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Stock Talk Podcast Episode 44 Show Notes
Date: Jul 6, 2018

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KeyStone’s Your Stock Our Take – American Green, Inc. (ERBB:OTC, Star: is TeraGo Inc. (TGO:TSX), Dog: Calfrac Well Services Ltd. (CFW:TSX).

 

This week in our Your Stock, Our Take segment we look American Green, Inc. (ERBB:OTC), a US Cannabis related stock which we reviewed in this segment last August. At that time we saw it as uninvestable – the stock is down roughly 40% since that time and we were asked by a listening to take another look at it. Is it a BUY, SELL, or HOLD – we’ll tell you. Our Star of the week is TeraGo Inc. (TGO:TSX), which provides businesses across Canada with data and voice communications services, data center colocation and hosting services, as well as cloud infrastructure as a service computing and storage solutions. The stock jumped 25% in the past couple weeks after it appears to be poised to unlock value in a significant wireless spectrum asset. Finally, our Dog of the week is Calfrac Well Services Ltd. (CFW:TSX) provides specialized oilfield services, including hydraulic fracturing, coiled tubing, cementing and other well completion services to the oil and natural gas industries in Canada, USA, Russia, Mexico & Argentina. The stock has lost 35% of its value over the past couple months on the heels of a potential shareholder lawsuit. The debt heavy business appears to be turning around operations in a stronger energy pricing environment. Is it a Dog or an opportunity?

 

If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook.

 

Now, let’s dig into the show.

 

I welcome back my co-host, KeyStone’s VP and Senior Analyst, Aaron Dunn.  

 

 

 

 

Your Stock, Our Take

 

 

Wayne in Toronto – Asked us to revisit and update a stock we gave a thumbsdown to in this segment last year – American Green, Inc. (ERBB:OTC – pink sheets)

 

 

Current Price: $0.1 of a cent.

 

Market Cap: $22.595M

 

  • Today, we are going to revisit a stock we talked about 10 months ago.
  • The company is American Green and trades under the symbol ERBB on the OTC Pink sheets.
  • The company was a Your Stock Our Take topic last August and it’s been very interesting to see the reactions we got from a couple people.
  • Looking at the stock financially back then, we were unimpressed with the numbers. They had very little revenue, significant debt, were burning through cash and had a crazy share structure….I believe they had about 13 billion shares outstanding at that time…today that number has increased to 22 billion as disclosed in their last quarterly report.
  • The share structure is crazy…just to put that into perspective…22 billion shares…that is significantly more shares outstanding than Apple, Amazon, Microsoft, Google and Facebook have combined.
  • Anyway, a couple of people who obviously own shares in the company or are associated with it in some other way, sent us very angry comments, because we didn’t like the stock.
  • First of all, we always like to see comments, so if you agree or disagree with our views, either way we want to see you posting comments on our linkedin, youtube, facebook and twitter feeds.
  • But I’m also going to say this…we are fundamental investors which means that we are evaluating the financial success of individual businesses.
  • It is the continuation of financial success, which translates into growing revenues and profit that is going to drive the share price higher into the future.
  • If you are someone who doesn’t care to look under the hood at a company’s financial performance, or you just don’t know how, then our opinions are going to differ from yours.
  • If you are going to get angry when fundamental investors, like us, don’t like a company you own because it produces almost no revenue and continuously burns through cash then first of all you’re just being silly and secondly, deep down you probably know that what we are saying is right. 
  • But anyway…moving on to our analysis of American Green…the stock is trading today at about 0.1 of a cent. That’s a fraction of a penny. At the time of our original assessment it was trading at 0.17 cents.
  • Looking at the financial statements, not much has changed except for a huge increase in the share count.
  • At the end of the last quarter, the company had about $250,000 in cash and $14 million in debt.
  • The company reported revenue of $138,000 for the first 9 months of the year and net loss of $1.8 million.
  • At this point, as a fundamental investor, there is no reason to go any further into the research.
  • Virtually no revenue generation, losing lots of money and a highly leveraged balance sheet…any company with that profile is highly, highly speculative and not a real investment.
  • Now I know that this company has some growth plans.
  • They have reported buying a town in California called Nipton and want to turn it into a cannabis destination.
  • But I going to say something that some people are going to have difficulty understanding.
  • IT DOESN’T MATTER.
  • It doesn’t matter what a company is telling you. What matters is what they are actually doing.
  • At KeyStone, we’ve been doing this for 20 years. We’ve heard thousands of stories, we’ve heard thousands of promises.  
  • Talking is very easy; building a sustainable and cash flow positive business is not.
  • So until we see some actual financial evidence of success, like maybe some meaningful revenue or a penny of profit…until we see that we could care less about what management is promising.
  • My opinion of American Green is unchanged from a year ago.
  • I see no investment value and I wouldn’t touch it.
  • I invite the company to prove me wrong, and I wouldn’t be upset if they did, but that chances of that happening are very, very, very miniscule.

 

 

 

Weekly Star

 

TeraGo Inc. (TGO:TSX)

 

Current Price: $7.20

Market Cap: $113.97 million

 

This is a 25% increase in the last 3 weeks.

 

What Does it Do?

 

TeraGo Inc provides businesses across Canada with data and voice communications services, data center colocation and hosting services, as well as cloud infrastructure as a service computing and storage solutions.

 

 

 

 

What is Driving the Stock?

 

TeraGo’s bought deal was for 1.1 million common shares at $5.30 per share for net proceeds of $5.3 million, with a fully exercised over-allotment option of 15%. The proceeds will be used to fund the purchase of 24 GHz spectrum, which TGO had been using under lease from Mobilexchange Spectrum Inc. (MSI).

