It’s time to buy Polar Power (POLA). The window is open and, once the second quarter results are released, we expect it will close. This blog will detail exactly why we believe now is the time to be getting on board the POLA express. But first, some recent history on the company.
Polar Power makes DC generators. They have a very strong IP in this industry and are certainly the one of the leaders in the space. For this reason, we believe POLA deserves a premium multiple to traditional manufacturing companies. However, this strength of theirs is rather inconsequential to the story at this time and we will delve deeper into it in the future. For now, we will focus on the value play here and why business is about to turn upwards in a big way at Polar.
The DC generators developed by Polar are used primarily in the telecommunications industry, where they serve as either primary (Prime) or backup power. The market is obviously huge; think of every cell tower in the world needing some form of backup in case of a power outage. Or, in remote locations off the grid, they require primary power. In either case they require a generator.
Polar’s DC generators are starting to take market share in this industry. This is due to the benefits of DC versus AC in this application. On their website is a good article (especially if you’re technically savvy) about these benefits, but, in a nutshell, DC has a smaller footprint, starts up easier, and uses much less power to run. Suffice to say, there is an economical benefit to using DC versus AC in this application, which is why Polar is well positioned for the future.
But, we promised the readers some recent history, and this is what we need to look at to understand why POLA is so compelling right here and now. To do this we need to look back to last fall. At that time, Polar was undergoing an IPO. After years of working on developing DC generators for many applications, they had struck the motherlode. The telecom industry realized that DC was a better solution for their hundreds of thousands of cell towers and the business pipeline at Polar started looking robust.
On December 6, Polar went public by raising over $18M at $7.00 per share. At that time the benefits of DC versus AC in telecom had only recently been understood and business was just beginning to ramp. The future looked very bright for Polar and the fundraising provided them the necessary capital to service the major teleco companies that were knocking on their door. That was the good news.
The bad news for Polar, and this starts to get into why we see Polar at this discounted valuation, was that when they went public they basically had only one customer who was rolling out their product in any volume. That customer was Verizon, which is obviously a big, tier-one customer. However, in Verizon, Polar had major (to the tune of 90% of sales) customer concentration. The end result being that, at the time of their IPO they had a disruptive product, a burgeoning pipeline, but only one customer. And, shortly after their IPO, for reasons unrelated to POLA, their one big customer decided to temporarily slow their orders. Ouch…
As you might imagine, POLA shares suffered from the slowdown in Verizon business.
Now, let’s fast forward back to today. We’ve discussed how Polar has a compelling, disruptive technology for backup in cell towers. Yet, the stock trades at a 20% discount to their IPO of December…due to their largest customer slowing business. Why is POLA compelling at this time?
In a nutshell, the promise that Polar was talking about when they went public, mainly that of the potential for major sales to multiple large international telecos, is now, finally, happening. Here are some data points from recent calls with management. Taken together, these paint the picture of a business about to launch.
~ AT&T and T-Mobile signed as customers, expecting business to start in 2nd half of 2017.
~ Answering RFPs for numerous international telecoms…should build backlog, if not sales in 2nd half of 2017.
~ Verizon business expected to pick up meaningfully in 2nd half of 2017.
~ New sales teams in place covering Africa/Middle East and Asia Pacific regions.
~ Engineering hires with established relationships in Europe and Latin America.
Wall Street projects revenue in 2017 to be a slight increase over 2016 and very back end loaded. However, the 2018 numbers are showing growth of more than 50%. And, this growth comes from a company with a P/E ratio of about 12X estimated 2017 earnings.
If the Company is accurate in their guidance, we should expect to see a very strong second half with business at Verizon alone picking up. Add to that the likely case that both AT&T and T-Mobile start ordering in bulk, and you’ve got a compelling story. That is without any international RFP wins, which are also likely. From our point of view, Polar Power should exit 2017 with a strong revenue kick and a substantial backlog for 2018 and beyond, numbers that concur with (or exceed) Wall Street forecasts
To be clear, the second quarter of 2017 might not be a very good quarter. The Company hinted to this in their recent 10-Q in which they said Verizon’s business continues to be soft. But, we strongly believe that this quarter marks the nadir for the business of Polar and we expect the second half to be much better, followed by an explosive year in 2018. This is not going out on a limb, when you look at what the company is saying and what analysts expect. However, investors are not giving them much credit due to the recent hiccup in earnings.
As a result, Polar is trading at a valuation cheaper than its IPO at a time where their business is about to ramp. For that reason, we find now to be a very compelling time to invest in POLA. And, why we feel that, once the earnings are released, investors will wake up to the coming growth at Polar and this window of opportunity to pick up shares at a ridiculously cheap valuation will likely close.