Plug Power Notes

On Thursday May 29, I attended a panel about fuel cells at the Cowen Conference. Andy Marsh, Plug Power CEO, presented.  The other panelists represented Ballard, Fuel Cell Energy, and Hydrogenics.

Here are the main key points I noted from Andy's comments:

1. Total Global Market for PLUG is $30 billion annually.
2. The addressable market (now) is $10 billion annually.
3. PLUG expects revenues of $500 million in 2018.
4. It is working on accelerating the full ownership date of Hypulsion.
5. From what I could gather it appears the company is working with Honda in Europe. Honda could be a new forklift customer.
6. All of the panelists were extremely bullish on the overall Hydrogen market because it is such a small segment of the energy market currently with so many potential applications.

 Written by Michael Bigger.

Is American Apparel Reinventing Its Marketing Approach?

I have this hunch that American Apparel is reinventing how it sells clothing. It appears that the company is transitioning its marketing from a more traditional approach to an approach located at the intersection of:

• Visual Social Media (Instagram).
• Retail level, as close as possible to the customer.
• Employees' own photo shoots.
• Sell them a product they want to talk about and share images. Amplify the social media discussion.

This approach increases the engagement between American Apparel and its customers on platforms where the youth customers are highly active.  This visual social media, mobile and customer centric strategy is resonating with customers by judging from the company's success on Instagram. For employees, it makes the job at the store level much more creative and fulfilling and it builds on the company photographic heritage. 

No other company that I can think of has been so successful at empowering employees and customers to create free advertising on social media. And this is the key piece because social media is only meaningful if it comes from friends and connections, not from a company promoting a product. Because American Apparel is so open to customers and employees taking artistic license with their products, the social aspect of social media works in their favor.

(Images Source: Instagram).

What do you think?

Written by Michael Bigger.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 million shares of American Apparel. American Apparel 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. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

One Year Ago at Plug Power

One year ago, on 5/21/2013 we had the opportunity to visit Plug Power manufacturing facility. This day will stand out as one of the most vivid experience of my entire life as an investor.

It ranks way up there with the day in 1995, when Benoit Lavigne met me at my apartment in the Solow building on 66th St in Manhattan to raise money for his fledgling but capital starved Innovative Fibers.

In both situations I could feel that both entrepreneurs/managers were emotionally intense as if they were facing a massive space of potential but needed more capital to ignite the rocket. 

Here is a picture of two emails I sent Andy Marsh at that time. We wrote this Post about our investment thesis following our visit.

Michael Bigger <mbigger@biggercapital.com>	5/17/13
to Andy

I see you on Tuesday 10 am. My partner Jennifer Galperin might join us. Let me know if this is an issue. 

 

Kind Regards,

 

Michael

Michael Bigger <mbigger@biggercapital.com>	5/22/13
to Andy, rick_mason, erik_hansen, dave_waldek, bcc: me

I want to say thank you for a wonderful visit. I also want to tell you that since my investment in Innovative Fibers in 1995, I don't think I have ever come across a company facing such a large opportunity given its market size. 

 

Keep the faith, you are almost there. "The obstacle is the Path".

 

Michael Bigger

 

Bigger Capital, CEO

 

 

 

Written by Michael Bigger 

American Apparel the Photographer

In this excellent article, Aaron Taube describes the secrets of American Apparel's ($APP) red-hot Instagram account. I would like to add my own comments to Taube's article.

 

Since I have been following the company, $APP has always promoted photography heavily on its site. When you lend on americanapparel.net the first thing you see is a slideshow of different images not all related to the promotion of clothing. The company has invested its own efforts to make its photographic endeavor part of its strategy. The amateurish look of the pictures promotes authenticity of the brand and allows any employee to contribute to the effort. Dov Charney, has himself led some of these photo shoots but most of $APP Instagram pictures come from employees working at different retail locations throughout the world. Most companies will not allow this to happen. They prefer having professional shots with management curing the content for branding identity.

 

American Apparel does not have these constraints and it makes the brand appear less corporate and more authentic, which is paramount to gaining trust in a social media centric society. In addition, employees, working at the retail level, are closer to the customers and are in a better position to seize the magic when it happens. As shopping becomes more visual, American Apparel, the photographer, will benefit.

 

 

 

 

$APP's activities on Instagram won't move the needle much in the near term but it supports our thesis that Dov Charney is obsessed about building a highly differentiated apparel company. This is one more piece to the puzzle that confirms that he may be closer to his objective than most people think. In addition, when you account for all the highly differentiated initiatives the company is pursuing, it becomes more obvious that the company is an asset that is grossly undervalued.

