Description

PRM operates two business segments: Fire Safety and Specialty Products (completely unrelated). The Fire Safety (60% of revenue) business formulates and manufactures fire retardants and firefighting foams that help combat various types of fires, along with specialized equipment and services to supplement the use of the retardant and foam products. The Specialty Products business (40% of revenue) produces and sells P2S5 (phosphorus pentasulfide), which is used in end markets including lubricant additives and, primarily, engine oils.

PRM has been written up twice on VIC, once for Everac Holdings (the SPAC ticker) and once post-de-SPAC almost exactly a year ago. Since the last post a year ago, the stock has traded between $7 and $12 and has settled around $8 due to the suppressed fire season in 2022 leading to lower than expected revenue. Trading at 10x NTM EBITDA, the stock is not necessarily cheap, but I think it is a very high quality business with a few issues that warrant attention, but don’t kill the idea.

I’m in agreement with most of what yarak775 highlighted a year ago, but want to focus more on developments that have taken place since then for the Fire Safety segment.

2022 Disappointment: 2022 Fire Safety revenue shrunk 13% while Specialty Products grew 32%, leading to revenue down half a percent YoY.  The underperformance in Fire Safety is due to the nature of the business being tied to the fire season, which in 2022 was “unexpectedly quiet.”  https://www.nytimes.com/interactive/2022/12/20/climate/california-wildfire-season-2022.html. According to the California Department of Forestry and Fire Protection, 362,478 acres burned in CA in 2022 versus 2.5M in 2021, over 4M in 2020, and around 300,000 in 2019. While this year to year volatility in acres burned may turn investors seeking consistency away, the broader trend of wildfires has been unfortunately moving higher over the past few decades and is expected to continue. 2022 is an opportunity to enter the name during near term disappointment around a largely inconsistent market that is destined to grow.

New competition: Backed by Compass Minerals (CMP), Fortress is PRM’s greatest threat. Other competitors have tried to gain government approval, but failed as PRM has been able to hold its sole supplier status with the US Forest Service. One competitor named Pyrocool has claimed to have tried to sell through to Cal Fire, but is unable to because of the lack of approval from the US Forest Service. Their retardant is cheaper and less toxic, but simply lacks approval.

https://www.vcstar.com/story/opinion/columnists/2019/03/12/firefighters-using-all-right-stuff/3140954002/

“We’ve been trying for at least 10 years to get CalFire to use our product,” says Pyrocool CEO Robert Tinsley, a resident of the San Francisco suburb Brentwood. “With these devastating fires, you’d think they’d take a look at something else that has credentials.”

The 3Q22 CMP call highlighted the progress Fortress has made in entering the largely uncompetitive $300M market that PRM has been able to secure for itself. CMP estimates that the market size is 80 million gallons ($300M revenue) in North America. Fortress’s product uses magnesium chloride sourced from CMP to produce its fire retardant that is supposed to be more environmentally friendly. However, the approval process with the US Forest Service is not easy, and PRM has built a tight moat around its relationship with the US Forest Service (which is now potentially prone to change, although not as fast as the market may think).

“However, Fortress is the first new company in over 20 years to successfully get to the final approval stage with the U.S. Forest Service. We expect that heading into the 2023 fire season, two aerial retardants will be listed on the U.S. Forest Services qualified product list as fully qualified products, positioning Fortress to competitively bid on multiple airbases with U.S. Forest Service, USDA and Cal Fire in the 2023 season and beyond.” – CMP Q322 Earnings Call

One key advantage for PRM is that the transportation costs of PRM’s product is lower than Fortress due to the need for less of PRM’s concentrated product to make the ready-to-use product in fighting fires.

Quality

As yarak775 outlined, the business is well set up to flex pricing power long term. PRM acts as the sole supplier to many key end customers, with a product that is immaterial to broader firefighting operation costs, strong regulatory approval barriers to entry, and tight and recurring customer relationships. PRM has historically taken lsd to msd pricing on its products, and that

Valuation

Despite trading lower, the company is still not quite cheap at 10x forward EBITDA, but we believe that this is a business facing inevitable secular tailwinds with a strong moat. 

Risks

• Fortress gains traction within the US Forest Service faster than expected
  • Fortress is being actively tested by the US Forest Service for use
• Fire season fails to pick to historic levels
  • Very unlikely, this is more a concern over growth steadiness. The growth is certainly not linear.

Catalyst

Earnings growth, Fortress does not obtain regulatory approval, Fire season unexpectedly hotter than expected in FY23