How does a company transition from a fledgling start-up to a dynamic growth company capable of quickly scaling its revenues from $0-$50-$75M in 2-3 years? The simplest way is for a company to be in the heart of a massive secular trend with a hot product. One such company in the mid-90's was Fore Systems, whose ATM-switch product line allowed the company to gain significant share on Cisco (CSCO) and grow its revenues from $1 million in 1992 to $75M in 1995. In the late 70's and early 80's, Apple (AAPL) took advantage of a blossoming home computer market to scale in an even more massive way, from a start-up to almost $2 billion in revenues by 1984.
In an economy prone to inconsistent growth like our present environment, perhaps the most effective way for a small company to grow exponentially is to team up with a Fortune 500 partner which can act as a vendor on the company's behalf. ZAGG Incorporated (ZAGG) comes immediately to mind. In early 2008, ZAGG had successfully increased its sales to $2-$2.5 million per quarter. However, it was the transformative agreement in July 2008, to sell its InvisibleSHIELD product at Best Buy (BBY) stores, which catapulted ZAGG to an entirely new level of growth. Within one quarter, sales jumped to $6.5 million. From there ZAGG never looked back. Over the next 18 months, ZAGG's InvisibleSHIELD found itself on the shelves of three other Fortune 500 companies: AT&T (T), Verizon (VZ) and Wal-Mart (WMT). This dramatic growth in shelf space and market share created one of the most dynamic growth stories of the past 4 years and propelled ZAGG's stock up over 2,000%.
This leads us to Abtech Holdings Inc. (OTC:ABHD). After dedicating the past fifteen years to developing its patent portfolio (17 patents) and enhancing its EPA-approved stormwater product, SmartSponge, Abtech now appears ready to scale its revenues and earnings in a similar fashion to ZAGG. Just as Best Buy enabled ZAGG to multiply its revenues and earnings, Abtech's relationship with Waste Management (WM) is likely to result in a comparable growth pattern. For those who would like to learn more Abtech's unique opportunity in the storm water segment, please refer to our April article on the subject.
Two weeks ago, Waste Management announced the formation of public-private partnerships for the stormwater market. While we have seen this public-private partnership model implemented previously in both drinking and wastewater infrastructure, it appears Waste Management is the first private company to create such a model for stormwater. This is significant for a number of reasons.
Many municipalities around the country lack sufficient resources to independently finance these projects. At a recent congressional hearing reviewing financing tools for water infrastructure, Chairman Bob Gibbs (R-OH) of The Subcommittee on Water Resources and Environment stated:
"A large portion of the Federal, not to mention State, regulatory mandates are going unfunded by the Federal and State governments. Rather, local governments are being forced to pay more and more of these costs of these mandates. Increased investment needs to take place, which leads to the question - where is the money going to come from? There is no single answer to that question. Rather, we need to make a variety of financing tools available for the infrastructure financing toolbox."
Waste Management's management team should be praised for having the foresight to be first to the market with such financing tools for cities and municipalities. Even the head of the EPA, Lisa Jackson, was impressed with Waste Management's plan:
"Innovative, cost-effective strategies for reducing stormwater runoff will help meet one of the most pressing needs for protecting waters across the Unites States. These kinds of public-private partnerships are instrumental in protecting our health and our environment while growing our economy."
With both sides of the house in Congress as well as the head of the EPA endorsing this public-private partnership model for the stormwater market, Waste Management and Abtech should both benefit immensely, especially given that Waste Management is prepared to offer financing to municipalities in need of it. While it is difficult to ascertain the timing of the first contract wins, progress is likely to be imminent. After all, WM has 33,000 cities and municipalities who are already customers!
Just how significant of an opportunity is this for Waste Management and Abtech? In its Clean Watershed Needs Survey prepared for Congress in 2008, the EPA estimated the unfunded capital costs for project needs for a 20-year period to total over $100 billion, with $42.3B earmarked for stormwater and $63.6B for combined sewer overflow improvements. Think about it. This equates to a $5 billion-a-year opportunity for Waste Management and Abtech for the next two decades.
Even for a Fortune 500 company like Waste Management, this multi-billion market opportunity could help improve its top and bottom-line growth, after being stuck in neutral for years. Needless to say, Abtech will enjoy more near-term benefits, as its first set of contract wins will springboard the company into hyper-growth mode.
