Cliff Note #96 First Look: Recurring Revenue Has Inflected This Rare Small Cap Turnaround With $4 Billion In Revenue To Growth Mode
Themes: GARP - Recurring Revenue - Several Years Of Visibility - Dividend
While we are still buttoning up Cliff Note #95, for which we published an initial elevator pitch on July 12, 2024: “Specialized AI Player Where Stock Has Finally Pulled Back To Attractive Price Levels,” another stock popped up on my radar… One not nearly as exciting as the AI play that belongs to Cliff Note #95.
If you know me, I just adore turnarounds. However, I did not really explore true turnarounds and special situations until I was a good 20 years into my investing journey.
One of the most memorable turnarounds that worked out for me was BXC 0.00%↑ (Bluelinx Holdings). I first bought and wrote about the stock in 2016 (on Geoinvesting) when the stock was trading around $8.00.
As of Tuesday’s close of $120.88, it’s up 1,411% since then and just $10.00 off it’s all time of $130.00 reached in March of this year.
BXC is a top 5 lumber products distributor with over $3 billion in revenue. When I found the stock, the market cap was around $72 million. In 2016, the company was thought to be on the brink of bankruptcy, still licking its wounds from the collapse of the housing market in 2008. However, the company owned a good deal of real estate that it was trying to sell to lessen its debt load/interest expense.
With some quick math it was easy to see how wildly profitable BXC would look, vs. the losses it was reporting, if it could indeed sell the real estate assets it had communicated to the market (which it eventually did).
The company was also restructuring other parts of the business and when the company announced an acquisition on March 12, 2018, the stock rose approximately 100% in one day to over $30.00.
Don’t cheer me yet.. I sold most of my shares between $20 and $40.
Looking back, I certainly exposed myself to some risk by getting involved in BXC at the early stages of its turnaround, meaning that the company would continue to lose money until it sold enough real estate to pay off its debt, and reduce interest expense burden.
Since BXC, I have been looking for another smaller cap turnaround of a company with substantial revenue and market presence. And I think found one, with one big difference… this time around, after two years of losses, the target company I’m looking at is about to inflect to consistent profitability, like right now.
Here are some of the talking points, thus far, that have me super motivated to set up a live fireside chat with management for our community… ASAP!
Over $4 billion in revenue
Will turn vey profitable in 2025, easily surpassing the range of EPS experienced between 2014 to 2022 (basically experienced no growth), by 4x.
P/E of 12x on 2025 EPS, reversing 2024 loss
EPS Is expected to grow another 50% in 2026
Pays a respectable dividend of ~5%. (Creates bottom in the stock).
Now, has several years of sales growth visibility, yet analysts are only forecasting revenue to occur in 2025. (Will lead to earnings surprises, forcing analysts to increase estimates).
Management expects the company to experience improved profitability and margin predictability, as they are in the final innings of honoring fixed price legacy projects that the company is losing money on.
Working closer with its customers to ensure better performance of projects (Will help reduce overruns on cost of projects as work is being done).
Just put a legal issue behind them through a settlement agreement (Should help valuation re-rate higher).
Nimbly entering some growth markets.
New long-term higher margin contracts (Creating recurring revenue stream for years to come).
Backlog appears not to include meaningful projects that will commence in 2025, including some recurring revenue (Ensures that reported earnings will exceed analyst estimates).
Selling non-performing assets.
Strong Earnings Power Ranking, meaning the company should experience a long runway of earnings per share growth on a quarterly basis (Investors love predictability).
Another thing I like about this set-up is that the company may not screen well because revenue growth is currently negative, surely keeping some investors from looking at the company. While we are waiting for revenue to grow, earnings and cashflow will dictate where this stock ends up… our bet, it’s much higher.
More research on this company coming soon.
The symbol and description of the company is: