We came across a bullish thesis on Perma-Fix Environmental Services (PESI) on ValueInvestorsClub by MT30. In this article we will summarize the bulls’ thesis on PESI. Perma-Fix Environmental Services shares were trading at $11.23 when this thesis was published, vs. closing price of $10.53 as of Sept 10.
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Perma-Fix Environmental Services (PESI) operates four of the ten active mixed-level nuclear waste treatment facilities in the U.S., which are scarce assets due to strict regulations and community opposition, making them nearly impossible to replicate. Permits to build such facilities involve federal, state, and local approvals and can take over a decade to secure. The replacement cost of PESI’s fully permitted facilities is estimated at $200 million, compared to a current enterprise value of $166 million. The company has built a significant moat with over 50 unique patent-protected processes and expertise developed over decades, including the only mixed waste thermal combustion unit in the U.S. This experience gives PESI a unique position in a market that has not seen a new entrant in over 20 years due to significant barriers to entry.
PESI’s most significant opportunity lies in treating waste from the Hanford Site, a $280 billion environmental liability for the U.S. Department of Energy (DOE). The Hanford site holds 56 million gallons of radioactive waste in aging tanks, with 50 million gallons classified as low-activity waste (LAW) and 6 million gallons as high-level waste (HLW). The DOE has spent $14 billion building a Direct Feed Low-Activity Waste (DFLAW) plant to treat part of this waste over 50 years, but it can only handle half of the DOE’s LAW liability. Grouting, a lower-cost alternative to vitrification, has emerged as a vital solution, with the DOE planning to ship 1.8 million gallons of effluent LAW annually to PESI’s nearby Richland facility for the next decade, providing PESI with a highly visible revenue stream.
PESI is positioned to generate $80 million in annual revenue from treating effluent waste, a significant increase from its consolidated revenue of $70 million last year. With a contribution margin of 70% and the potential for additional treatment volumes, PESI could see significant growth. The proximity of PESI’s Richland plant to Hanford, coupled with its unique regulatory approvals, provides a monopolistic advantage. The DOE is also expected to ship additional supplemental LAW to PESI for treatment, potentially increasing treatment volumes to 2.8 million gallons per year by 2027. This growth could drive PESI’s revenue to $180 million annually, generating $98 million in cash EBIT, and offering significant upside potential as additional waste streams are processed.
Over the next three years, PESI’s stock is projected to trade between $50 and $100 by 2027, with earnings expected to reach $5 per share. By 2034, PESI could potentially achieve $15 in FCF per share, assuming a reduction in share count from 16 million to 10 million and stable FCF. This scenario underscores the significant leverage effect of share repurchases on cash EPS growth, especially if the company’s cash generation remains steady. PESI presents a unique opportunity for substantial appreciation, driven by increasing FCF, strategic share repurchases, and the inherent value of its assets. Successful management of share repurchases and market capitalization of PESI’s high-margin FCF stream could yield significant returns for investors in the medium and long term.
Perma-Fix Environmental Services is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 7 hedge fund portfolios held PESI at the end of the second quarter which was 6 in the previous quarter. While we acknowledge the potential of PESI as an investment, our conviction lies in the belief that 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 as promising as PESI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.