Whoa. On first glance this actually looks like a very interesting idea. Will look further at this. Thanks for the writeup.
Quick couple questions.
1) Doesn't selling to a leasing company cut out a potentially more profitable avenue for the business? Is this relationship by choice? IE have they debated leasing or is this just not as attractive/economical an avenue to pursue?
2) The recycled plastic space is from my experience, 75% salesmanship and 25% product quality. I take it there is definitely key man risk here, but outside of this, do these guys have a big sales team or is this mainly a company built on industry relationships?
3) Given the price discrepancy with wood vs plastic, how do they convince companies to make the switch? I would think if the payback period is about 5 years, that is a tough sell to bigger companies running on typically tight budgets.
Otherwise it does seem, especially with the 10 year Miller relationship, that once companies switch over, business is sticky. I'm just curious how these guys get better penetration into the market.
1) They actually used to lease a lot of pallets IIRC. They still do offer leasing as an option according to their website, but they've de-emphasized it. So they definitely have had that discussion and decided to go more the sales route. I'm not sure exactly why but if I had to guess it would be to improve near-term cash flow. Also, once customers are convinced of the value of plastic pallets, they tend to buy rather than lease since it cuts out the lessor (Walmart started buying Greystone pallets after first leasing them from iGPS).
2) I think that for Greystone does genuinely offer a unique value proposition and they're not as based on selling through relationships. From my understanding, few plastic pallet manufacturers are able to match Greystone on their price/quality combo ($45 pallet vs. $100+) because recycled HDPE for an application like pallets is hard to get right. When I was researching the company, I learned that iGPS actually tested pallets from every major manufacturer and then went with Greystone. There is still definitely still some key man risk, however, as CEO Kruger and upper management seem to handle most of the sales directly (keeps SG&A low at 5% of sales). Their website says to call the CEO to place an order.
3) Leasing is the primary entry option. After a while, customers start to buy directly.
Devils advocate:
Insiders control both the equity and a significant amount of debt. So it seems that they can take this private via a recap and screw over minority shareholders any time they want. It’s not purely hypothetical, since they have tried before.
Too much management ownership with microcaps isn’t necessarily a good thing.
Another take-private attempt is possible. I wouldn't say they tried to screw over minority shareholders last time -- they were trying to buy odd lots at a premium to reduce the # of holders of record. My feeling is that if they wanted to do something like that, they would have done it already. But there is no way to know for sure. How likely do you think they are to try to pull something like this?
Hey all:
I took a look at this last year and took a pass on it.
I will admit it is interesting, AND is cheap (at 1st glance), AND has interesting potential.
HOWEVER, the thing that scared me off is that they are double levered. They have/had a BUNCH of corporate debt, but they also were leasing some of the critical capital equipment?
I also seem to recall that they were leasing their warehouse/production facilities.
There were also some related party transactions.
So there has to be TON of profits to really pay down debt and build up equity.
A lot of things had to go right.
None of the related party transactions look egregious, but then again I'm no expert on what plastic pellets should cost vs. what they're buying for. CEO's high ownership stake and repeated purchases of common stock give me some confidence that they're aligned here. I discussed the leverage in the write-up -- the interest coverage is not bad and should improve a lot with margins. They run the business pretty lean so they should be able to withstand an economic shock even with this level of debt. IMO debt financing was the right decision vs. dilutive equity financing especially given the low cost of debt (management personally guarantees and provides collateral for a lot of it).
