Elevator Pitch
Earlier today, Kelso Technologies Inc. (NYSEMKT:KIQ) released a press releasethat highlighted the tremendous opportunities presented to it. The Department of Transportation, on May 1, illustrated its plans for furthering safety regulations for tank cars carrying crude oil and also its plans to have the retrofitting process done in an expedient manner. Several of the technologies discussed and being mandated by the Department of Transportation include technologies that KIQ is currently producing, as well as one that expects AAR approval in 2016.
Thesis & Catalyst For KIQ
A lot of investors have shied themselves to buying shares of KIQ due to a market cap that is incomparable to its current revenue, but recent regulatory measures have ensured me that a bet on KIQ is not only justifiable, even at its current market cap, but incredibly smart.
The company itself is financially competent. It has no long-term debt obligations and generates positive free cash flow. It rewards investors by paying increasing dividends year-over-year. Finding a cash-generating, rather than consuming, small-cap stock is extremely difficult to find. The company has plenty of room to grow, with just 3 production facilities in Texas. It is smartly located near its customers, which decreases transport costs and makes the company more responsive and faster in meeting their needs. There are reasons besides just the nature of the company itself that make me bullish.
First off, KIQ is a stock with increasing short interest. Short interest, in fact, exceeds average daily share volume a lot of the time. This presents an excellent near-term catalyst as news such as approvals for new products, receptions of patents, and of course, earnings growth and regulatory mandates make themselves known. Short-term pops are going to occur as the company nears 2016 and the final availability of its full tank car kit.
Secondly, the recent announcement by the Department of Transportation has key interests for KIQ and its shareholders. It mandates pressure-relief valves, of which KIQ specializes in. It also includes the need for bottom-outlet valves, the likes of which KIQ should have approved and available for next year. KIQ is growing organically without regulatory catalysts, but this just adds to the growth potential. Not to mention, the time table given for retrofitting is considerably small, three years for DOT-111 tank cars. New cars produced after October 1 of this year must also meet the new DOT Specification 117 criteria, which includes the aforementioned pressure relief valves and bottom outlet valves.
Another crucial catalyst, which I think is being underappreciated, is the Kelso Klincher Manway, or KKM. The KKM uses a single bolt. Its design is much more efficient, turning open and close times to just five minutes. It reduces clean-up costs and hefty NAR fines. It is patented with no existing competition. The recent announcement for the Department if Transportation also discussed the problems associated with traditional eye-bolt manways. This product is a game-changer and future regulatory mandate, or widespread acceptance for its overall betterment with no added price compared to traditional manways, could make it the norm. The company is even looking into expanding into trucking through an arrangement with Bulk Tank Inc. One of the company's independent directors, Bill Troy, was owner and CEO of a major trucking company that serviced Fortune 500 companies. That kind-of insight and experience could lead to future expansion of the KKM into trucking as well.
Valuation
Like I said, the company's market cap seems scary at first, but it is completely justified. The company experienced revenue growth 81%, while EBITDA rose 159%. The company is improving margins, has experienced management and sales focusing on valves and the KKM, and is poised to gain from recent regulatory moves. The company set a target of $36 million in revenue for 2015. With a new hire, who specializes in valve sales, increased regulatory pressures, and a breakthrough product with no competitors (KKM), KIQ will exceed that expectation.
Disclosure: The author is long KIQ.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.