July 17, 2012 (Investorideas.com newswire) The nuclear industry is a bit clubby. The expertise required to handle radioactive materials is hard to come by, placing only the most stalwart in the nuclear society. It is in that exclusive circle where investors can find Perma-Fix Environmental Services, Inc. (PESI: Nasdaq) , a provider of hazardous waste treatment and disposal services. Indeed, Perma-Fix is smart about all manner of toxic materials left over from power generation, industrial and commercial processes. Besides waste clean-up, Perma-Fix consults with industry in matters of safety, standards and efficiency for nuclear and other hazardous materials. Perma-Fix's expertise serves as a wide and deep moat around its business.
A Sharp Turn To Product Innovation and New Markets
Historically Perma-Fix has waited for customers to generate hazardous waste and then call for treatment services. Now Perma-Fix is using its expertise to innovate new products and proactively reach out to customers - the moat gets wider.
Perma-Fix's engineers have come up with a proprietary technology for isotope separation including technetium. Called Tc-99m for short, it is widely used in medical tests. The Company expects to achieve commercial scale with its new process for Tc-99m within the next two years.
The timing could not be better. Tc-99m requires another isotope, molybdenum 99, which is now made in nuclear reactors using weapons-grade uranium. North America's supply comes from a 54-year-old reactor in Chalk River, Ontario. Its license expires in 2016 and efforts to develop alternative production capacity have fizzled. Smart about resins for treating contaminants at polluted industrial sites, Perma-Fix has come up with a resin that will hold an atom of molybdenum but release it when it decomposes into technetium. The Perma-Fix process is easily deployed using standard research and commercial reactors.
The medical community is concerned about shortages when Chalk River is no longer operational. Tc-99m is the most widely used medical isotope in the world, representing a $100 million market in the U.S. alone. It is used in thousands of heart, kidney and breast procedures a year because it throws off an easy-to-detect gamma ray that breaks down very quickly and gives only a small dose of radiation to the patient.
Perma-Fix expects to capture a share of the Tc-99m market, a feat that would add a significant new revenue stream to the Company's top-line in the years ahead. Management plans to engage a distribution partner with experience and contacts in the medical supply chain.
Perma-Fix's results are getting a boost this year from the $17.9 million acquisition of Safety & Ecology Corporation Ltd. Completed in October 2011, the deal added $18.6 million to total sales in the March 2012 quarter, the first full quarter period Safety & Ecology had been a part of the mix. Safety & Ecology markets a menu of products and services: environmental engineering and consulting, health physics, contaminated land remediation services, and water and wastewater management. Safety & Ecology claims a respectable customer base, including the U.S. Departments of Defense and Energy.
The 2011 acquisition of Safety & Ecology has helped Perma-Fix with a critical issue - customer concentration. Perma-Fix is a subcontractor to CH Plateau Remediation Company , which is the prime contractor managing clean up of the Hanford Site in Washington State, the U.S. nuclear production facility that was the home of the Manhattan Project. CHPRC is Perma-Fix's largest customer, contributing 49.9% of total sales in the year 2011. Even though the CHPRC relationship is solidified with a long-term contract that can be renewed, it is a big plus that with Safety & Ecology in the picture CHPRC's contribution to the mix is diluted.
Deep Value in a Growing Enterprise
Overall the Safety & Ecology deal beefed up service revenue to approximately 66% of the sales mix from 44% previously. Unfortunately, thus far the acquisition has also contributed an operating loss to the mix. There are apparently some cost savings potential through the elimination of duplicative administrative functions and other excesses. More importantly, management sees doors opening to new direct relationships with U.S. government agencies and a means to expand to new foreign markets. Japan's recent nuclear energy troubles make it a prime market for Perma-Fix's expanded monitoring, measuring and engineering services.
The drag on operating profit presented by Safety & Ecology might also be holding back valuation of PESI shares. The stock has traded off nearly 40% from its 52-week high price, with most of the decline since Perma-Fix reported a net loss in the first quarter 2012 results. Management is confident in a profit for the full year 2012 and believes the debt it took on to finance the 2011 acquisition is well justified by future growth potential.
Understanding Perma-Fix is not as difficult as it might seem with its laundry list of service offerings. Investors could be rewarded by taking the time to look beyond the bottom line and into Perma-Fix's market position that appears to hold both short-term and long-term opportunities. In my view, trading at 5.0 times trailing earnings, the stock appears oversold.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
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