Recently, I caught up with Dr. Louis Centofanti, CEO of Perma-Fix Environmental Services (NASDAQ:PESI), a provider of nuclear waste treatment solutions. I had a chance to follow up on a conversation begun last summer before my July 2012 article "Perma-Fix: Innovator in Hazardous Waste." In that article I focused on the company's efforts to broaden its product offering both through internal innovation and acquisition. Security analysis is never a one shot effort, making it worthwhile to follow up on whether a company is delivering on its goals. It is also important to reassess risks in a security. So I put the following questions to Centofanti:
Q. Shares of Perma-Fix have been under pressure in recent months, particularly since report of the third quarter 2012 results. What do you think is causing investors the most concern? What did the investment community overlook in the quarter results?
A. Overhang concerning the Department of Energy budget has been the major concern. However, [DOE] cleanup activity is mandated by law and court orders. Therefore, we do not see DOE budgets dramatically impaired, even in a difficult fiscal environment. We are using this opportunity to gain market share and grow revenue by expanding our services business.
During the third quarter and heading into the fourth quarter of 2012, we have seen a sequential improvement in our Treatment Segment sales. That is reflected in improvements in both revenue and backlog which were up approximately 13.6% and 59.6%, respectively, compared to our second quarter of 2012. Within our Services Segment, the larger contracts continue to be delayed, but we are winning smaller contracts.
In the meantime, we remain focused on generating positive cash flow, reducing debt, controlling our costs and growing our revenue. Our balance sheet is extremely strong and we see the current market as an opportunity to gain market share.
Q. Will the Energy Solutions deal make a difference in the competitive landscape?
A. We do not expect any impact on our relative competitive position if the Energy Solutions deal is completed. Right now the nuclear waste industry needs leadership. We believe we can offer leadership, given our solid reputation in the industry.
Q. What are investors missing in the Perma-Fix story?
A. We have tremendous staying power because our balance sheet is strong. Our business can be lumpy. Sometimes our customers are busy with construction projects or otherwise hold back waste disposal projects. Despite budget concerns, eventually the work has to be done. That is the nature of the nuclear waste business. Ample cash and low debt put us in a position to last through the periods when business is slow.
Q. Your balance sheet is strong, but investors do not seem to be giving you credit for that. What are they missing?
A. We have ample cash and low debt. I think investors see that. They might not realize that we own facilities for nuclear waste that are irreplaceable. From a duplication standpoint it could take as much as $400 million to build the same nuclear waste treatment capacity and it would be impossible to replicate the permits we have. We also have the expertise and knowhow to operate those facilities and generate earnings.
Q. Contributions from the recent acquisition of Safety and Ecology helped offset sluggish sales in other segments in recent quarters. Does Perma-Fix need to do more acquisitions to stoke the fires of growth?
A. Not at this time. Perma-Fix is concentrating on aggressive bidding on government, commercial and international contracts, as well as further strengthening the balance sheet. The acquisition strengthened our capabilities, which is allowing us to bid on a much broader scope of work.
Q. What new capability has Safety and Ecology brought to the mix?
A. The health physics group is extremely talented. We are committing resources to leverage the expertise of this group in developing treatment solutions. For example, we are developing methods to separate radioactive material from waste to reduce the amount that goes to into the landfill space. We are also getting acquainted with the Safety and Ecology clients and learning what new services we can offer them. We expect more cost savings and new revenue from this acquisition in the future.
Q. Your company received a notice from Nasdaq that the PESI bid price no longer meets requirements for continued listing. Of course, the company has some months to get back into compliance. Does the company have a 'game plan?'
A. We are not concerned about delisting. We believe that our performance will be reflected over time in the stock. We have a number of other tools in our arsenal that we could utilize if the Street continues to undervalue the stock. Most importantly, our balance sheet is extremely healthy and, with greater visibility, we have begun a much more active outreach program to meet with investors.
Q. New contracts could get investors' attention. Are there any contracts in your business pipeline that could be coming along in the near-term?
A. Between our own bids and those with partners, we are involved with over $600 million in bids. We can see the pressure building. While our customers do seem indecisive because of budgetary concerns, they cannot sit on nuclear materials forever. As we sit today, we see a lot of work ahead.
Q. In early December 2012, Perma-Fix staged the Nuclear Waste Management Forum. What was the highlight of the event?
A. This was the twelfth annual event for our customers and partners. The keynote speaker this year was Christine Gelles, the Associate Deputy Assistant Secretary for Waste Management from the DOE Environmental Management Headquarters. There were several other DOE managers from Oak Ridge, Hanford, Idaho and Los Alamos sites at the event as well. It is a 'user' event for our customers. It is building in importance in the industry. Attendance at our forum rivals national industry events.
Q. The last time we spoke we talked about your efforts to expand into production of isotopes for medical imaging. Recently the company licensed new technology in this area. How does that new technology fit into the mix? What recent progress has Perma-Fix made toward the medical isotope market?
A. Perma-Fix has signed an exclusive commercial license for a patent-pending column generator technology that produces radioisotopes not derived from 'fissioned' uranium. We had been working with a national laboratory over the past two years with each of us owning a part of the technology. This license agreement formalized an arrangement for Perma-Fix to use the technology in medical isotope production. It is an important step in reaching a market-ready product.
Technetium-99m is used in tens of millions of medical diagnostic procedures. It is called Tc-99 for short. It is usually derived from molybdenum-99 by fission of highly enriched uranium in nuclear reactors. We think our new technology is important and very timely because a key source of Tc-99 radioisotopes for medical imaging in North America is being closed down.
Perma-Fix's new Mo-99/Tc-99m production process encompasses the full production cycle. Unlike conventional methods, the new process produces Mo-99 using natural molybdenum irradiated in research or commercial reactors. We believe this offers important advantages over current production methods. These advantages include less radioactive waste and no fission product emissions during post-irradiation processing of Mo-99.
Perma-Fix is now focused on completing the final stages of commercial development. We are looking forward to announcing additional milestones.
Q. In a nutshell what is the opportunity for investors in Perma-Fix?
A. Perma-Fix is the clear technology leader in the nuclear waste industry. We are leveraging our technical expertise as we rapidly expand our services business, and continue to diversify into commercial and international customers. Our balance sheet is extremely strong, and it would be nearly impossible to replicate the technology, permits and facilities that we have assembled.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.