 

American Apparel is an asset you can't build for the value of its market capitalization. 

 

 

 

  

Written by Michael Bigger 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 million shares of American Apparel. American Apparel 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. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

3 Interesting Microcap Companies

Thursday I attended the microcap conference put on by Drexel Hamilton.  Drexel is a firm that employs disabled military veterans, so we are proud to support their efforts by attending the event.

Several interesting companies presented.  The ones that struck me as particularly interesting were:

HPEV, Inc. ($WARM).  HPEV is a development stage company with no revenues yet.  They own or in the process of obtaining patents on cooling systems for mechanical pumps.  The cooling systems will increase power generated by the pumps as well as decrease pump size and weight.  The company anticipates that the global market for pumps is about $120Bn, of which about $60Bn is right for their product.  The plan is to license the technology to existing pump manufacturers for a standard 3% licensing fee.  Critical to success will be the ability to negotiate these license agreements with pump manufacturers, and management has a great deal of experience in the industry with relationships at many of the key firms.  In addition, HPEV has developed a mobile generation product and received their first $1mm order this week.  

The market cap is $60mm and they have an agreement with Lincoln Park Capital (LPC) that LPC will buy up to $10mm in stock over the next 3 years subject to conditions.  They currently have outstanding options on 5mm shares at an average price of $2. 

Sundance Strategies ($SUND): Sundance is a company that invests in a portfolio of life insurance policies.  The company hand-picks policies that have a high value and trade between 6% and 12% of face value.  Sundance holds the policies for approximately 8-10 years until the death benefit is realized.  The company bought its first portfolio of policies last year in June ($400mm in face) and plans to buy about $1Bn in policies each year.  The company needs to raise $50mm in equity financing on top of the $15mm they raised privately last year, and the rest of the cost (purchase price + ongoing insurance premiums) will be covered by debt financing and cashflow from portfolio assets.  Current market cap is $350mm.  Insiders own about 70% of the company. 

Datatrak ($DTRK).  Datatrak provides software for clinical trials of pharmaceutical products.  Here is the stock price chart, so you can see the issues this company faced as it’s stock price fell from $160 (split-adjusted) to just a few bucks:

So what happened?  Revenues fell off a cliff and the stock price did too.  But look what is happening since 2010.  Revenues are picking up, and backlog is back up to the 2005 (pre-cliff) timeframe.  And, according to the CEO, current backlog is more high quality since it is more long-term relationship driven backlog.  According to this chart, the revenue and backlog numbers are outpacing the stock price, giving a good amount of potential energy in the system here:  

What do you think of these companies, or the rest of the presentations at the conference?  

Written by Jennifer Galperin.  Follow me on twitter and stocktwits.

American Apparel Inventory Levels

American Apparel ($APP) reduced inventory by $6 million from $169.3 million to $163.3 million during the first quarter of 2014. The company's objective is to reduce inventory by $25 million in 2014. The company should end 2014 with about $144 million in inventory for a 14.7% decrease. After visiting a few stores we believe that the company might be able to reduce inventory further. How much further? We believe after talking to a few analysts that $APP could match Delta Apparel ($DLA) inventory turn of 2.39. At a turn of 2.39 Americal Apparel could reduce inventory further by $32 million to $130 million. $32 million represents two coupon payments on the bond. 

VFC Corp. ($VFC) is a best of breed retailer that turns inventory at 4.2 times. It is possible that $APP could push the envelope further but don't count on it...For now unless management proves us wrong.

Here is a picture of what the inventory situation would look like under different inventory turn scenarios. 

 

Written by Michael Bigger. 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 million shares of American Apparel. American Apparel 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. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

Note to Self: American Apparel Amount of Cash

This is a rough calculation of the amount of cash we believe American Apparel will have on hand at year end 2014. Our Investment Thesis should be updated with these metrics. We assume the ABL usage constant for the rest of 2014.

3/31/2014 cash = $16.7 million

2014 EBITDA guidance = +$45 million

2014 EBITDA efficiency gain (Source: Internal calculation) =  +20 million

2 bond cash interest payments = -$31 million

Cash interest payment on ABL = -$1 million

Capital Expenditures for reminder of 2014 (Source: Amendment to credit line 3/25/2014) = -$4 million

Decrease in Inventory = +$19 million

Total Cash as of 12/31/2014 = +$65 million (Very rough estimate)

This does not account for incremental sales contribution above sales guidance.

