Quick Updates on PPSI and WOW

Both ideas are attractive at the current share price levels.

I am back from a brief holiday, and given several recent developments in a couple of portfolio ideas, I want to quickly share my thoughts. The updates on both portfolio names, PPSI and WOW, are mostly positive and suggest that the investment theses remain intact.

Pioneer Power Solutions (PPSI) — Initial post here, last update here

Let’s start with PPSI.

For a quick refresher, PPSI is a manufacturer of electrical power management products with two key product lines: the mature, cash-generative e-Bloc (switchgear systems) and the still-unprofitable e-Boost (portable fast-charging units for EVs). The PPSI investment thesis is pretty straightforward: the company presents a cheap way to bet on the anticipated growth of EV infrastructure. PPSI is currently trading at 15x P/E, an undemanding multiple given company’s rapid ~50% topline growth in 2022 and 2023, with a further 30% growth guided for 2024.

PPSI is making progress with its historical financial restatements. Last week, the company filed its Q1 2024 report. Along with the announcement, PPSI stated that the last remaining overdue financial report, for Q2 2024, is expected to be filed "in the coming weeks." This will finally bring the company current on its financials after a series of historical restatements starting with Q1 2022 due to revenue and cost recognition errors.

As for the reported results, the Q1 report was fairly bare-bones, with no conference call, making it difficult to provide extensive commentary. Performance during the quarter was mediocre, with revenues flat year-over-year at $9m, as a slight uptick in e-Boost sales was offset by a minor decline in e-Bloc revenues. However, this was not unexpected for several reasons:

• Firstly, this aligns broadly with the previously indicated order timing. While PPSI had announced a number of large orders throughout 2023 (you can find them here), the company had explicitly noted that only one of them was scheduled for delivery “beginning in” Q1 2024.

• During the most recent conference call in April, PPSI’s management indicated the company has been facing production capacity constraints in the e-Bloc business. To accommodate the growing order book, the company has been outsourcing lower value-added manufacturing activities while focusing on higher value-added engineering and design (see the quote below). This transition has likely temporarily delayed order fulfillment.

Yes. I mean we -- we're facing a little bit of a crunch on the e-BLOC side of the business. We've been addressing it. I guess, since I don't know, in the middle of last year, started the program to really move out some of the less value-added operations that we do. We're probably too vertically integrated in our facility near Los Angeles. And that's what we're in the middle of. We're trying to do it without spending. I mean anybody could go and say, okay, I need a new -- my order book is growing, blah, blah, I need another facility, I need more equipment. I need this. I need that. So we're trying to be more judicious. We're trying to concentrate on what we're getting paid for, which is unique engineering and unique design and complicated wiring being able to do complicated wiring of controls and components and things like that and not really -- we're not really compensated for making a 90-inch door. That's how we're addressing it. We don't think that we're going to have a capacity issue. Although we're shifting this year. So it's a little bit of a consolidation for us, a little bit -- a little haywire, but we don't expect to have any -- we're not turning down anything because of capacity this year or we don't anticipate any issues next year either.

What can we expect from the Q2 report? Well, management has previously outlined that several large new orders are expected to be delivered starting in Q2 (e.g., the $10m+ order announced in December 2023), so we could see a notable improvement in topline and profitability. Nonetheless, given the potential impact of production capacity constraints and/or the ongoing transition to outsourcing, I’d conservatively pencil in only a marginally better quarter compared to Q1, with growth potentially still lagging behind recent years.

More importantly, however, after weaker Q1 and possibly Q2 performance, PPSI seems well-positioned for substantial revenue and earnings growth in H2 2024 and 2025. In the press release, PPSI’s management noted expectations that H2 2024 revenues would be "significantly higher" than those in H1. It’s not hard to see how this can materialize. As covered in my previous posts (here, here, and here), PPSI announced multiple significant new customer orders totaling over $20m in late/post-Q2. This, coupled with the completion of the outsourcing transition, is likely to drive significant improvement in revenues and profitability in H2’24 and 2025. PPSI’s customer order backlog stood at $46m as of March 2024 (compared to $41m in TTM and $52m-$54m in 2024E revenues), with expected fulfillment over the next 12 months. Note that this does not include over $20m in new customer orders announced during and after Q2. So, while PPSI reiterated its 2024 guidance in the press release, given the large backlog, there’s a decent chance the revenue outlook may prove overly conservative.

