A Better Poker Hand

We can't know everything about every company.  There is always something that another smart investor will know about a company that we just don't know.  What we do know, though, is our thesis and their actions.  

In April, 2011, a group of Canadian investors lead by Michael Serruya and Andy DeFrancesco made a significant investment in American Apparel, providing the rescue financing that the company desperately needed.  At that time, we made an investment in the American Apparel brand. A brand we believe in. We increased our position when the stock went below $1 and when the actual operational results confirmed the benchmark of our original thesis.

We did this with incomplete information, but Serruya and DeFrancesco's actions served as a beacon to make ourselves comfortable with this uncertainty.  

We see a similar situation right now with $PLUG.  Back in early May, Air Liquide made a strategic investment in Plug Power ($PLUG).  The capital provided by Air Liquide, a large public company with over $5bn in current assets, allowed $PLUG to continue operating.   

At that time, our analysis pointed to tremendous strategic value in the $PLUG asset. We built a substantial position.  Although we could not know everything there is to know about $PLUG, we know that Air Liquide has a much better seat at the table and a much better poker hand than we do.

We don't know what they know but we know the decision they made based on what they know. We can't see inside the black box, but we have insight based on what came out of the box.  

Plug Power needs additional financing to get to cash-flow positive.  The stock is under pressure, and we think this is the reason.  However we are cautiously optimistic the money will come in based on our strategic assessment of the $PLUG asset. 

What do you think? Will they get the money they need?

Disclaimer: We are long $PLUG and $APP.  Both stocks are very risky and are not suitable for the majority of investors. There is a high likelihood of losing your entire investment in both situation. 

Written by Jennifer Galperin.  Follow me on Twitter and StockTwits.

With the collaboration of Michael Bigger. Follow me on Twitter and StockTwits. 

American Apparel Shareholders Meeting Notes

I attended the American Apparel shareholders meeting yesterday in New York City. The formal meeting was pretty uneventful except that observing the crowd made me realize the positive energy in the room. 

When Glenn Weinman, American Apparel's General Counsel, called for Q&A, I was the only one to stand up. I had only one question in my back pocket...actually, more an observation than a question.

I commended the company for its recent operational and financial improvements. I stated that I was a big fan of the company and that I was one of the largest shareholders of the company in the USA.

But I thought I could add more value to the company by sharing with the Board one of the issues I see.

My issue with the company relates to the recent compensation of management given the stock performance since the company came public. More specifically, I was disappointed that the Board extended the maturity of the $3.25, $4.25, and $5.25 strike options by one year. The objective for the grant of the $3.25 options expiring in early 2012 was not met and the attitude should be "There is no Game 8 in the Stanley Cup Final". Just deal with it. By extending the maturity of these options, the Board is basically moving the hockey net over the puck and shouting GOAL! It should not work that way.

I told the Board that it is great how the company focuses on treating all its stakeholders very well but now it's time to give the shareholders some loving. From the Board Members body language it felt that they heard me loud and clear. If they haven't I am happy to repeat the message in a more formal manner.

Dov Charney, CEO, came to me at the end of the meeting to explain that for him it's not about the money. For him it is about retaining control of the company so that his big visions behind American Apparel (such as Made in the USA and the different social causes) are continued to be realized.  He believes that a different management would most likely change the course and discontinue the legacy of American Apparel. I totally agree with this point of view. But I think this objective could be realized without diluting the current shareholders so aggressively by letting Dov vote the proxies of current shareholders. It is up to Dov and the Board to sell this idea to all owners to stop dilution while keeping control.

I sensed from Dov that he is fully committed to giving loving to American Apparel shareholders. Let's see what happens. Show me the MONEY!

If not, I can always shout louder.  Moving the net is gloves off.

Written by Michael Bigger. Follow me on Twitter and StockTwits.  

