Long Cast Advisers LLC, a boutique investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A return of 16% was recorded by the fund for the Q4 of 2020, outperforming its S&P 500 Total Return benchmark that delivered a 12% return but below its iShares MicroCap ETF and the Russell 2000 index that delivered a 32% and 31% return respectively. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Long Cast Advisers, in their Q4 2020 Investor Letter, said that Perma-Fix Environmental Services, Inc. (NASDAQ: PESI) has been a drag for their results during the fourth quarter of 2020. Perma-Fix Environmental Services, Inc. is a waste treatment facility that currently has a $76.8 million market cap. For the past 3 months, PESI delivered a -7.74% return and settled at $6.32 per share at the closing of February 11th.
In the letter, the fund illustrated a chart(see P.2) for PESI together with their thesis for the company. Here is what Long Cast Advisers has to say about Perma-Fix Environmental Services, Inc. in their Q4 2020 investor letter:
“PESI is another stock that has been a drag on results for the quarter and year, despite the fact that it’s undergoing a remarkable turnaround partially masked by COVID related issues.
The Treatment segment (left chart) is an asset-heavy processor of low-level nuclear waste – mostly derived from the cleanup of soils and machinery at closed federal facilities – at four locations in the US. This business makes money on the capacity utilization of its facilities; as long as the machines are running and the waste is flowing the business generates 15%-20% OpInc margins. The Services segment (right chart) does “boots on the ground” type work which it bids and conducts similar to a construction project, (though it’s more likely deconstruction). This segment was stagnant under prior management but has been rejuvenated under the current CEO Mark Duff, who joined the company in 2016 and was promoted in 2017.
The large decline in Treatment mirrors the large COVID-related decline in waste shipments across the country. A data point that’s illustrative of the decline: At YTD 3Q19, ~760k cubic feet of waste was disposed at a variety of federal facilities and cleanup sites nationwide. At YTD 3Q20, that dropped to ~380k cubic feet. (A keen observer of these links might notice significant growth at the Perma-Fix facility at TN, but that’s the result of an acquisition in Feb 2020 of a high volume low margin sorting facility.) As a result of declining waste shipments nationwide, margins in the normally stable Treatment segment have collapsed and ~$2M in quarterly operating profit has temporarily disappeared.
The cumulative effect of the temporary decline on high margin Treatment concurrent with growth in lower margin Services makes it appear as if the company is experiencing decremental margins or “running to stay in place”, likely why the company gets no credit for the improvement at Services. At some point, Treatment will come back, growth in Services will be additive and I think shareholders will be rewarded.
The stock trades for about 12x TTM EBITDA, slightly above the peer group, but this is against an EBITDA figure that’s understated by ~$3M due to the aforementioned temporary factors. Adjusting for these factors, it’s trading at 8x “normalized” EBITDA. When the environment re-normalizes, we should see the full benefit of the turnaround in Services + improved results in Treatment. None of this even remotely considers some of the large federal cleanup projects on which the company is actively
bidding.”
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PESI delivered a -20% return in the past 12 months. Our calculations show that Perma-Fix Environmental Services, Inc. (NASDAQ: PESI) does not belong in our list of the 30 most popular stocks among hedge funds.
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