Tertiary Finance

Tertiary Finance
Contributor since: 2011
Interesting and well documented article thanks. I would only caveat that 1) E&C firms do sometimes trade at low multiples vs the mkt though I agree CBI is cheap and 2) it is a very cyclical business so a lower - though not 5 EV/EBITDA or 7 P/E - is quite justified.
Very nice article and I ultimately believe this company will get bought. The leasing idea is interesting for PX devices but it will be hard to convince their customers to switch - particularly when the PX device is such a deminimus part of the construction cost. Someone would buy them for the technology as it is the premier energy recovery technology in RO but Flowserve seems unlikely - they bought Caldor/Dweer 4 years ago and would be cannabilizing their own sales. Would their board authorize this type of foray again? Who knows. But Sulzer and DHR sell largely into desaly plants, as does XYL, so maybe they would buy ERII at some point but there is no hurry to buy something that is still > 4 sales - and has been since the IPO.
I am curious - did Joel Gay mentioned what happened to Tom Rooney or Borja Blanco for that matter? Mr. Blanco was a very popular member of the water community and his abrupt dismissal raised many eyebrows - and may be a lawsuit right now though I do not know nor have I checked on that.
Now they are contemplating buying the Goodyear plant in France after the media fiasco about that earlier this year. More straight talk from Taylor.
I have to agree with you. I made some money on TWI last year and gave it all back on Q4 earnings. After looking at it again we found that statements made on one of the calls, about union negotiations, were patently untrue. At least when compared with bulletins posted on the Union websites about company concessions. Taylor has done a terrible job managing the company, is paid handsomely for it, cannot keep his mouth shut on issues that are unrelated (the tire plant in France), and controls the board. And the board has people on it serving from 1997. A real s-show and I have no economic interest long or short.
I believe the helium cliff may be another reason.
thanks for the article. you recommend buying the stocks but could you share your valuation methodology? Expensive on any multiple you choose and I doubt a DCF gets you anywhere near the current stock prices without heroic assumptions.
Thanks for the reply. I am aware of the comments, I was on the call. The trade publication is Global Water Intelligence. iPhone comment was a joke about market demand.
Thanks again and - meant sincerely - I hope you are correct.
Michael, very well written article and I agree with you on many points.
I have followed ERII for 5 years now and am impressed with how the new management team has turned around the company - with the benefit of the financial crisis receding and subsequently more investment in their core market. The adjacent opportunity in oil and gas is well thought out though it will likely take awhile, the adoption of new technologies frequently does and ERII's influence in a new market has yet to be determined.
$125M in revenue for 2014 is too aggressive. You cannot extrapolate on a linear basis, your own comments indicate you know that. $75M is more realistic. Desal plants have a long design build cycle and ERII has visibility into what is permitted, on the board and breaking ground. You know that, you're an engineer. These aren't iPhones. We are all trying to promote our own stuff but you know the 125 is too high.
Excellent article though. I do appreciate your efforts.
How do you figure he is worth every penny? Since 12/29/06 through June 28, 2013 the stock has returned 5.58% vs 55+% for the Standard and Poors Industrials, 30.8% for the S&P, and 70% for Pirelli. He did beat Goodyear over that time frame for the past two years Goodyear outreturned TWI by 20%.
I will happily pay a CEO who makes money for his shareholders, I'm an investment manager not a socialist for god's love, but how does Mr. Taylor fit that description?
Not playing this one way or another and I appreciate the article but to amplify your comments on Maurice Taylor:
The NYT reported today, in the proxy too, that he is one of the highest paid CEO's based mostly on perks, not stock.
Also, on their 1Q conference call he claimed he got everything out of the Unions in his contract negotation. That did not foot with the Local's websites which reported the company gave concessions. So there is a credibility issue as well. Go for it and good luck if you believe in their end markets but the company and Taylor have a history of not executing. His interests are not aligned with shareholders and his, as he calls it, "straight talk" is questionable.
Luis, this is a well thought out and well written piece, thank you. I only read through this once but I appreciate the way you highlight your assumptions as all investing is ultimately based on assumptions. There is "maybe" in everything. I don't know if this thing will work but new management has plenty of runway to clean up the company as they didn't even have on ERP system before or one invoicing platform. There is wood to chop here.
Let me clarify and - respectfully - I will say that I over generalized. I will give you a detailed response because I did like your article as opposed to many yahoos on this, and other, web forums who just cite technicals and don't provide any fundamental details.
Jennings owned nearly 550K shares in Feb of last year and now owns just over 300K. He has no options according to the last proxy (page 44) and and was granted 5800 in RSA's last year.
Granted there is nothing wrong with him taking money off the table
but most of his comp is now in cash and he is 46 years old. These are Facts. He can sell all the stock he likes, and he will likely be granted more though they have yet to file their proxy.
Since the close of 03/07 when this sale hit the tape HFC has underperformed most of their group by over 200bps or more. That is another fact. Maybe it is very short term but for those of us who manage money for others and have to mark our books each night, talk to clients, LP's, investment committees, risk officers or whomever it is not insignficant.
Brent - WTI is widening which is likely more correlated to HFC performance than anything else (haven't done that regression) but I wouldn't be so dismissive of RINs. You never know.
Nice article. RIN noise is considerable but HFC's president selling a large chunk of his holdings last week was also a terrible signal. Refiners are also weak on contraction of the Brent-WTI spread.

We all appreciate your article and commentary on the California Water situation but all your bullish prognistications miss one point which has been made over and over again in the comments:
this company has no cash and no visible means to raise cash for all of its activities which, even under the most optimistic scenarios, will take some time.
In the real world we call this insolvency and given their debt stack that may become bankruptcy.
Thanks for your article and the commentary on the state, or lack of, water in California.
There are some other challenges facing Cadiz: the Metropolitan Water Authority, who operates the aquaduct, are not likely not very fond of CDZI. They went through a lengthy lawsuit years back after CA Gov Gray Davis engineered a deal between them. Putting that water on the aquaduct, hexavalent chromium and all, is not a given.
Also, CDZI is being sued by numerous entities inside and outside of CA because their aquifer underlies federal land and draining it is of environmental concern. These entities include the Mojave National Monument and a Marince Corps Base at Twenty Nine Palms.
CDZI does have some water - the USGEO disputes their survey - but may well be in lawsuits for some time to come.
They also have rescheduled their debt a few times and are burning cash at the rate of a few mil a year - for a handful of employees, some d&o insurance, and an office in LA.
Thanks again.
Good company but I have to agree with the other two commenters: way overvalued. It is priced like a growth stock and is not.
It appears they sold through their season passes last year earlier in the fall and sales, and mountain visits are down. Moreover Colorado is still in a drought and MTN needs to access water to make snow, that is becoming frequently more difficult. The National Ski Areas Association and the U.S. Forest service recently got into a dispute over water rights. Though the first round went to the NSAA on technical grounds, such disputes portend a further degradation of their business model.
No mention of CIM's portfolio holding. Prepayment speeds, the fact that CIM is mostly non agency and hasn't filed any financials for awhile (OTI dispute with Ernst and Young) and therefore faces a greater risk of getting their repo lines pulled than many other mreits. Or that CIM may, or may not, have cut their dividend again as they have done in the past.
Not an in depth analysis of CIM.