Quick update on $ATER
1) My next stock writeup for paid subscribers will be out next week
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$ATER (formerly known as $MWK) is a stock that I wrote about when $MWK was trading around $12, then it zoomed up to $48 over the next couple months then came all the way back down to $12 which is when I sent out this update on May 17th [click here to read].
Since May 17th the stock has grinded higher from $12 to $20 but then yesterday we got a stock offering for $40 million and the stock nosedived to under $16 when we found out this offering or “private placement” was priced at $15.
Here is the announcement [click here]
I’m still annoyed that they priced the offering at $15 when the stock was trading at $20 just two days earlier but they clearly needed to get $40 million onto their balance sheet in a hurry and I have a couple predictions as to why that might be.
First off, $ATER already provided guidance in their Q1 earnings of $360-390 million of revenues and $30-34 million of EBITDA [click here to read].
They also had $35 million of cash on hand at the end of Q1 so I don’t think this was a liquidity issue.
Here are the two most likely reasons why they needed to raise $40 million in hurry and be willing to price it at $15.00
1) $ATER said during the Q1 earnings report/call they have $500-$600 million of potential M&A deals in their pipeline so it’s very possible that a couple of these deals are ready to close and $ATER needed to raise some cash as part of the purchase price. I would like to think they would not raise capital at $15.00 if these deals didn’t come with a very attractive price tag while also being very accretive to 2021 full year financials
2) $ATER said during the Q1 earnings report/call they are speaking with several Tier 1 banks about a bigger, cheaper credit facility and it’s very possible these banks are ready to finalize the terms but they told $ATER they wanted to see more cash on the balance sheet so $ATER needed to raise another $40 million. Since a big chunk of $ATER’s business model relies on their access to capital so they can continue buying Amazon ecommerce businesses at 5x earnings then eliminate 80% of the fixed costs to increase the profit margins and earnings yield on these deals. Getting a new credit facility in the $200-$250 million range would be incredible for $ATER and give them a ton of dry powder to go on an spending spree and drive revenues/earnings much higher for years to come. $ATER’s business model is low risk for the banks because they are buying profitable companies and then making them even more profitable. In the case of Squatty Potty which was their most recent acquisition, there’s a very good chance that $ATER can strip $2-3M of annual costs out which would bring the earnings yield up to the 25% range.
In full disclosure, I don’t have any inside knowledge regarding $ATER but raising this $40 million would only make sense if one of these two scenarios was happening behind the scenes which means we’d get an announcement very soon or worst case when they report Q2 earnings in late July or early August.
Personally I added to $ATER this morning at $15.50 because I still like this story long-term and right now the company is growing revenues at 100% YoY (some organic and some through M&A) yet trading at just 1.5x 2021 EV/sales with 54% gross margins. $ATER is not profitable yet but should be within a couple years. In many ways $ATER is a small publicly traded e-commerce focused LBO (leverage buyout fund) where they are hoping to borrow capital at 5-6% then buy established ecommerce brands at 4-6x earnings, strip out 80% of fixed costs thus increasing those profit margins then use the free cash flow to pay down the debt and make more acquisitions. If they can lockdown a bigger, cheaper credit facility then I become 5x more bullish on $ATER.
Now we have to wait and see what that $40 million was for — hopefully it means we’re getting both #1 and #2 from above.
Have a great weekend and let me know if you have any questions on $ATER
Sincerely,
Jonah Lupton
Disclaimer: The stocks mentioned in this newsletter are not intended to be construed as buy recommendations and should not be interpreted as investment advice. Stocks mentioned in this newsletter should only end up in your own portfolio after you conduct your own research and due diligence. Many of the stocks mentioned in my newsletter have smaller market capitalizations and therefore can be more volatile and should be considered more risky. I encourage everyone to do their own research and due diligence before buying any stocks mentioned in my newsletter. Please manage your own portfolio and position sizes in accordance with your own risk tolerance and investment objectives.