First published in The Globe and Mail on July 15, 2011

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Bennett Environmental is an unlikely cash cow. The company is in the business of treating contaminated soil by burning it. This doesn’t sound like a high-margin business, but it is. In good times, Bennett’s plant can post profit margins north of 50 per cent. Most of that cash flow is gravy for shareholders because the plant needs very little maintenance.

And yet, despite this lavish profitability, the stock trades for next to nothing. Notwithstanding more than $1.60 per share of cash in the bank and no debt as of the end of the first quarter, Bennett’s stock is quoted at $2.20.

That strikes me as pretty good value, and I’ve been a buyer of the stock lately. I’m not alone: Noted value investor Irwin Michael, who runs the successful ABC Funds, has also been a big buyer. In the last few months he’s amassed an 18-per-cent stake in the company. That’s a pretty big bet and I don’t think he’s doing it to earn 10 or 15 per cent. The story, which I’ll spell out, has a lot of potential upside. And the nice thing is that the stock is not that sensitive to the general economy or the direction of the stock market, a theme touched on last week.

First the history: once a stock market darling – the shares were $28 seven years ago – Bennett blew up. The company’s revenues fell as Superfund, a U.S. government program set up to pay for the cleanup of contaminated sites, dried up.

Bennett was then accused of a conspiracy to defraud the Environmental Protection Agency, which ran Superfund, to which it pleaded guilty and for which it paid a $1-million (U.S.) fine. The founder and chairman resigned. The stock plunged.

A new and very able CEO, Jack Shaw, was brought in to turn the floundering company around. He did yeoman’s work, cutting costs, getting rid of unneeded assets, raising funds and securing a big contract that generated a lot of cash. By the beginning of this year Bennett had $65-million in cash and was looking to deploy it in an acquisition that would add more consistent revenues.

However, a big shareholder, Second City Capital Partners, was getting impatient. After a bitter but brief proxy battle, most of the old board was bounced, including Mr. Shaw, and replaced with fresh faces. Lawrence Haber, a former financier and lawyer, is the new chairman and interim CEO while the board looks for a permanent head.

With the proxy battle over, the company can focus on the two things that will build wealth for its owners. The first is to land more remediation contracts. Bennett’s business is very lumpy. While treating contaminated soil can be very profitable, the plant needs a certain amount of dirt to run efficiently. Capacity is 100,000 tonnes a year; break-even production is about 20,000 tonnes or so.

In 2009 and 2010, the company ran its plant at about 70-per-cent utilization and earned roughly $1 a share. Put another way, Bennett produced almost $40-million in free cash flow. The market value today is about $90-million. That’s value.

But the plant hasn’t run in months, as there are less than 20,000 tonnes of inventory.

The contracts will come – Bennett’s technology is, by and large, the preferred method of treating soil – it’s just not clear when, although there could be a big contract win this summer. And with $9-million in tax losses, a lot of those future earnings will be protected from the reach of the taxman in Ottawa.

That explains why the stock is so cheap. It’s hard to value lumpy, irregular earnings. But the earnings will come for those who aren’t fussed about quarterly performance.

As for those who are, there’s also good news. That cash hoard will eventually be put to use – in fact Second City had suggested a couple of merger or acquisition targets before the proxy battle (which the old board didn’t think were good fits).

I’m guessing something could happen relatively soon, perhaps an acquisition of a similar business but with more consistent earnings, which would increase the multiple that investors are willing to pay. The upside on the stock, in my view and that of others I’ve spoken to, is potentially big. The downside, given the cash balance, looks small by comparison.

First published in The Globe and Mail on June 8, 2011

Gain since first recommend 3 months ago: 77%

For more detailed analysis and other market-beating stock picks: www.presidentsclub.ca

The nice thing about busted stocks is that they thumb their noses at the index. The market can do whatever it wants: A badly broken stock on the mend will tend to go up. It’s always nice to have a few of these in your portfolio because you can count on them to put a little green on your screen when you’re otherwise seeing red.

Intertape Polymer Group is a broken stock on the mend. Once quoted at $45 a share, it can be had for less than a twentieth of that.

But the stock has done well over the past few months, handily outpacing the market. And that trend will likely continue, which is why I consider it a stock well worth owning, and why I own and continue to buy it.

Intertape makes tapes (duct, masking, etc.), films, wraps, liners and a variety of other plastic products. It’s been around since 1981 and has more than $700-million in annual sales but a market value of only $107- million. Those numbers make it look very cheap but they are, to a point, justified.

Like a lot of highly successful small companies, Intertape was heartily encouraged by investment bankers. It grew rapidly by acquisition in the nineties and early part of the past decade. And as often happens, that strategy didn’t work out well. The company ended up stuck with too many assets, too little efficiency and a confused corporate strategy.

In 2006, founder and chief executive officer Mel Yull retired from the corner suite and a new management team was brought in. They struggled with rapidly rising input costs (natural gas, oil, paper, rubber, resin, etc.), but did manage to attract a takeover offer of almost $5 a share – a slight premium to the stock price then – from a private equity firm.

While management embraced the deal, Mr. Yull and another large shareholder killed it. Senior management was expelled and Mr. Yull took over, just in time for the financial crisis, which was especially hard on Interta pe because it carried a lot of debt (and still does).

But the firm survived and last year Mr. Yull’s son Greg took over. The junior Yull is very focused. Growth, he says, can be overrated. “I don’t care if we grow as long as we grow in high-margin areas.”

The company is moving away from commodity products with slim profits and concentrating on items with fatter margins. Intertape invests in research and development, and this year cranked out a number of new products. The “size matters” attitude is gone. The recent closing of an Ontario plant lowered revenue but added $4-million to earnings because the plant had lost money.

So the CEO has made some progress in the year he’s been at the helm. But there’s much more potential upside. Three factors will drive this stock price.

The first is the stock’s expanding multiple – the amount investors are willing to pay for Intertape’s earnings (which are pretty consistent when you look beyond the noise of writeoffs). The multiple has gotten bigger but it still has room to grow.

The second is more sales and earnings. The ticket to boosting the top line is a gradually improving economy

And with respect to earnings, Intertape is getting a lot of help from an 800-pound gorilla named 3M.

That juggernaut is one of Intertape’s biggest competitors in a lot of the products it makes. As the economy roiled and commodity prices crushed margins, 3M decided not to raise prices on its tapes and other products. It can afford to do so because it gets a premium for its stuff thanks to its brand name.

Because 3M is the market leader, no one else could raise prices. But that’s changing: 3M is raising prices, its rivals are following suit and there are more hikes likely to come. That really expands profits. Management’s goal is to get gross margins to 18 or 19 per cent over time. They’re only about 12 per cent now, and so that kind of an increase would multiply earnings.

The third driver is the possibility of cooling commodity prices. You can decide for yourself how likely that is. There are some who say the end of quantitative easing will help. We’ll see, but that would be gravy. The stock should do well, regardless.

It’s always easy to think you’ve missed the opportunity in an investment that’s up 50 per cent in a short period of time. That’s not true. The shares of broken companies go up by multiples as they fix themselves, not fractions.