Stock Sonar #66 - 7/31/2024

Shimmick Inc (NAS:SHIM) — mrkt cap $120mm; Price $3.09; EV/EBITDA NA

PASS. SHIM is a leading provider of water infrastructure solutions, having built some of the largest wastewater recycling systems. It is consistently ranked among the top ten water solutions providers in the USA and generates more than $600 million in revenue per year. Given these facts, it was surprising to find that SHIM consistently loses money and is a microcap. In an industry where companies typically generate close to double-digit gross margins on new projects, SHIM generates about half of that and is trending lower. Although SHIM can execute projects, it lacks the financial discipline to generate a profit. With the recent resignation of the CFO, it will likely continue to flounder. We will be watching to see what measures the new CFO can implement in the company.

Rackspace Technology (NAS:RXT) — mrkt cap $525mm; Price $2.35; EV/EBITDA 12.5

MORE RESEARCH NEEDED. Rackspace IPO’d in 2020 after being part of an Apollo LBO. The company is an expert in cloud services and has recently shifted towards providing expertise for companies looking to accelerate AI deployment. Most mid-sized firms will need extensive development help to achieve their AI ambitions, and RXT is well positioned to meet this demand. Although RXT has an EV/EBITDA of 12.5, it is heavily leveraged with over $2 billion of variable rate debt. Despite this, RXT has redirected resources to become a key player in implementing AI solutions for clients. Being closely tied to the cloud, they are well suited to provide these solutions and have already had a few successful iterations.

Clear Channel Outdoor (NAS:CCO) — mrkt cap $823mm; Price $1.68; EV/EBITDA 9.4

PASS. As we anticipate a softening of rates, we have focused on screening good names with high debt loads. Clear Channel Outdoor (CCO) is an outdoor advertising provider with significant debt. CCO’s growth has primarily come from converting static displays to digital formats, which has shown healthy ROI. Management has prioritized disposing of its low-margin European segment to focus on the U.S. market. The proceeds from this sale are intended to pay down debt, thereby deleveraging the company and freeing up capital for growth CAPEX—a potential win for shareholders. However, the regulatory environment in Europe is stringent, making it uncertain when a buyer for the European assets will be found. Additionally, the penetration of their outdoor market and the feasibility of digitizing B and C properties are unclear. Each change requires sign-off from the municipality, which may not be automatic. This investment falls into the “too hard” bucket for us.