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Peck: An Actually Profitable Renewable Energy Stock To Watch In 2020

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About: The Peck Company Holdings, Inc. (PECK), Includes: CSIQ, FCEL, FSLR, PLUG, SPWR
by: Edward Vranic, CFA
Edward Vranic, CFA
Long/short equity, Growth, momentum, event-driven
Summary

Peck has tanked since becoming publicly traded despite heavy revenue growth and positive operating profits.

Peck's revenue multiples compare quite favorably to larger solar industry peers.

Two major risks to Peck are its slumping gross margins and exploding accounts receivables balance.

Peck claims that its minuscule cash balance will be sufficient for 12 months. Collecting its receivables and avoiding a financing would be major positive catalysts for the stock.

Stocks like FuelCell Energy, Inc. (FCEL) and Plug Power Inc. (PLUG) have been on fire recently thanks to increased investor interest in hydrogen and fuel cell power generation systems. However, other renewable energy sectors have largely been ignored. That may be understandable. Sectors such as solar have generally been where investor money has gone to die, such as the notorious multi-billion dollar SunEdison bankruptcy of 2016.

Investors who like renewable energy stocks but are wary of being burned by over-leveraged balance sheets and poor business models may want to give The Peck Company Holdings, Inc. (PECK) a look. Peck is a solar engineering, construction and procurement contractor for commercial and industrial customers across the Northeastern United States. It's a second-generation family business that got started in 1972 as a traditional electrical contractor which has since morphed primarily into a solar company. Peck has installed over 125 megawatts of solar systems since inception and went public with the intention of undertaking an aggressive growth strategy. Its home state is Vermont, which is fertile ground for solar energy project expansion.

Peck became a publicly traded company last year after a share exchange agreement with special purpose acquisition company Jensyn Acquisition Corp. After a hot start where the stock spiked to $26 on June 20, PECK has exhibited a ski-slope chart that is inherent in other SPAC listings such as Phunware, Inc. (PHUN) and Akerna Corp. (KERN). It is now down over 90% from its highs and over 75% off its go-public transaction price of $10.

Chart
Data by YCharts

While the poor stock price performance is unfortunate, I believe that it has more to do with the supply-demand imbalance of this little-known stock that was a former SPAC than any fundamental or business model weakness. Any risk tolerant investor who decides to initiate a position has the opportunity to make substantial returns if they can wait it out until Peck gains respect from the market and sellers from the old capital shell dry up.

A review of Peck's Q3 2019 income statement supports a bullish thesis:

For Q3 2019, the company achieved $11.7 million in revenue, an increase of 194% over Q3 2018. It achieved $21.9 million in revenue for the first nine months of 2019. Backlog was $16 million as of September 30, 2019. The company expects to realize nearly all of this backlog in the next 12 months. Considering that the market cap is only $13.5 million, this leads to a revenue multiple that will be in the 0.25x to 0.5x range after the release of Q4 financials. This compares rather favorably to larger industry peers such as First Solar, Inc. (FSLR) which has a revenue multiple of 2.6x, SunPower Corporation (SPWR) which has a revenue multiple of 0.8x and Canadian Solar Inc. (CSIQ) which has a revenue multiple of 0.4x

Peck has managed to achieve profitable growth during this time as Q3 2019 net income was $76,000. The company recorded a $698,000 loss for the first nine months of 2019, but much of that was due to a provision made for income taxes of $1.55 million.

Just like any microcap stock, there are major risks inherent in these financials, any of which may put liquidity pressures on the company. Peck suffers from slumping margins and exploding receivables. Despite the tremendous growth in revenue for 2019, gross margin has only grown from $3.1 million for the first nine months of 2018 to $4 million for the first nine months of 2019. Year-to-date gross margin percentage has decreased from 24.1% in 2018 to 18.4% in 2019. The company explained the erosion in gross margins as being due to increased materials costs. This could be a problem going forward as some of Peck's contracts have fixed prices. If materials costs continue to rise, the company needs to find a way to pass these increased costs onto the consumer.

The other issue stems from the company's balance sheet. Accounts receivable has grown from $2.1 million at the start of 2019 to $7.2 million at the end of September. This increase can be explained by the high growth of revenue seen in Q3, which is why I am not red flagging just yet. A ballooning accounts receivable line item can be indicative of a company that is booking bad, inaccurate or otherwise uncollectible revenue. So it is something to keep an eye on. Ideally Peck will convert this line item into cash within the next couple of quarters.

The low margin and growing receivables leads to the next issue. The company is low on cash. It had only $29,000 in cash at the end of September and a working capital deficit. Even though it has recorded operating profits, Peck has operating cash outflow of $3.6 million for the first nine months of the year. Despite that, the company claims this in the liquidity section of its Q3 financial filing:

As of September 30, 2019, The Company’s working capital deficit was $76,693, compared to a working capital deficit of $276,258 at December 31, 2018. The Company believes that the aggregate of its existing cash and cash equivalents will be sufficient to meet its operating cash requirements for at least the next 12 months.

If there is a legitimate reason why the stock has tanked to the level it has, the market's disbelief that Peck has sufficient cash for the next 12 months would be it. If what the company is stating about its liquidity position is true, that means it must be expecting to collect on its receivables shortly. If it does, that could be a major catalyst for the stock to move up. It would mean the company's need for financing is diminished and that it will not be diluting the 5.6 million shares currently outstanding with a secondary offering priced at the 52-week lows.

No microcap stock comes without risk. Peck has demonstrated strong revenue growth and profitability in a burgeoning renewable energy industry in a solar-friendly place like progressive Vermont. However, its low cash balance, struggling margins, overlooked solar industry and former SPAC status have all put downward pressure on the stock. I believe that the downward pressure has been too extreme and that Peck makes a prime candidate to at least bounce back to its initial $10 price upon further revenue growth, collection of its accounts receivable and avoidance of further capital raises.

Disclosure: I am/we are long PECK. 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.