We came across a bearish thesis on Perimeter Solutions, Inc. (PRM) on Substack by Directionally Correct Research. In this article, we will summarize the bears’ thesis on PRM. Perimeter Solutions, Inc. (PRM)’s share was trading at $11.82 as of Feb 10th. PRM’s trailing and forward P/E were 14.15 and 19.57 respectively according to Yahoo Finance.
Perimeter Solutions (PRM) has emerged as a unique specialty chemicals company, benefiting from a surge in demand for its wildfire retardant products, driving a notable rally in 2024. The company’s stock price, however, now reflects expectations of continued high earnings through the upcoming fire season, typically from June to September. With a multiple of 9.5x trailing EBITDA, PRM is priced as though the elevated earnings will persist into 2025, but a modest normalization in demand, potential return of competitive pressures, and share dilution pose considerable downside risks.
If the 2025 fire season proves to be less severe than anticipated, PRM could see its EBITDA fall by 35% to $175 million. At a constant multiple, this would equate to a fair value of $7.50 per share, representing more than a 35% downside from current levels. In a worst-case scenario, where competitive pressures or terminal value concerns re-emerge and the multiple contracts to 9x, the stock could drop further to $7.00 per share, a more than 40% decline. Conversely, if 2025 turns out to be another intense fire season, PRM could achieve record EBITDA of around $300 million, resulting in a special dividend and a potential 20%+ return. However, such a strong 2025 would increase the likelihood of a sharp downturn in 2026, with EBITDA potentially declining to $165 million, leading to a stock price below $6.50 and a negative 20% two-year internal rate of return (IRR).
Perimeter’s core business centers on its Fire Safety segment, which accounts for 70-80% of sales and EBITDA. The Fire Safety division includes both suppressants and retardants. Suppressants, such as foams applied directly to fires, have seen steady growth in recent years due to a shift away from harmful PFAS-based foams. Retardants, used to prevent the spread of wildfires, remain the company’s largest and most lucrative business. PRM’s primary customers in this segment include U.S. government agencies like the Forestry Service, Bureau of Land Management, and CAL FIRE, which together represent over 75% of sales. These customers require products to combat increasingly severe wildfire seasons, with demand directly tied to the number of acres burned each year.
The cyclical nature of wildfire seasons makes PRM’s future earnings highly unpredictable, as sales depend on the severity of the fire season. The past years’ fire seasons and the number of acres burned have exhibited a clear pattern, though forecasting future cycles remains a challenge. The current consensus among analysts expects slight growth for the Fire Safety segment in 2025, but a less severe fire season could lead to significant declines. Additionally, even if demand remains high in 2025, there is a high likelihood of a downturn in 2026 as the fire cycle stabilizes, presenting substantial downside risk for investors. With the stock fully priced and the potential for a cyclical turn in the coming years, PRM presents an attractive short opportunity, with the downside risks outweighing the limited upside.
Perimeter Solutions, Inc. (PRM) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 25 hedge fund portfolios held PRM at the end of the third quarter which was 20 in the previous quarter. While we acknowledge the risk and potential of PRM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PRM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.