My 13th NR: All about Capital AllocationWhat a beautiful day outside, and an incredible day on the markets, as usual.... Share price goes up, my today net worth goes up..... Share price goes down, I get to buy more shares at a discount, and my future net worth goes up! It's always beautiful when you KNOW what you own, and you own AMAZING companies!
I want to really focus on a part of today's news release....
“The Company recently invested approximately $1MM in state-of-the-art production equipment, and we announce today its successful installation,” said Mr. P. Peter Pascali, CEO and Chair of PyroGenesis. “This equipment has a wide range of capabilities and will significantly reduce the manufacturing time of our plasma torches. For example, parts that previously took 4 hours to manufacture will now take 15 minutes. PyroGenesis will produce parts faster and at lower cost, thereby reducing delivery times while increasing profitability.”
So great news obviously, make parts cheaper, faster, etc etc......
But let's look at this from the point of view that TRULY matters to most of us here.
Pyrogenesis spent $1mil of OUR MONEY(yes, it is shareholder's money) on a thing.
Now I am sure most of you here understand capital allocation, and return on capital spending, but I'll refresh you with the way I look at it.
The money that the company has left, after all operating costs and debts are paid off, belongs to us shareholders. We trust the company/CEO to do something(or in some cases nothing) with that money. The company can pay down debt with it, buy back shares, invest in other companies, invest in itself by buying equipment/supplies, or give us a dividend. How this money gets managed, at it's purest level, is the most important thing that will have a long term impact on share price. BASICALLY, everything else being equal, the company that does the best job with allocating this capital(directing this money), is the company that stands the best chance of growing it's business, and correspondingly, it's share price....Now, back to the bolts....
Pyrogenesis could've given us a dividend with that $1mil, and because they did not, we should want to make they made god use of it!
CEO Peter Pascali has stated many times over that he is focused on being a master capital allocator, and in turn growing sharehold value maximally. His team chose to spend $1mil on investing in the company, and that's a great thing, as long as the returns are there. He opted to purchase equipment that is intended to make TORCHES 1500% faster, and at a lower cost.
So, in order for this to be a good use of capital(remember, the building was also leased as well to house this equipment), we have to recover that $1mi; and thena bunch more for the opportunity cost that we lose by not giving me a dividend and letting me invest it at a menial 7% return.
It's still early in the day for me so my brain doesn't exactly translate thought to type very well, but the point here is that because the CEO intends to be a great capital allocator, and he also understand what this means, he felt that spending $1 million dollars on speeding up torch production, and lowering production costs, was worth it.
So, how many torches does a company have to sell in order to warrant leasing a new facility and buying a MILLION dollars of equipment in the name of maximizing future profit????
In order to recover that $1mil using future savings, and the recurring building costs and taxes associated, I believe we are looking at more than just a few torches, don't you?
The bashers will have you believe that this is a waste of money, a sham, and just words. If you believe that, sell now.
Cheers!