It should also be noted that Abtech has other irons in the fire. While investors await validation and contract wins from Waste Management, Abtech seems close to making headway in another new vertical: fracking. The EPA has been highly visible in regulating fracking-produced water, looking to establish initial standards for regulating this burgeoning industry.
Abtech's SmartSponge-based products underwent field testing in Wyoming in late 2011. The SmartSponge successfully removed 99.99% of the free oil and dissolved phase hydrocarbons (BTEX), with varying flow rates between 150 to 300 gallons per minute. This de-oiling stage in the produced water treatment process is critical as it can protect and assist such downstream technologies as electro-coagulation and reverse osmosis to become more efficient. In addition to being highly cost effective, as an added benefit, the spent Smart Sponge material can be re-cycled and burned as an energy source.
These advantages have not gone unnoticed within the fracking community. In its last earnings report, Abtech announced the SmartSponge had become "embedded in proposals of at least four significant frac water service providers." Although no contracts have been announced, it appears Abtech is moving ever closer to first wins in this new vertical. We expect progress shortly.
Additionally, we believe Abtech has begun to make headway within the industrial waste-water market. Although the company will not publicly confirm this, our research has unearthed a significant contract for the company within this vertical. Let us explain.
A short time ago, we learned that Energy Solutions (ES) has secured the contract to provide the clean-up solutions for the Fukushima nuclear site. Given that Abtech has worked with Energy Solutions in the past and was listed on their December PowerPoint presentation as a distributor of their products, we began to make some calls to the analyst community. While most of them had not yet heard of Abtech, we talked with two analysts who were familiar with Abtech and spoke highly of its solutions.
Our best source on this matter turned out to be an associate analyst at a top-tier bank. According to this analyst, Energy Solutions' new management team has made a big push to expand market share by partnering with companies that own differentiating technologies, like Abtech. By incorporating these technologies into their own solution, ES was able to offer the most comprehensive clean-up proposal and secure the Fukushima bid. While Energy Solutions has refused to comment on the exact contract value, we estimate it could be worth $50 million or more.
What will this mean for Abtech? Consider that Japan has stored millions of gallons of contaminated seawater which needs to be purified by processes which will include Abtech's technology. Suddenly, it is easy to imagine Abtech garnering $6-$10 million for its role in the cleanup. Let's use the end-point of $8 million, with $4 million booked this year and $4 million next year.
While at this point, investors may question whether Abtech can make good on its $17-$20 million revenue guidance for 2012, we feel there is still time for the company to deliver. With tangible progress in its third vertical and its primary verticals on the cusp of breaking through, Abtech has placed itself in a very strong position for the next few years.
Looking ahead to 2013, we feel Abtech can achieve top-line growth of 50-100%. Considering that Waste Management is positioned to gain considerable market share within stormwater very quickly, these growth projections will most likely prove to be conservative.
At these revenue levels, Abtech should be extremely profitable. Even with assuming a slight increase in headcount and R&D, and an increase in OpEx to $10-$11 million, at the high end of our revenue estimate the company would earn $10-$12 million in profits. Based on a fully diluted share count of 84 million shares, this would translate into $0.12-$0.14 in earnings for next year. Looked at from this perspective, Abtech's shares seem very cheap right now, trading for 6X forward numbers. One final note to investors on the share count: should all outstanding convertibles, options, and warrants convert into common stock, this would bring $9 million to the company's balance sheet.
Add it all up and we believe Abtech has the potential to replicate the type of growth curve ZAGG enjoyed over the past four years. As this growth begins to manifest itself, we expect the stock to respond in kind, especially with the scarcity of dynamic growth stories in the market right now.
As with all stocks, there are a number of risk factors investors should consider before becoming involved. First, Abtech has convertible bonds coming due in the next few months. Abtech will need to demonstrate tangible progress to investors ahead of their maturity. There is also the risk that Abtech will not secure sizeable contracts from either Waste Management or the fracking space. We consider this risk very minimal. Another risk is that the stock trades on the bulletin board and it is not liquid. This risk should lessen as the stock gains traction and as volume increases with new institutional money flows into the name.
For those investors with an aggressive bent, we feel these risks are well worth the potential reward. With a valuable IP portfolio of 17 patents, a significant partnership with a Fortune 500 company and new verticals supplying additional layers of growth, Abtech has multi-bagger potential from current levels, just as ZAGG did when it was trading at similar levels four years ago.