Two of my "Long Shot" ideas I have been riding for some time reported solid results recently, making them worth a quick update. Both names were under some pressure as investors started to lose a bit of patience, but the quarterly reports reaffirmed the long-term thesis for each.
The first is Energy Recovery (ERII), which I proposed 18 months ago in "An Energy Infused Turnaround". ERII makes specialized turbines that recover heat from pressurized industrial fluids. Their principal market has been desalinization plants, which expend a lot of energy to force water through membranes in order to remove the salt. The energy recovered via ERII devices can be substantial. Since my recommendation in September 2012, the stock is up 106%.
After a strong run into the fall of 2013, the stock retreated meaningfully after the company "missed" third quarter numbers. The company sells into large projects with uncertain timing, and is subject to a high level of variability in results. Management attributed third quarter results, in which revenue was half of expectations, to delays in shipments that would be fulfilled in the fourth quarter.
The company delivered last week, reporting blow-out numbers. Revenue was $23 million, ahead of the $21 consensus, and far higher than third quarter revenue of $5 million! Earnings per share of $0.13 were well ahead of the street's $0.08.
The company remains upbeat about moving beyond desalinization into oil and gas processing plants, which represent a far larger opportunity than desalination. Although they could not provide details, management noted that they had received first orders from oil and gas customers. They expect meaningful revenue in 2015. ERII is in field trials with Saudi Aramco, Sinopec, and Chesapeake, so we can presume those prospects are most likely to be starting to order.
The second name I like is Pingtan Marine (PME), which I highlighted on November 1 in "Fishing for Profits". The story here is simple: this is an undiscovered and unloved China play that has a profitable business with visibility to long-term growth. Its history was complicated, because it came public via a Deutsche Bank-sponsored SPAC. It also had two marine-related businesses that needed to be rationalized.
The chairman bought the marine dredging business from PME, in the process cleaning up the balance sheet and creating a pure play fishing company. Since my recommendation, the stock is up nearly 24%.
With PME, nothing has changed in the thesis or execution; the market was simply getting a bit impatient waiting for results. The stock had been in steady decline on "no news", but the fourth quarter earnings reported Tuesday perked things up. Revenue of $61 million showed spectacular growth compared to $28.4 million in the fourth quarter of 2012. With gross margin of almost 40% and selling, general and administrative expenses only 3% of sales, PME reported earnings per share of $0.36 -- far ahead of last year's $0.14.
They also reaffirmed guidance for $80 to $85 million in net income in 2014. The guidance is very visible, since you can count the ships in the fleet (126), and you know their average catch and the band of pricing for their catch. With a market cap of $279 million, PME is trading at only 3x the forward guidance.
I believe the stock will not be fairly valued until it trades somewhere between 9x and 14x earnings. As a result, my price target assumes the stock could still be a double or triple from here. It remains one of my "Best Ideas".