How I Think About Plug Power NOLs

Plug Power ($PLUG) has 3/4 of a billion in net operating losses (NOLs) it has accumulated over the last 15 years. I am trying to find out the worth of these NOLs for a potential acquirer in a tax free transaction. I am assuming for this exercise that the capital structure is composed only of common equity. In addition, to keep the arithmetic simple, I assume the acquirer would pay $100 million in stock for the company. $PLUG trades at a fraction of this number and therefore this assumption is unrealistic.

The following method has been derived with the help of our accountant.

The amount of annual NOL the acquiring company gets to offset income with is calculated by a statutory formula since there will be more than a 50% change in ownership in the company being acquired. 

The value immediately before the acquisition of the loss company being acquired multiplied by the long term tax exempt bond rate (currently about 3.5%) = the amount of annual NOL deduction allowed by the acquiring company.  NOLs have an expiration date, generally 20 years.  So, the value of Plug Power corp. as well as the years in which its NOLs were generated are key factors in determining how much of the NOL will actually be used.  

For example, if the acquirer pays $100 million for 100% ownership in Plug Power today, the formula to determine the acquirer annual allowable NOL deduction is as follows: 

$100 million multiplied by the long term tax exempt bond rate of about 3.5%=$3,500,000 allowable annual NOL deduction.  (Plug Power’s total $750 Million NOL may never be fully absorbed depending on the years Plug Power’s NOLswere generated & the value of Plug Power immediately before the tax free exchange.) 

Plug Power has generated cumulative NOLs of $750Million over the last 15 years.  This means some of the older NOLs are going to expire shortly…the older NOLs should be absorbed first. 

The cumulative value of the allowable annual NOL deduction is about $70 million over a 20 year period for a $100 million investment. The net investment would be about $30 million when taking into account the allowable deduction.

I think going through this exercise is helpful to understand the value structure of $PLUG.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold about 3% of Plug Power. We intend to increase our position if the company's results confirm our thesis through time. 

Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. We have been wrong on many of our thesis before.

Written by Michael Bigger. Follow me on Twitter and StockTwits.  

The Business Case for Fuel Cells

Twitter user @jl4th shared with me this wonderful report about the Fuel Cells industry. It is a must read for anyone interested in our Plug Power investment thesis.

Fuel Cells Business Case 2012  (with permission from Jennifer Gangi)

Plug Power a Free Option?

We all know that Plug Power ($PLUG) is a highly distressed situation. What is little known though is that $PLUG at current level might be as closed to a free options as I have ever seen in my life. A free options on the adjacent possible of hydrogen that is now becoming reality.

A month ago, Air Liquide, an hydrogen supplier, invested in $PLUG at about $.25 via a convertible preferred. Air Liquide's motivation is quite simple after you read this article.

The conversion of just 10% of the worldwide fleet of forklift trucks would represent

a potential hydrogen market of €7 billion.

1. The Adjacent Possible Market

That is correct....a €7 billion market. At 20% conversion rate it is a €14 billion market right? So the hydrogen suppliers such as Linde (Germany) and Praxair (USA) have a big vested interest in seing $PLUG thrive.

Check this video out to understand why the technology resonates and focus on the name of the hydrogen supplier on the hydrogen tank.

2. The Free Option

It is pretty obvious to us that PLUG will get the capital infusion of $10 million that it needs to reach EBITDA breakeven (we have been wrong before on our assumptions). Air Liquide, Linde and Praxair have too much at stake to let $PLUG disappear. Remember the €7+ billion market? Remember the Linde H tank at the BMW facility in South Carolina? Other investors could be interested in such an important strategic asset. I know I am, but you gotta discount the fact that I am a bit crazy. I wish management would do a better job of communicating the importance of PLUG to the investors community. I guess after 15 years of meandering, no one cares about the company.

If you only focus on the financials of PLUG you are missing the whole story. In our opinion, this economic asset will get funded and it will thrive.

