash flow by 2025.
The following segment was excerpted from this fund letter.
Perimeter Solutions (PRM)
Perimeter is the sole qualified provider of aerial fire retardant for many applications. This mission critical product represents a small portion of its customers’ spend, and revenue is recurring in nature as long-term secular tailwinds (growth in number and size of fires) support growth. Perimeter is led by what we consider to be an experienced, best-in-class, capital allocation focused management team.
Perimeter checks our boxes for an investment. It is a market leader in a growing market, strong cash flow generation and return on capital, talented management team, trading at an attractive valuation.
On December 12th, Morgan Stanley published a note from management’s road show:
“PRM's major competitive moat in its core market remains its greatest value proposition — and the greatest investor debate… Near term, it seems likely that Fortress (the potential entrant) will reach full qualification for usage by the US Forest Service in 2023. However, this will likely carry more headline than practical risk. The real point of contention is whether it is logistically efficient for firefighting agencies to use multiple, non-compatible fire-retardant solutions.”
Perimeter’s shares sold off over 10%. We agree that the risk is more in the headline than risk to the underlying business and market share.
We believe there are a few reasons the stock continues to trade where it does today:
1. Concern over the approval of a potential competitor's product for aerial use
The risk of a competitor taking market share is unlikely. Perimeter is currently the only supplier with USDA approval. While it is likely Fortress will be approved in the near-term, Perimeter’s infrastructure and integration into the supply chain provides a lasting competitive advantage to help maintain market share. This, combined with the fact that Perimeter’s product represents only ~3% of customers suppression spend, makes it challenging and unlikely for Federal and State agencies to switch providers.
2. Variability in earnings as a result of variation in fire season
We understand fire seasons are not perfectly linear but the overall trend in acres burned continues to support unit growth. We believe there was some misunderstanding of the fire suppression market this year. This year’s fire season had a large number of acres burned in Alaska. Since fire retardants are not often used in remote locations where the fire is not a threat to humans or infrastructure, this did not provide support to Perimeters volumes.
3. Some investors are turned away by unique compensation structure
In our view, if it’s a clearly defined plan and you can model it out, you can account for it going forward. We like a management team that is paid to perform and has skin in the game.
Revenue should be able to compound around 10% from a combination of increased volumes and mid-single digit price increases. Volume growth will be fueled by continued increases in acres burned, larger fires, and further stretched out fire seasons. Outside of its North American Fire business, additional growth should come from underpenetrated international markets and the Specialty Products segment. International is currently around 20% of revenues and gaining traction. The second leg of Perimeter, which gets less focus and represents 1/3rd of revenues, is Specialty Products which, as of the third quarter, has grown year-over-year revenues 40% and has more than doubled EBITDA.