KeyStone’s Stock Talk Show Episode 276.
Great to chat with you again this week as we finish our final webinar of 2024 – on demand version just posted – get it today. I will start with our Star of the Week, Argan Inc. (AGX:NYSE), a stock which has been BUY recommendation in our US Coverage dating back to March of this year. The cash rich business, which provides a full range of construction and related services to the power industry – enabling electrification – saw its share price surge 36% in the past month on very strong Q2 numbers and may be getting a boost from the “Trump Trade”. Clients will be happy to hear the stock is up 211% since our March Buy recommendation this year. Brennan chimes in with our second “Star of the Week”, which also comes from our U.S. Small-Cap research, Pro-Dex Inc. (PDEX:NASDAQ). Pro-Dex is a medical device manufacturer and was recommended to clients in June 2023 at a price of $19.00 and has jumped 150% to $47.59. Pro-Dex is up over 55% in the last month alone. In our YSOT segment, Aaron answers a viewer question on BCE Inc. (BCE:TSX), a communications company, provides wireless, wireline, Internet, and television (TV) services to residential, business, and wholesale customers in Canada. The company missed Q3 expectations and is down 26% year-to-date. Aaron let’s you know if the drop is justified, or if there is an opportunity. Last, but not least, Brett answers a viewer question on Neptune Digital Assets Corp (NDA:TSX-V), which operates in the cryptocurrency and blockchain space. Neptune engages in operations across the digital asset ecosystem including Bitcoin mining, proof-of-stake, blockchain nodes, decentralized finance (DeFi), and other associated cutting-edge technology. The stock is up 139% year to date – but most of the gains started in October – Brett let’s you know what is driving the gains and if it can continue.
Let’s get to the show –my cohost, Mr. Aaron Dunn – and the killer B’s, Brett and Brennan.
Our Poll Question this week?
Now that the US election is decisively decided with a Republican sweep. Broad stock market reaction was positive with the S&P500, Dow, NASDAQ Comp. and many other indexes surging setting all time highs.
Has your general outlook on stocks changed now that the results are in?
1st Star of the Week Argan Inc. (AGX:NYSE)
What does Argan do?
Argan Inc. (AGX) is primarily a construction firm involved in Power Industry Services (74%), Industrial
Construction Services (23.5%), and Telecommunications (2.5%) that conducts operations
through its wholly owned subsidiaries. The company provides a full range of engineering, procurement, construction, commissioning, maintenance, project development, and technical consulting services to the power generation market. Argan’s service offerings focus on the engineering, procurement and construction of natural gas-fired power plants and renewable energy facilities.
Why did has the stock surged 36% in the past month and why is it up 229% year-to-date?
I have seen a few analysts suggest Argan was a stock to buy if Trump won – the theory being “ in terms of the construction and engineering sector generally which Argan is a part of, Trump is aiming to charter 10 new cities on underdeveloped federal land and streamline approval for infrastructure projects. Essentially good for energy infrastructure projects.
The more tangeable reason is blowout earnings and a jump in backlog:
The company smashed analysts consensus earnings estimates and easily beat the most optimistic street estimates on earnings.
This drove the stock higher.
The year-to-date gains are really just a continuation of this trend, positive outlook in quarterly calls from management and backlog moving to record levels from significant contract wins.
Let’s take a closer look at the just released Q2 numbers.
Revenues up 61%
Earnings up 39%.
Gross margin were lower which is something we are monitoring but this was largely due to a changing project mix in the quarter and will fluctuate with differing projects – it is something we monitor.
Shows you a continuation of the growth seen in Q1 – even an acceleration on the topline.
Let’s take a look at a key driver moving forward – strong contract wins in quarter pushed the backlog to $1.0 billion.
Backlog.
Argan closed the second quarter with backlog of $1.0 billion, which reflects an increase from last quarter of approximately $210 million, and includes $570 million of renewable projects.
Commenting on the backlog and outlook – management stated that the addition of high energy demand data centers, the onshoring of manufacturing operations and the expansion of electric vehicle use are primary drivers of the increasing forecasts of future electrical power demands and the robust pipeline of new business opportunities. Argan’s pipeline remains strong and the company is confident that Argan’s energy-agnostic capabilities and proven success leave the business well positioned to compete effectively for the growing number of projects coming to market.
One of the elements that attracted us to Argan – which is a more volatile business than we traditionally recommend given the contract driven nature of its work – was the very strong balance sheet that continues to strengthen.
Valuations:
I highlighted the 2025 forward PE – it may come down given the increase in backlog, earnings beat and the potential for further beats this year and into next. Near-term, the valuations are on the high end of the company’s historical metrics.
Conclusion:
Clients will be updated over the next week.
The 36% boost this month and the 220% plus gains year-to-date, make it our Star of the Week.
The Star of the week is: Pro-Dex Inc. (PDEX:NASDAQ)
This is a company which we recommended to clients back in June 2023 at a price of $19.00 per share, and clients had the opportunity to add all the way down to ~$15.00 per share.
Now the company is our star of the week as it is up 54% in the past month and 139% since our initial recommendation where its currently trading at:
Price: $45.52
Market Cap: $148 million
Description:
Now, Pro-Dex is a medical device manufacturer which specializes in the design and development of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily in
the orthopedic and maxocranial facial markets.
We recently updated clients following its Q1 2025 results but lets take a look at what’s driving the increase:
Slide 2
First and foremost, the company’s strong financial results are driving the share price higher… with revenue up approximately 25% year over year, and Adj. EPS up 13% year over year.