 To the man with a hammer, the world looks like a nail -Charlie Munger

We believe it would cost more than $200 million to build another PLUG from scratch. Even if you assume we are wrong and you use a $100 million figure, the situation is grossly misunderstood.

In my opinion, our biggest risk here is to be taken out of our position at a ridiculously low price.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold about 3% of Plug Power. We intend to increase our position if the company's results confirm our thesis through time. 

Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. We have been wrong on many of our thesis before.

Written by Michael Bigger. Follow me on Twitter and StockTwits. 

American Apparel 325

I just got this email from a friend who lives in Montreal:  I am watching Tele-Quebec and they are interviewing Dov Charney and they are discussing American Apparel. Interesting brand!

 

Recently, Charney has been very active in the media, discussing reforming the garment industry following the disaster in Bangladesh. Check out the Vice interview here.

 

I expect Charney to press hard on the public relations pedal this year. Charney owns a significant amount of options struck at $3.25 expiring in April of 2014. Management is clearly interested in having the stock reach this level before the options expire.

 

I do believe that two more catalysts will push the stock to that level before the options expire. The new distribution center will allow the company to reduce its inventory by about $30 million by the end of 2013. With a better looking balance sheet, The turnaround thesis will become obvious to the Street. 

 

In addition, comps are accelerating and the company will most likely surprise to the upside for the rest of the year.

 

The company has performed above our expectation and we have added to our long position last week. The story is evolving from a distressed situation to a growth story. The growth story will become evident in 2014, as we expect the company to start expanding its global franchise. 

 

Written by Michael Bigger. Follow me on Twitter and StockTwits.  

More Information Supporting our Plug Power Thesis

I came across these two articles posted on Stocktwits. Big thank you to the people who posted them. This is great information if you are interested in our Plug Power ($PLUG) thesis.

http://www.energyandcapital.com/articles/the-fuel-cell-is-back/3435

http://www.airliquide.com/en/rss/first-hydrogen-filling-station-for-forklift-trucks-in-france-for-ikea.html

Enjoy and let us know what you think.

Written by Michael Bigger. Follow me on Twitter and StockTwits.  

The Essence of a Brand: American Apparel

I love trying to figure out the mind of the customers of the consummer brands I own. Here is a cool video produced by @fashionbylani. She discusses her most recent collective haul, the results of a shopping trip at many clothing retailers.

At about 3 minutes and 17 seconds in the video, she discusses American Apparel ($APP). Check it out:

How customers think about a brand helps me understand the essence of a brand. That is what I invest in. Thank you Lani.

Written by Michael Bigger. Follow me on Twitter and StockTwits.  

The Ugliness of Price Targets

Some have been asking me about our Plug Power ($PLUG) price target. My view about it is that you should get involved with something that has so much potential as to render the exercise of computing it irrelevant.

It's not easy because these opportunities are rare. With Plug Power ($PLUG) we have said that we would be incapable of building the business if you gave us $200mm. Some might be able to do it with $100mm but from our vantage point, we think it can't be done. We will be monitoring how the situation evolves but won't commit to a firm target.

A while back, I wrote the post A Thousandfold Return on Investment about my friend who bought McDonald's ($MCD) in 1965. Can you imagine the results he would have achieved if he had focused on a price target and a discipline of selling the stock if it reached the target?

My friend is still holding the stock to this day and when we talk about the company, I never hear him talk about a price target.

Do price targets force investors to think small?

Written by Michael Bigger. Follow me on Twitter and StockTwits. 

Plug Power Investment Thesis

This is how we think about Plug Power ($PLUG). Most of the descriptive material has been sourced at plugpower.com.  

$PLUG is a company with real business products, revenues, and customer relationships.  In addition, $PLUG is a technology company with huge potential future applications.  While cash is an issue near-term, the revenues and growth are real and tangible.  The current price looks cheap even for the revenue stream, and if you assign any value to the potential future applications, the stock looks like a great deal.

