Carmanah Technologies: Lean mean and yes, green.
by Nick Waddell
Green tech. Who among us hasn’t been at least tempted to invest in green
technology stocks? After all, open any any paper’s business section and
you’ll read about wind farms in Germany or fuel cells in Japan. Surely
there must be a way to profit from this still young phenomenon.
Ask anyone who has dabbled in the space, though, and they will likely tell
you investing in green tech is, and has always been, fraught with peril.
The life cycle of such stocks is usually as follows: massive promise and
hype followed by even more massive losses. Those Green tech stocks that do
actually manage to successfully commercialize their product trade at
multiples that scare away most investors with a sense of value.
Take Vancouver based Ballard Power (TSX:BLD). Ballard was founded in the
early 1990’s to develop fuel cells. It was an ambitious plan, and it made
sense. The late Geoffrey Ballard went as far as to call opponents to the
technology “piston heads”, insisting that fuel cells would be
commercialized by 2010. Investors bought into the story, The stock roared
to over $170 in March 2000. Nearly a decade later though, Ballard is still
deeply in the red. The Company lost .32 cents a share in 2008 and .47
cents a share the year before that. The stock closed at $2.07 on June 1,
On the other side of the equation is First Solar (NASD:FSLR). First Solar
has become the poster boy for successful green tech in the United States.
The Company has grown from US $48 million in revenue in 2005 to over 1.2
billion in 2008. It spins off a ton of cash too; earning $4.24 cents a
share last year. The Company is, by anyone’s standards, a roaring success.
The only problem? Everybody knows it. Investors flocked to the stock in
droves, and it now trades at anywhere between 15 to 25 times sales. At
those lofty valuations investors are betting that First Solar can
continue, perhaps even better, its recent success.
While it’s on nowhere near the same scale as First Solar, Victoria based
Carmanah Technologies (TSX:CMH) may represent a lucrative middle road in the
world of green tech investing; a company that has filled in the value
beneath its share price, but still has the potential for explosive growth.
Carmanah was founded in 1994 to develop durable solar powered marine
lights. The Company went public on the TSX Venture exchange in 2001 and
graduated to the TSX in 2005. Today, Carmanah is a leader in marine and
aviation lighting, specializing in “off the grid” situations in which
reliable, low maintenance lighting is required.
The stock was a slow starter, but after graduating to the TSX, CMH hit a
high of $4 in February of 2006. The Company’s revenues ballooned from
under $39 million in 2005 to over $62 million in 2006. Carmanah had hit an
inflection point though; when revenue flattened out at approximately $60
million in fiscal years 2007 and 2008, it became clear that changes were
needed to to stem the tide of losses it was experiencing.
In June, 2008 The Company began a restructuring under CEO Ted Lattimore,
who had been appointed in October of the previous year. Lattimore trimmed
the company’s workforce and cut back its product line to focus on its key
revenue generators. At the time, he explained that Carmanah needed some
short term pain for longer term gain: “…our metrics will improve as we
move forward” he said, “…the strategic lighting business (will become)
a bigger portion of the future revenue mix..”
Results for Carmanah’s first quarter of 2009 are just in and and they
are, at first blush, disappointing. The Company’s revenue of $10.4 million
was down from $15.1 million for the same period in 2008. A look closer,
though shows that this was really a transition quarter in which Carmanah
was exiting several of its non-core businesses. Furthermore, The Company
instantly improved its gross margins with these changes; to 36.1%, up from
33.6% in 2008. Its cash flow from operations improved too, $1.3 million,
up from $0.1 million in 2008. It’s Cash balance? That was up, too, to $9.2
million March 31, 2009, from $7.9 million in 2008, while continuing to be
debt free. It was Carmanah’s fifth straight quarter of positive Adjusted
EBITDA and cash flow results.
Looking at its stock, Carmanah Technologies sizzle days appear to be over.
On June 2, 2009 The Company closed a $600,000 deal with the US Coast
Guard, but the stock closed that day at just .91 cents. The hot money in
greentech has clearly gone elsewhere and the inevitable, sometimes less than sexy
task of building an actual business is now front and center. In a recent
interview with The Globe and Mail, Lattimore pointed out that the “green”
label has limited leverage in the business world, adding that “most
companies will not buy a product simply for its green qualities if it
doesn’t make economic sense.”
But back to Carmanah’s stock: sure, Carmanah has reached a newer more
“mature” stage in its life cycle, but the numbers are suggesting rigor
mortis has set in, which is far from the truth. In our recent “Quant
Snapshot” Carmanah was trading at a price to sales multiple of almost one
half of one times sales (0.55) with 24% of its market cap in cash and no
debt. What’s more, The Company still boasts a healthy three year growth
rate of nearly 20% (19.5).
Carmanah Technologies is retooling and rebuilding and, in a sense, reassessing its prospects. One could be excused for believing that the intense focus on the bottom line means The Company is through carving out huge swathes of market share for itself and has entered a permanent condition of lower growth. But having barely scratched the surface of the market for solar powered LED lighting, with a new CEO who has an impressive “company builder” track record, and with an increasingly strong balance sheet giving it the ability to be aggressive, this moment in Carmanah’s history feels more like a pause.
Carmanah Technologies is in the business of solar powered LED lighting, but for investors it may important to keep in mind that the wind is still very much at their back.