 

TGO’s lease agreement had included an option provision, which allowed the company to purchase the spectrum before expiration (August 1, 2018). The lease agreement had been struck in 2015, and, it appears allows TeraGo to purchase the spectrum on favourable terms. TeraGO will be buying spectrum covering 3.1 billion MHz-PoP (Megahertz Pop) for an effective price of $0.19/MHz-PoP ($5.7 million in aggregate). Megahertz pop is a standard telecommunications industry measurement referring to one megahertz of bandwidth passing one person in the coverage area in a spectrum license.

 

This sounds like a bunch of gibberish to those unfamiliar with communication spectrums – or essentially, the vast majority of the population. But we can use a comparable to see if TeraGo is getting a good deal. For a comparable, a company known as Straight Path bought at an implied value of $1.80/MHz-PoP. The spectrum TGO is purchasing is not identical to what was held by Straight Path, but the spectrum is close enough to represent a decent proxy, in our view.  Comparing the two, it appears that TeraGo’s option to buy has it purchasing the spectrum at $0.105 on the dollar – or a very good price. Probably the reason the share price has surged of late.

 

Our Take:

 

The option purchase certainly adds significantly to the intrinsic value of the business. The share price has adjusted to this to a large degree – which is good for existing shareholders.  What concerns us with TeraGO is that the underlying business is just not growing at a significant rate. In fact, in 2013 the company posted $51 million in revenues and this past year the company posted $55 million – that is total revenue growth of under 8% in 4 years. EBITDA and cash flow has gone down over that period. In Q1 2018, the total revenue decreased 3.8% and adjusted earnings was down 16% - the company posted a loss overall.

 

The gains over the past month make it our STAR of the week! But we think with the stock trading at and EV/EBITDA multiple of 10, it is fully valued near-term and would have to see more growth in the core business for us to become at all interesting in investing long-term!

 

 

 

Dog of the Week

 

Calfrac Well Services Ltd. (CFW:TSX)

 

Stock has declined 35% over the last two months and 19% decline over the last month, and 13% decline over the last week and a half.

 

What Does It Do?

 

Calfrac Well Services Ltd provides specialized oilfield services, including hydraulic fracturing, coiled tubing, cementing and other well completion services to the oil and natural gas industries in Canada, USA, Russia, Mexico & Argentina.

 

What Is Driving the Stock? – Lower

 

Relevant News

  • On May 9th, Calfrac announced US$650 million offering of senior notes due 2026 in order to repay up to all its outstanding 7.5% senior notes due 2020, with the balance to partially fund repayment the remaining C$196.5 million principal of Calfrac’s second lien term loan
  • Also on May 9th, the Wilks Brothers (who own 19.9% of Calfrac) issued a press release urging Calfrac to initiate a strategic alternatives process in order to improve results
  • On May 15th, Calfrac announced that the senior notes offering due 2026 would be at 8.5%
  • On May 30th, Calfrac launched a lawsuit against the Wilks Brothers for a breach of confidentiality agreement, and intent to cause harm to Calfrac at shareholders’ expense. Calfrac’s statements were:
    • In May 2016, Wilks Brothers stablished Profrac Services, LLC, a competitor to Calfrac.
    • In September 2017, public filings by Wilks Brothers disclosed that it might take an activist role in relation to Calfrac.
    • In response to this, Calfrac sought to constructively engage with Wilks Brothers, and to facilitate this, Calfrac entered into a Confidentiality Agreement with Wilks Brothers in February 2018
    • Wilks Brothers knew as of February 23 of Calfrac’s intention to pursue financing, with specifics of plan and timing
    • Wilks Brothers at no time expressed any dissatisfaction with said plans until an inquiry from Calfrac on May 7th, two days before its May 9th press release regarding the financing, and 75 days after they had been made aware under confidentiality
    • Calfrac claims that Wilks Brothers referred to discussions that were under confidentiality, failed to mention their own interest in the competitor company Profrac, and timed their press release to negatively impact the financing

 

Wow! Infighting with major shareholders which seem to have an interest in a competitor is not a positive near-term. Activist shareholders can unlock value, but the current situation at Calfrac seems to be a bit of a mess.

 

From a business perspective – in an improving energy pricing environment as one might expect – Calfrac is performing well.

 

Q3 ended March 2018

  • Revenue was $582.8 million compared to $268.8 million, up 117%
  • Net income was $3.2 million compared to a loss of $19.5 million
    • On a diluted per-share basis, $0.02 compared to a loss of $0.14
  • Adjusted EBITDA of $73.0 million compared to $21.6 million, up 238%
    • On a diluted per-share basis, $0.51 compared to $0.16, up 219%

 

TTM (12 months ended March 2018)

  • Revenue was $1.8417 billion
  • Net Income was $28.6 million
    • On a diluted per-share basis, $0.20
  • Adjusted EBITDA of $243.2 million
    • On a diluted per-share basis, $1.73

 

 

Debt is high.

 

Balance Sheet as of March 31st

  • Current Ratio: 2.12
  • PP&E make up 60% of Total Assets
  • D/E: 1.86
  • High debt

 

 

Valuation

  • P/E: 26.75x
  • EV/EBITDA: 7.21x

 

 

Trading with an EV/EBITDA multiple of 7.21 it is likely priced at a discount to peers. But debt levels are high and the current infighting increases risk. If the energy price environment stays supportive the stock could again rebound, but the declines over the past month and ongoing shareholder drama make the company are Dog of the Week. 

 

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Market Buzz Edition
Jul 6, 2018