Excellent summary - and fast too! I was also listening in on the call while frantically reading their FY2024 audited financials which had been released at the same time.
- agree that ~$3/share is a very fair price given where Covalon is at. I'm certainly not selling in disappointment and the low 3s seems a very stable base for the stock to build from. While the price might not move much, there is little downside. All the space to move is up. Assuming the story continues to play out, I'd expect a new higher base price level to be established after their Q1 report in late February/early March.
- while the firm is doing well and the growth story remains intact, I was slightly disappointed with the quarter, imagining sales at +40% (vs +28.6%) and EPS of ~$0.05. I guess the market was feeling similar as the price dropped ~10% at the open.
- my main conclusion from the call is that the CEO is going all in on being bought by one of their larger competitors. It's not up to him, of course, but he is doing what he can to bend reality in that direction.
- Covalon now seems sustainably cash flow positive and has over $10M in surplus cash on their balance sheet. I asked what plans they had for that cash and the CEO said he preferred not to answer. Earlier in the call he talked vaguely but with excitement about 'numerous' partnership, merger and acquisition opportunities. It is a realistic possibility that Covalon is bought by one of their major competitors, who Covalon appears to be beating in narrow segments. In that case, $3/share is pretty cheap. Johnson and Johnson, one of their competitors, trades at 4x sales. If they offered 4x FY2025 sales for Covalon, that would be ~$5.90 a share. Give it a year and another 20% growth in sales, it becomes $7/share. Noting the CEO's prior industry experience and contacts, I expect this might be exactly the kind of pitch he is making and his real strategy is to be taking their business in mainstream US hospitals enough that they big guys notice and buy them.
- according to their FY2024 annual report, Covalon has C$4.9M and US$11.1M of accumulated tax losses. This would be a sweetener if someone was to buy them, or helps them amp up their cash flow for the next several quarters of profits as they use up those tax losses.
- Covalon has basically abandoned Canada and overseas markets, focusing instead on the US. This is probably a consequence of the new CEO 'cutting costs and focusing'. They didn't get to my question about these markets. FY2024 US sales were $27M while Canadian sales were $40K (!!). Mid-East sales dropped from $5.9M to $2.7M. I'd assumed the answer would be something like 'we've focused on the US and gotten excellent traction, which we continue to build on. Now that we have that traction, we've got a strong story to go back into other markets we have traditionally done well.' Presumably, the home market of Canada would be ~10% of the US market. However, that they didn't get to my question suggests to me that the real reason is to go all in on doing what it takes to get noticed by a big guy. Selling to Canada and Saudi Arabia doesn't do that. Covalon taking flagship US hospital after flagship US hospital does. ~$200M is a cheap price to pay to make the hurting stop and add leading SKUs to your global offering. Your sales people are probably begging you to do that for them already.
- as of the big warrant conversion in September, Covalon disclosed that 51.8% of their shares were held by insiders. Today's FY2024 report has 40% of shares held by insider Abe Schwarts and 17% held by insider Goldfarb Corp (the corporate entity of one of the people on the Board). Existing management has lots of RSUs (I've not looked it up). I've not seen corresponding filings of insider transactions, but we are at something like 60% of the fully diluted outstanding shares held by insiders and the CEO repeating, again and again, his confidence that the firm has a lot to grow into.
I took the failure to answer as a good sign and a tell. Maybe on the next call he'll have carefully prepared something anodyne and meaningless as an answer, but for this call he wasn't expecting the question. Just the way he didn't answer had me immediately think that he was surprised, that he totally knew what he was planning but that he best not say. Just a vibe I got.
I like the current management, so take it to mean that whatever the thinking is would be good news for shareholders rather than some value destroying ego trip. I hope to not be disappointed. Of course, this is at best speculation. It is too soon in the company growth cycle for a dividend. If it was a share buyback they'd have responded differently and we'd see/have seen news soonish. It doesn't take long to get share buybacks approved so that we haven't seen news suggests there isn't one planned. A share buyback would be kind of dumb at this stage and they need the cash as a war chest for something better...
Based on the CEO talking several times about mergers and acquisitions, he is looking hard in both directions. He's placing the company as an attractive takeover target at a premium to current prices. The CEO was at Solventum (then 3M Health) prior to Covelon, so he knows all the execs. A big chunk of Solventum is in the same space as Covelon, yet Covelon is growing >20% top line while Solventum is stagnant. J&J is a good fit as well. If either thought the other was interested, urgency would be created.
I suspect the CEO is also looking a similar microcaps in the same space that are struggling but would fit nicely with Covalon's existing niche and sales network. Sales people in the field love having extra products to sell that tie in nicely with the existing offering. He could trade cash for a new product or two that would grow revenue with minimal increases in SG&A or Sales and Marketing. Win for Covelon, win for the heath microcap looking at either running out of cash or raising money and further diluting.
