Tourlite Capital - Perimeter Solutions: Checks All Our Boxes For An Investment

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The pursuing conception was excerpted from this money letter.

Perimeter Solutions (NYSE:PRM)

Perimeter is nan sole qualified supplier of aerial occurrence retardant for galore applications. This ngo captious merchandise represents a mini information of its customers’ spend, and gross is recurring successful quality arsenic semipermanent secular tailwinds (growth successful number and size of fires) support growth. Perimeter is led by what we see to beryllium an experienced, best-in-class, superior allocation focused guidance team.

Perimeter checks our boxes for an investment. It is simply a marketplace leader successful a increasing market, beardown rate travel procreation and return connected capital, talented guidance team, trading astatine an charismatic valuation.

On December 12th, Morgan Stanley published a statement from management’s roadworthy show:

“PRM's awesome competitory moat successful its halfway marketplace remains its top worth proposition — and nan top investor debate… Near term, it seems apt that Fortress (the imaginable entrant) will scope afloat qualification for usage by nan US Forest Service successful 2023. However, this will apt transportation much header than applicable risk. The existent constituent of contention is whether it is logistically businesslike for firefighting agencies to usage multiple, non-compatible fire-retardant solutions.”

Perimeter’s shares sold disconnected complete 10%. We work together that nan consequence is much successful nan header than consequence to nan underlying business and marketplace share.

We judge location are a fewer reasons nan banal continues to waste and acquisition wherever it does today:

1. Concern complete nan support of a imaginable competitor's merchandise for aerial use

The consequence of a competitor taking marketplace stock is unlikely. Perimeter is presently nan only supplier pinch USDA approval. While it is apt Fortress will beryllium approved successful nan near-term, Perimeter’s infrastructure and integration into nan proviso concatenation provides a lasting competitory advantage to thief support marketplace share. This, mixed pinch nan truth that Perimeter’s merchandise represents only ~3% of customers suppression spend, makes it challenging and improbable for Federal and State agencies to move providers.

2. Variability successful net arsenic a consequence of variety successful occurrence season

We understand occurrence seasons are not perfectly linear but nan wide inclination successful acres burned continues to support portion growth. We judge location was immoderate misunderstanding of nan occurrence suppression marketplace this year. This year’s occurrence play had a ample number of acres burned successful Alaska. Since occurrence retardants are not often utilized successful distant locations wherever nan occurrence is not a threat to humans aliases infrastructure, this did not supply support to Perimeters volumes.

3. Some investors are turned distant by unsocial compensation structure

In our view, if it’s a intelligibly defined scheme and you tin exemplary it out, you tin relationship for it going forward. We for illustration a guidance squad that is paid to execute and has tegument successful nan game.

Revenue should beryllium capable to compound astir 10% from a operation of accrued volumes and mid-single digit value increases. Volume maturation will beryllium fueled by continued increases successful acres burned, larger fires, and further stretched retired occurrence seasons. Outside of its North American Fire business, further maturation should travel from underpenetrated world markets and nan Specialty Products segment. International is presently astir 20% of revenues and gaining traction. The 2nd limb of Perimeter, which gets little attraction and represents 1/3rd of revenues, is Specialty Products which, arsenic of nan 3rd quarter, has grown year-over-year revenues 40% and has much than doubled EBITDA.

Based connected our 2023 projections, astatine nan existent stock value of astir $9, Perimeter is trading astir a 6% free rate travel yield. That is for a business pinch sizeable competitory advantages that should turn free rate travel per stock by complete 25% per twelvemonth for nan adjacent 2 years astatine least. This is simply a business mostly uncorrelated to economical cycles and we judge location is constricted downside to normalized earnings. We spot a way to adjacent $1 per stock of free rate travel by 2025.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Single banal ideas excerpted from money letters published by Seeking Alpha.