$PPSI: Q2 2024 update

Preliminary thoughts before Q3 2024 guidance is released

Alright, so here's my view on why $PPSI after the sale is very compelling risk/reward and why the stock reaction makes no sense to me.

After the sale of the Electrical Infrastructure business for 11x 2023 EBITDA, they've significantly de-risked the story in my opinion.

First on the pro forma.
$6M of net cash prior to the deal, the sale adds $50M, unclear to me what taxes and fees are involved, $48M of it cash and $2M ownership in the new company. 
So PF net cash (assuming no major taxes, they also have a decent chunk of NOLs), is $56M.  Market cap at $6.1 per share is $66M, so EV of RemainCo is $10M.

Now what will they do with the cash? Nathan's been pretty clear about what it's going to be:

• Fund the e-Boost business' growth without dilution or debt.

• Shareholder returns either through a special dividend or buybacks.

• M&A: looking for something with $25M+ in revenue to better spread fixed costs so that it comes with significant synergies. It'd have to be related, enhance the product offering, which is a "very narrow, narrow group of candidates".

  • I am not too scared of M&A with this management team. They've been good, CEO is the largest shareholder, the reasoning makes sense and they sound quite selective.

So what do you get for $10M?

You get the fastest growing business within PPSI with the most potential. Backlog has massively inflected (see below), and multiple comments from the CEO on the call indicate that he definitely wanted to keep the Critical Power business over the Electrical Infrastructure business:

• CEO: "This sale enables us to one focus on our e-mobility business, which we believe has a significantly higher ceiling than the E-Bloc business"

• CEO: "On the EBOOST side, it's frankly the opposite. We can't give it to the market as fast as a lot of them want it. We're already holding. The reason we hold so many millions of dollars of inventory and engines and alternators and trailers and so forth."

• Investor: "On EBOOST, just trying to get an idea of what this market looks like and the opportunities out there in your pipeline. Is this something you could grow 20, 25% per year? I mean is that the type of demand that's out there?"

  • CEO's answer: "The kind of demand is much higher. I think that if we were to grow it 25% a year, we'd be in extremely profitable and solid business. We're trying to -- We're trying to not go crazy on the growth and lose profitability. But the demand every month, the use cases and demand and users never cease to amaze me."

  • For those who don't get it, what Nathan is saying that if they were to only grow at 20-25%, they'd have significantly higher margins than today, but because this business is growing much faster than this, they're still investing in it.

So what could this business get to?

Well we got an idea of 2024 and 2025 could look like:

• CEO on 2024: "We expect the critical power division to generate a bit over $20 million in revenue this year and look forward to sharing more specific financial information with you on our third quarter earnings call coming up in just about two weeks"

• CEO on 2025: "You know, even if, let's say hypothetically, we projected, I don't know, call it 32 million for 2025. I'm not saying that. But if it were, that's still a small business, and there's going to be some lumpiness to that."

  • The man says it's not guidance but it definitely feels like a realistic number, even if it's a bit later than 2025, given the level of backlog and the high demand he seems to be seeing

$PPSI trades at 0.3x revenue assuming $32M of revenue is an achievable number. This is a very low number for a business growing 65%+, especially considering they sold the e-Bloc business for 1.7x 2023 revenue, a more mature business with less growth opportunity.