On Friday, energy service specialist Profire (PFIE) reported an all-around 1Q19 beat on revenues of $10.8 million and EPS of $0.03. But judging by the stock's reaction during the trading session (or lack thereof), not many investors seem to have been very excited about the results.
Credit: Business In Focus
There was nothing particularly worrisome about Profire's first-quarter performance. However, it seems evident that this will be a less exciting year compared to 2018 that was the most profitable and second-best revenue period in the company's history.
The top line dropped 11% YOY. But to be fair, the decrease happened over a very strong 1Q18 that had seen revenues rise 56% over 2017 levels. On a two-year stacked basis, sales grew an annualized 18% in 1Q19 over 1Q17, while crude oil prices were up a more modest 6% per year (see graph below).
On profitability, gross margins on the product side (by far the largest of the company's revenue generators) expanded nearly four percentage points to 55.2%. While the increase could in part explain the bottom-line beat, I recognize that margins tend to oscillate quite a bit from period to period depending on revenue mix and inventory reserves and may not necessarily be an indication of trend improvement.
On opex, I was impressed to see costs drop across the board - i.e. not only administrative, but also R&D and sales and marketing. The 6% YOY decrease seems a bit inconsistent with the company's recent narrative of "investing internally to build for the future" by making "additional key hires in the R&D, service and sales departments". At play here might be mere timing, and possibly a justifiable concern for keeping costs under control in the first half of the year, given reduced top-line scale.
All accounted for and despite the revenue pullback, GAAP op margin of 19.7% looked robust, having moved up 120 bps over 1Q18 levels.
On the stock
Following the earnings beat that looked respectable, PFIE has traded largely sideways on surprisingly low volume this Friday, oscillating mostly between plus and minus 1%. At best, the muted reaction suggests indifference for the company and the stock, if not lack of interest in the investment story.
I do not think that the problem with PFIE is disappointing results or rich stock valuations. In fact, as the chart below depicts, P/E has been dropping fast over the past year at least, sending shares into bargain territory - especially after the $23 million net cash position, representing about one-third of market cap, is taken into account.
Instead, as I hypothesized last time, Profire seems to be lacking sufficient catalysts to spark interest from investors. Sure, the company is launching its new BMS product line in the fall. More importantly to me, CEO Brenton Hatch has mentioned "strategic investments with the intent of increasing revenues in the coming years", which could lead to inorganic growth enabled by the large quantity of dry powder in the company's balance sheet. Yet, growth opportunities seem to be on hold for at least the next six months, with an expected improvement in 2020 still feeling a bit speculative.
PFIE was one of my most successful calls of the past few years, when the stock returned 174% between my purchase in 2015 and my disposition in 2018 (while the energy sector (IYE) traded just below flat). Today, nearly one year after the secondary offer that marked the sharp unwind of the stock price of the past 12 months, I am much less excited about the investment opportunity, despite the company's decent execution.
I do not own PFIE because I believe I can create superior risk-adjusted returns in the long run using a different strategy. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.
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.