Written by Michael Bigger. 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 million shares of American Apparel. American Apparel 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. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework. None of the Bigger entities individually or in aggregate have an obligation to file its position with the SEC at the time this article was published.

American Apparel Thermometer

This is an image that we have created to help us visualize different valuation frameworks for American Apparel. The exercise is not an exercise in precision but an exercise in visualisation. Take the numbers with a grain of salt.

 

 

 

Produced by Michael Bigger and Jennifer Galperin 

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family own more than 3.27 million shares of American Apparel. American Apparel 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. In other words, the probability of losing all your investment in this situation is very high. We have been purchasing American Apparel since May of 2011 and we have nothing to show for it. Take our opinions with a grain of salt and do your homework.  

Plug Power's Devastating Offering

We are hearing a lot of chatter about the Plug Power ($PLUG) offering that took place last week, and a lot of it is very negative in our opinion.  Our first thought, like many investors, was: "Why can't they just get to profitability without raising capital?"

Once the emotional jolt lapsed we thought about it a little longer and came up with an explanation.

The answer is that they can get to profitability without this latest round. They are growing bookings, sales, and revenues ahead of plan. A plan that calls for profitability in the 2014 fiscal year. But when we invest capital we want our return to be MAXIMIZED according to the opportunities facing the company. And we think PLUG management wants that too. This is the management team that created the "GenKey" solution which simplifies the hydrogen solution for customers and anchors the PLUG solution deeper at customers sites. The customers love it. 

This customers' delight is guiding PLUG to seize the amazing opportunities for growth. To name a few (Source 8-K filed 4/23/2013):  

 • Grow sales force to address increasing demand for the Company’s products. 

 • Invest in expanding into new markets, including JV's in Europe and Asia. 

 • Invest capital to improve vertical integration.

 • Complete opportunistic acquisitions for vertical or horizontal growth.

 • Focus on hydrogen generation and distribution opportunities.

 • Research and develop new markets, e.g. TRUs and range extenders, plus whatever additional /   adjacent applications become feasible in the near future.

With these exciting opportunities for investment, they have a choice to make. They can decide which of these "children" to feed with the capital they have, or they can raise equity capital to feed each project as much as necessary to succeed.

Now, Andy Marsh is a fairly conservative executive, and we don't think he would raise capital unless he had a real, concrete, near-term opportunity to deploy it.  The JV that is in the works with Hyundai in Asia might require a capital injection from both companies. Would you prefer PLUG reject the JV opportunity in Asia for lack of available capital?  Should PLUG neglect its fledgling business in Europe, a market that is much bigger than the US for PLUG products, because it lacks appropriate capital to fund this business? If the company finds an opportunity to acquire strategic technologies on the cheap by purchasing small companies with complementary portfolios of patents, are you saying postpone and open the door for a competitor?

Plug Power is building its arsenal for the battle of world domination of the hydrogen business. The company has cracked the hydrogen code and it has a significant time lead over potential entrants. Now is not the time to futz around or take things slow. PLUG must strike now. These are the opportunities of a lifetime and it makes sense to capitalize on them even if it means the stock price suffers a little bit in the short term. Go for the jugular PLUG, you will not have a second chance!

Written by Jennifer Galperin and Michael Bigger.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold a very large stake in Plug Power. We have participated in the latest stock offering and we purchased call options as of 4/28/2014. We have a very long term horizon that extend much further than the average investor's time horizon. These high growth situations are often not suitable for most investors since they are extremely volatile and it can take decades to realize their full potential. Take our opinions with a grain of salt and do your homework.

Our Social Media Sharing Philosophy

This post describes partially our social media sharing philosophy regarding our investments. It is a work in progress.

• We are happy to discuss our ideas via social media platforms because so many people are generous and we benefit immensely reading their articles.
• We don’t contend we are smarter than the average bear or bull on any stock we discuss, we just try to gain insight about each company.
• We don't give financial advices and stock recomendations.
• We don't discuss the price action or "the price target" of a stock. Sorry, we don't focus on that.
• We care a LOT about the underlying business now and in the future..
• We have a very long term investment horizon.
• Most of our investments are usually highly distressed situations that are not suitable for the majority of investors. 
• We usually find 1 or 2 amazing opportunities every 3 to 5 years (more frequent in bear markets) and when we find one we spend a lot of time thinking about and talking about it.  We sound like a broken record most of the time.
• Often, we have nothing to show for our work for a long time so it is important to take our opinions with a grain of salt.
• We know we can and do fail often and we know that failure is an integral part of success. It is never a one way street. 
• Always do your own homework and reach your own conclusion. 

 Written by Michael Bigger.