Companies that disappoint on earnings and/or guidance will typically see their shares placed into the penalty box until credibility is re-built. After shelving 2012 guidance a few weeks ago, Abtech Holdings (OTCQB:ABHD) shares have been under pressure. Abtech's stock lost 12% of their value during Tuesday's trading session after an article appeared in the Island Valley Daily Bulletin detailing how an L.A. County storm water case was being sent to the Supreme Court.
Because its stock is in the penalty box, nervous and impatient investors reacted the wrong way - rather than buying the dip, they instead sold into the decline. Not only is this case old news from earlier this year, it will actually be a catalyst very shortly to spur considerable movement for all things storm water within L.A. County. With its first few contracts expected to close shortly, we consider this recent pull-back to be the final opportunity for investors to buy into Abtech before we see its shares break out to new highs. Let's explain why we feel this way.
In essence, the Supreme Court is being asked to decide whether the L.A. County Flood Control District, a collective of 85 cities and 140 unincorporated areas, will be responsible for billions of gallons of urban runoff that pollute inland rivers and streams. This case began in 2008 when the Natural Resources Defense Council and the L.A. Waterkeepers filed suit against the county. After winning last year in the 9th Circuit Court of Appeals, the County appealed the decision to the Supreme Court, hoping that the ruling will be overturned. A ruling on the case is expected in the spring.
Investors take note - this case has absolutely nothing to do with Abtech's and Waste Management's (WM) Public-Private Partnership (P-3) proposals pending at various small cities and municipalities within Southern California. In our view, some investors incorrectly assumed that because this case was now being appealed to the Supreme Court, this would cause a further delay for Abtech in securing its first contract wins. While an understandable knee-jerk reaction, it is not the correct one.
Multiple approaches will be needed to solve California's daunting storm water and water infrastructure issues. California seems to understand that better than anyone. Amidst all of the in-fighting of who is responsible for billions in damages in the case sent to the Supreme Court, the state is also promoting an initiative for all facets of its bureaucratic layers to work together. It is known as the Clean Water, Clean Beaches Initiative. At its heart, California is trying to promote collaboration among its various layers of government to assure that storm water issues are actually dealt with in a constructive way:
This Measure allows cities and the county to work collaboratively on water quality projects where they make the most sense, from inland all the way to the ocean, rather than having a string of very expensive and perhaps redundant projects paid for by each city. Projects funded by the measure may be single-purpose, or may be multi-purpose and multi-benefit, cleaning water, recharging groundwater supplies, and beautifying public spaces.
Looked at from this perspective, it seems clear to us that different projects will be funded in different ways. Also, different cities and different municipalities will choose to remedy their storm water issues from different angles. All of the solutions will not be the same.
Recently, L.A. County increased the number of contaminants that municipalities will need to address in their storm water permits. This was the first update of storm water regulations since 2002. Considering that Abtech's solutions will immediately remedy a number of these contaminants and will, over time, be adding new technologies targeting heavy metals removal, this will go a long way to solving not only municipalities' near-term requirements, but also their future ones. We therefore expect Abtech's P-3 proposals in place in Southern California to resonate strongly with those municipalities looking to be proactive and forward thinking. The first few will not wait to hear from the Supreme Court, as this has nothing to do with the recent mandates put into place by L.A. County's Water Board.
Because Abtech trades on the Bulletin Board, does not yet have analyst coverage and has yet to finalize its first set of contracts to showcase its proof-of-concept, investors have chosen to no longer give the company the benefit of the doubt in the near term. We believe that this is a mistake. Sure, there are a number of risks that remain for Abtech, including bureaucracy on the municipality side of the equation and, on the stock side, illiquidity risk, along with the risk that investors will not take Abtech out of the penalty box anytime soon. These risks are all known, however. In our view, they have almost all been discounted.
Have investors considered the upside risks in Abtech? Remember, the company is only six months into a partial roll-out of this product offering with Waste Management's municipal client base. The significance of Abtech's partnership with Waste Management cannot be emphasized enough. With over 33,000 cities and municipalities as existing customers, how much upside could there be in Abtech's stock if the company was able to penetrate 5% of Waste Management's customer base over the next 5 years?
A 5% market share would equate to 1,650 municipalities around the country eventually incorporating Abtech's technology to meet their water infrastructure needs. On Abtech's most recent conference call, they stated that the average municipality win will equate to $4 million over 5 years, with 60% of the contract value to be realized over the first 12 months of the contract. If we run the math, this equates to a $6.6 billion opportunity spread out over the next 5-6 years. The numbers could get very big, very fast.
In summary, investors in Abtech should not get discouraged by the daily swings in its stock price. While certainly frustrating, we expect to see the stock break out shortly after the company announces its first contract wins this month. After all, the company would not have already stated that they were closing in on its first two contracts if the process were not almost complete. Eventually, we expect analysts to initiate coverage on the stock and also an up-listing to ensue, catalysts that will help to attract new institutional investors into Abtech's shares, a process that will eventually make today's prices seem very cheap compared to where we expect them to be in the future.