The Growth Story Is Over At Input Capital

| About: Input Capital (INPCF)

Summary

Input Capital was an extremely fast-growing company with an innovative business model.

Stock price cratered due to worries about its business model, but those worries are behind us now.

Current metrics indicate that growth is over for now. Input is fully valued.

Input Capital (INP.V) (OTC:INPCF) is an innovative and promising business, providing capital to canola farmers on the Canadian prairies. The stock price has had some "drama" over the last year. Now, however, the company is about fairly valued. It will not be a bad investment, but the prospect of stellar returns has dimmed.

Business Overview

There are several good articles describing Input Capital's business model here on Seeking Alpha already, but in case you are not PRO'd up, I will describe it briefly. Input Capital has adopted the streaming model for agriculture, specifically, for canola farming. Basically, Input gives a canola farmer an upfront payment in return for a contract to buy certain number of tons of canola from the farmer over several future years at deep discount prices. The combination of the upfront payment and the discounted back-end payments is the capital Input provides. The company is paid in tons of canola, which it then sells on the open market. The simplest way to think about the business model is that Input is a bank making loans, and the loans are paid back in canola.

Company History

Input Capital was founded in 2012, and for the first three years of its life, it enjoyed astounding growth. Revenues were $4M in 2014, $19M in 2015, $47M in 2016 (Fiscal years ending March 31. All amounts regarding Input Capital's finances are in Canadian dollars, but stock prices will be in US dollars). INPCF traded in a range between $1.75 and $2.50 during (calendar years) 2014 and 2015.

Then, in November 2015, disaster struck. Three contracts went into default. This was a test for Input's business model. Although Input had advertised a comprehensive security package for its contracts from the beginning, it had never been tested. Could it get its money back? Would more contracts default? The stock price plunged immediately from $2.10 to $1.25, and traded as low as $1.09 in January 2016.

That was the time to buy. On April 11, Input released an update saying that the recovery of its imperiled capital was proceeding well: it had taken possession of 2,000 acres, was foreclosing on more, and was in the process of auctioning some farm equipment. The stock price reacted immediately, heading north from $1.20 to peak at $1.76 on May 26, or 46% in six weeks. The price has been in that neighborhood since, trading at $1.67 at the time of writing. At the last conference call for FY2016 results on June 1, management indicated that recovery of capital from defaulted contracts would take a while, but was proceeding well.

Future Prospects

Growth at Input Capital was red hot. Since Input contracts for future delivery of canola tons, it has excellent visibility into how much canola it can expect to receive in the next year. This metric is, likewise, a pretty good gauge of the company's growth. Other good gauges are revenue and operating cash flow. Those numbers look like this:

2014

2015

2016

CAGR

Canola tons

6,500

23,923

62,244

208%

Revenue

3,771

19,337

46,704

252%

Op Cash Flow

3,182

7,082

29,191

203%

Click to enlarge

(Source: Company financials)

You can see why Input was an attractive investment. But growth has slowed. Management has projected 60,000-70,000 tons for FY2017; maybe 10% growth over 2016 rather than 200%. Revenue depends on some other factors, like the price of canola and the amount Input can make trading, but revenue growth will be in the same ballpark as growth in tons. Operating cash flow will move similarly.

Another metric that shows slowing growth is deployed capital, the amount of money lent out by Input. Obviously, the amount lent out in one year affects revenues in future years. Historically, that metric looks like this:

2013

2014

2015

2016

Deployed capital

$6.1M

$25.0M

$49.1M

$40M (est.)

Click to enlarge

(Source: Company financials)

Input was targeting $50M in deployed capital for 2016, but on the last call indicated that it would be able to deploy only about $40M. Input's product is just not as popular as management had hoped, and the reason is not hard to guess. In its latest presentation, the company says it pays $249 up front per contracted canola ton, and $60 when the canola is received, then sells it on the market for $483. That is a juicy 56% return, which is why Input could compound its revenue at 252% per year. But these huge returns for investors are, conversely, a steep cost of capital for a farmer, and it is no surprise that many farmers are not interested in giving up so much income.

Valuation

Because Input Capital is basically a bank that transacts in canola, price-to-book is a good valuation measure. I think a fair price for financial companies is a P/B of 1, plus a premium for growth. During the high-growth years, Input's P/B was above 2, which was not unreasonable. Today, that ratio has declined to 1.5, which, if anything, is still pricey. During the high-growth years, Input had no net income. Last year was profitable though, and the trailing P/E is 17.8. Since I (and management) anticipate modest growth at best this year, 17 is a good estimate for forward P/E too. Again, if anything, that is pricey for a tiny Canadian company whose business model may have topped out. You probably wouldn't pay that much for a sleepy community bank of the same size.

The hope for a return to the $2.50 range, and/or a steadily climbing stock price, rests on the idea that what is keeping the price down now is worry about collecting on defaulted contracts. But I believe that worry has been addressed satisfactorily by Input, and the market has responded: that was the jump in price over the April-May period this year. The stock is no longer that high because the growth prospects of the company are no longer as high as they once seemed. The stock will start climbing again when it looks like growth is coming back.

Final Thoughts

In many ways, I like Input Capital. Management is honest, competent, financially conservative, and deeply connected to its customers. I like the business model. I just don't know how scalable it is.

I certainly would not short Input Capital, but I would not look for above-market gains any time before next year. The next two quarters will be essentially zero-revenue, which will compare unfavorably with comps, so the price may fall some between now and November. On the other hand, if the collateral from the defaulted contracts is collected and sold between now and then, that will provide a nice one-time shot of revenue. Real growth, however, will require (I suspect) either a lower effective interest rate charged to farmers (and thus lower returns for investors), or a macroeconomic event like a recession. If it cannot find ways to lend out capital, the company might institute a dividend to return it to investors, although so far it has expressed no interest in doing that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.