 1. The Business

Plug Power is the Premier system integrator in rapidly emerging Proton Exchange Membrane (PEM) based fuel cell market.  PEM fuel cells use hydrogen to produce energy in a clean manner, with water and heat the only emissions.  Potential PEM fuel cell applications are broad, and could one day power cars and trucks.  However, without infrastructure in place (hydrogen fueling stations), it is not yet a viable fuel for today's cars and trucks.

In the meantime, Plug Power has developed a commercial application for PEM fuel cells that is viable today.  Forklifts in our nations warehouses and distribution centers use power constantly to move merchandise and load trucks.  Most forklifts are powered by batteries, but Plug Power has created a PEM power alternative called GenDrive.  Plug Power customers buy GenDrive to increase productivity, to lower costs, to implement green solutions, and for increased performance.  Refueling stations within the distribution centers allow the trucks to minimize downtime and cut costs.  $PLUG has to date deployed approximately 4,000 GenDrive units to some of the largest companies in the nation.  

2. The Market

The company has a current addressable market of $4.0 billion in the U.S.A. and $4.0 billion in Europe, just in forklift truck applications. The company's solution provides about 95% of the hydrogen powered forklift trucks in the USA annually. PLUG is the dominant player in this market.

In addition, the company is working on potential new applications that could come online in the next few years.

3. The Strategy

Plug Power is focused on the fork lift market because it is a market they can make money at it NOW. PLUG's intention is to conquer new markets horizontally, as new markets emerge for PEM based power solution. For example, in early 2014 Plug will be demonstrating 15 ground support units (flat trucks pulling containers on a tarmac) powered by fuel cell with Federal Express at the facility in Memphis. There are over 1,300 of these units at the Federal Express's Memphis facility alone. This strategy allows the company to grow horizontally into new markets with minimal capital expenditures.

 4. Clients

Here is a list of some of PLUG's customers. 

5. The Model

The company expects to be EBITDA breakeven around mid 2014 on an annual run rate of $55 million in revenues.

The cost of good sold are expected to be at 67% of revenues and SG&A at 12% to 15% (minimum of $12.5 million). The cost of good sold could be as low as 55% in our estimate.

The company had $26.1 million of revenues in 2012 and grew unit sold from 1,024 in 2011 to 1,391 in 2012, an increase of 36%.

The company needs an additonal $5 to $10 million of funding to get to EBITDA breakeven.

The company's current manufacturing capacity is $200mm.

6. What went wrong?

The company has had its fair share of problems over a span of fifteen years. The situation has been going to zero fast. Investors have been attracted to this situation based on the promise of its technology but each time the company has been nearing the finish line, it has been pushed back.

In February 2013, the company raised money and the stock plunged on a botched financing attempt. The stock dropped to $.12.

The lead batteries manufacturers used this situation to point out to PLUG's customers that the company was toast.

Customers decided to pull out their orders and demand for GenDrive dried up.

7. Catalyst.

On May 8, Air Liquide came to the rescue and invested $6.5 million in PLUG. We view the Air Liquide investment as the catalyst needed to reassure customers and bring back PLUG to its recent success track.  The strategic investment from the worldwide producer of liquid hydrogen restored customer confidence in Plug.

Plug Power is currently trading at a market capitalization of $13 million. Never in my life have I seen a company with such a proven technology, a customer list that includes the best and biggest companies in the world, with an addressable market that will easily surpass $10 billion in 5 years from now, and with a dominant position in the emerging power business. If you gave me $200 million, I could not build a Plug Power.

Let us know what you think.

Additional posts we wrote about Plug Power: Plug Power Ignition and The Boulevard of Broken Dreams.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold about 3% of Plug Power. We intend to increase our position if the company's results track our benchmark.

Plug Power is a highly distressed situation and it is not suitable for the majority of investors. The likely outcome of an investment is a loss of principal. 

Written by Michael Bigger. Follow me on Twitter and StockTwits. 

and by Jennifer Galperin.  Follow me on Twitter and StockTwits.