#2 the company posted record backlog in the most recent quarter up to $58.8M, up sequentially from $19.8M in Q4 2024 and up from $35.7M in Q1 2024.
Another positive is that the company’s gross margins have been recovering, up to 35% in the last quarter which is the company’s highest gross margin posted since Q3 2021. So it appears the supply chain issues which we initially highlighted during our recommendation are starting to abate.
Slide 3
And this is really a good case study of a stock which offers an Asymmetrical RISK/REWARD opportunity. And I will go through our investment summary which was included in our initial buy report which was published in June 2023:
So, all in all it was really this thesis of additional capacity coming online (which management said they believed they could fullfill) along with a normalization of margins which were already significantly depressed when we recommended the stock…. And as such, management executed on what they said, the financials improved significantly propelling the stock and has made it our star of the week and I would like to congratulate clients who own it!!!
YSOT NDA Neptune Digital Assets Corp
1)
Question: Hey guys can you please cover $NDA (Neptune Digital Assets) on one of the next episodes. I’ve been a long-term bag holder and recently got my investment back and then some. Nonetheless would appreciate your deep dive into the company as I believe it has some merits. Looking forward to the upcoming webinar that I signed up with you all. Because you guys have been doing this podcast and actually take user feedback that is one of the main reasons I’m attending the webinar so keep up the great work. Cheers.
NDA Neptune Digital Assets Corp symbol NDA on the TSX Venture operates in the cryptocurrency and blockchain space. Neptune engages in operations across the digital asset ecosystem including Bitcoin mining, proof-of-stake, blockchain nodes, decentralized finance (DeFi), and other associated cutting-edge technology.
2)
The shares currently trade at $0.98 resulting in a market cap of $125 million. The stock is up 139% year to date, after being relatively flat throughout the year and then surging in late October.
3)
The stock surged with a corporate update announcement on October 25th.
From mining and staking the company is currently generating $220 thousand per month, $2.6 million per year using the rate from their last financials for cost the company would generate $1.1 million in gross profit per year at the current prices, before any overhead. Then all the other corporate overhead costs excluding the gains and losses of digital assets come out to about $2.1 million. Effectively meaning to be provided the company relies on the appreciation of assets.
Cryptocurrency prices are volatile as well as either staking yield or Bitcoin network difficulty changes over time, you can only ever analyze mining and staking revenue in dollars at a point in time, as it is unlikely to hold the current conditions over any significant length of time. The costs are more stable with the main variable being the price of electricity for mining, and staking the costs.
4)
Moving to the asset values the majority of its holdings are in Bitcoin, holding 349 Bitcoins worth approximately $42.5 million Canadian. The other major crypto asset is Solana, they have both locked and unlocked Solana, meaning they can not sell the tokens natively until certain dates with the majority being unlocked linearly on a monthly basis until January 2028. The locked Solana was purchased at a significant discount of 67%, earlier in the year likely originating from the FTX bankruptcy proceedings. I do have the Locked Solana at full price in the table that is up, but likely if Neptune decided to sell they would have to sell at a discount, but later Locked Solana auctions had less of a discount. In total, the crypto assets listed in the press release total, $54.6 million at this time. I will note as always cryptocurrency prices are volatile, and by the time you’re listening to this the prices I used may have materially changed.
The other interesting investment is they hold about $4.2 million in SpaceX shares using US$112 a share from SpaceX’s last issuance. As well, the company has $4.6 million in cash. Total assets come out to approximately $68.0 million Canadian or $48.7 million US, an 84% premium compared to the market cap.
5)
Next, the company announced on the 30th that it is embracing the Microstrategy playbook with a US$25 million credit facility. The Microstrategy playbook is effectively raising capital through debt or equity, to increase the per-share holdings of Bitcoin, Neptune is expanding this to encompass other crypto-assets. Prior to any credit facility drawdown, the company is debt-free and has a clean balance sheet as far as liabilities are concerned.
The playbook works with debt in a similar way to margin trading, you are levered and will pay an interest rate. The benefit Microstrategy had was when they issued their debt it was when interest rates were low, as well as benefitting from its legacy business ultimately having a very low cost of debt much lower than someone margin trading Bitcoin.
Neptune will not be able to access bottom-of-the-barrel interest rates as interest rates have moved higher since then, they are smaller, and it’s a credit facility compared to bond issuance. They do state it’s a “very low capital cost”, but do not state a figure, but would likely be better than margin rates.
Equity only when the shares are trading at a premium to the underlying assets, which is not a given. Right now Neptune is, like I went over before the company’s market cap is at an 84% premium to the net asset value. So at this time if they were to issue shares they could increase the per-share holdings for its assorted crypto assets. But this only works because you are holding the shares at a premium to the net asset value. The premium is effectively based on market sentiment adding significant risk and further volatility on top of the already volatile assets.
6)
Overall, to even consider investing in the company you need to be Bullish on cryptocurrencies, notably Bitcoin and Solana. But even then you are paying a premium, yes the premium can always go higher but in the case of a significant collapse of crypto prices you would not only see the net asset value go down but also the the premium would likely vanish and could even shift to a discount. Further assuming Neptune does end up using the credit facility to buy cryptocurrencies the risk is significantly heightened in a downturn, as assets would likely need to be sold to keep up with interest payments as the company’s operations in isolation of digital asset sales are cash flow negative. Overall I would not want to hold when it’s already trading at a significant premium in the hope the premium stays the same or rises more. Further, this would not fit into KeyStone’s investment criteria as the company at this time is more like a fund in corporate form.