Aside from the existing backlog, there is a strong likelihood of further significant orders for PPSI’s key products. Given the growing demand for electricity, most notably driven by massive ongoing investments in data centers (e.g., here), demand for PPSI’s e-Bloc is expected to increase, as the product allows customers to integrate and manage multiple power sources, leading to lower electricity costs. As for e-Boost, despite the slowdown in EV adoption in the U.S., EVs remain a fast-growing market (see here), so it’s safe to say that demand for mobile charging stations will continue to grow. I’d refer you to this tweet from everyonehatespoetry, which highlights the continuing rapid growth in the number of fast-charger ports in the U.S. The point I’m trying to make here is that we might be in the early stages of a multi-year growth story.

PPSI’s share price has jumped by 11% since the latest announcement and the stock currently trades at a 15x forward P/E. Nonetheless, given the ample growth runway for company’s key product lines, I think this valuation is modest.

I eagerly await the filing of Q2 financials and the subsequent conference call, where I expect management to provide more insights into company’s performance. For now, I continue to like the setup and have maintained my position.

WideOpenWest (WOW) — Initial post here

Shifting gears to another portfolio position: WOW.

A quick recap: WOW is a cable and fiber overbuilder that recently received a non-binding takeover proposal at $4.80/share from a consortium consisting of its major shareholder, Crestview, and the digital infrastructure investment firm DigitalBridge. Several equity holders, including the largest minority shareholder, LB Partners (which owns 8%), have opposed the acquisition, calling it lowballed and highly opportunistic. Various reference points, including industry transactions and peer valuations, suggest significant potential for a higher offer.

For a full overview of the investment setup, I’d refer you to the Special Situation Investments blog, where I shared my pitch on WOW last week. The write-up was posted right after the stock sold off sharply without any material news or updates, which presented a nice entry opportunity. The share price has since swiftly returned to pre-sell-off levels. In the pitch, I also covered the most recent precedent transaction: telecom giant Verizon’s acquisition of DSL/fiber broadband provider Frontier Communications (FYBR).

https://www.specialsituationinvestments.com/2024/09/guest-pitch-wideopenwest-wow/

Let me elaborate on this precedent transaction since I believe it is another positive valuation reference point for WOW’s pending takeover.

The offer values FYBR at 9x TTM and 8.8x 2024E EBITDA (compared to WOW’s current valuation of 5.2x TTM EBITDA). Now, I must note upfront that the comparison between FYBR and WOW is not entirely straightforward, given that FYBR has a mix of legacy DSL and fiber assets, with a higher proportion of revenue from fiber. Nonetheless, I believe the transaction directionally highlights the value of WOW’s fiber assets. Valuing FYBR’s copper assets at 5x EBITDA suggests that the company’s fiber assets are worth around 11x EBITDA, or about $2,200 per home passed. This is substantially below the valuations of T-Mobile’s recent acquisitions of fiber broadband providers Metronet (around $5,000 per passing, acquired in tandem with KKR) and Lumos (around $3,500 per passing, in tandem with EQT). As another reference point, recent securitizations of FYBR’s fiber assets were completed at significantly higher valuations, including $3,380 per passing in July 2023. So, it seems my fiber asset value estimates are likely to be directionally correct, if not overly conservative.

What does this mean for WOW? While WOW has not disclosed the number of fiber passings from its ongoing expansion, management’s greenfield buildout cost-per-passing estimate implies that its fiber network will cover over 160,000 homes (as pointed out in LB Partners’ letter). Conservatively valuing these at $2,000 per passing, a discount to the estimated valuation of FYBR’s fiber assets, would suggest an incremental value of $320m, or approximately $3.80/share, for WOW’s fiber assets. So, if the buyer consortium does not increase the offer for the existing business but simply pays up for the value of WOW’s fiber assets, we could potentially be looking at an improved offer 50%+ above the current stock price levels.

Despite this positive valuation reference point for WOW’s pending takeover, the stock price has barely reacted and remains in line with write-up levels. With ample room for a higher offer, I still expect to see a price bump from the buyer consortium in the coming weeks or months. Given the attractive setup dynamics, I continue to believe WOW is one of the most intriguing special situations in the market, and I have maintained my position.