Regardless, Covelon's Q1 will be out in late February or so. Since it's coming off a terrible Q1 last year, they'll report something eye-popping like 100% revenue growth. That ought to kick the stock up to a new level even as it makes the staid larger players pay attention.
Thanks for your details reply I appreciate it. I'm not in the vestor I've looked at it just haven't convinced myself yet. I own kraken and Enterprise and it's difficult to move from one to another when one has more potential at least for me I've learned my lessons. Doesn't mean that I'm not going to invest in this but I learned fomo is not the way to go hopefully the CEO knows how to use profits properly and not buying DVD players thinking because I bought something it's of value or good for the company. Allocating cash is super important in the right way
I'm just in it for the short term win. I doubt a takeover is imminent, though I'll do well if it happens. Rather, I figure it'll pop up to $4ish or more after its next earnings in late February show nearly 100% revenue growth off last year's terrible first quarter (right before the new management had refocused the company). At that point I'll take my profits.
[not for this thread about Covalon, but Kraken seems dead money. It's a good company that has done well for long time shareholders but now thoroughly discovered and already priced more than fairly. What is the upside I'm missing that could take it higher? Enterprise I don't know.]
Excellent summary - and fast too! I was also listening in on the call while frantically reading their FY2024 audited financials which had been released at the same time.
- agree that ~$3/share is a very fair price given where Covalon is at. I'm certainly not selling in disappointment and the low 3s seems a very stable base for the stock to build from. While the price might not move much, there is little downside. All the space to move is up. Assuming the story continues to play out, I'd expect a new higher base price level to be established after their Q1 report in late February/early March.
- while the firm is doing well and the growth story remains intact, I was slightly disappointed with the quarter, imagining sales at +40% (vs +28.6%) and EPS of ~$0.05. I guess the market was feeling similar as the price dropped ~10% at the open.
- my main conclusion from the call is that the CEO is going all in on being bought by one of their larger competitors. It's not up to him, of course, but he is doing what he can to bend reality in that direction.
- Covalon now seems sustainably cash flow positive and has over $10M in surplus cash on their balance sheet. I asked what plans they had for that cash and the CEO said he preferred not to answer. Earlier in the call he talked vaguely but with excitement about 'numerous' partnership, merger and acquisition opportunities. It is a realistic possibility that Covalon is bought by one of their major competitors, who Covalon appears to be beating in narrow segments. In that case, $3/share is pretty cheap. Johnson and Johnson, one of their competitors, trades at 4x sales. If they offered 4x FY2025 sales for Covalon, that would be ~$5.90 a share. Give it a year and another 20% growth in sales, it becomes $7/share. Noting the CEO's prior industry experience and contacts, I expect this might be exactly the kind of pitch he is making and his real strategy is to be taking their business in mainstream US hospitals enough that they big guys notice and buy them.
- according to their FY2024 annual report, Covalon has C$4.9M and US$11.1M of accumulated tax losses. This would be a sweetener if someone was to buy them, or helps them amp up their cash flow for the next several quarters of profits as they use up those tax losses.
- Covalon has basically abandoned Canada and overseas markets, focusing instead on the US. This is probably a consequence of the new CEO 'cutting costs and focusing'. They didn't get to my question about these markets. FY2024 US sales were $27M while Canadian sales were $40K (!!). Mid-East sales dropped from $5.9M to $2.7M. I'd assumed the answer would be something like 'we've focused on the US and gotten excellent traction, which we continue to build on. Now that we have that traction, we've got a strong story to go back into other markets we have traditionally done well.' Presumably, the home market of Canada would be ~10% of the US market. However, that they didn't get to my question suggests to me that the real reason is to go all in on doing what it takes to get noticed by a big guy. Selling to Canada and Saudi Arabia doesn't do that. Covalon taking flagship US hospital after flagship US hospital does. ~$200M is a cheap price to pay to make the hurting stop and add leading SKUs to your global offering. Your sales people are probably begging you to do that for them already.
- as of the big warrant conversion in September, Covalon disclosed that 51.8% of their shares were held by insiders. Today's FY2024 report has 40% of shares held by insider Abe Schwarts and 17% held by insider Goldfarb Corp (the corporate entity of one of the people on the Board). Existing management has lots of RSUs (I've not looked it up). I've not seen corresponding filings of insider transactions, but we are at something like 60% of the fully diluted outstanding shares held by insiders and the CEO repeating, again and again, his confidence that the firm has a lot to grow into.
Wow, next time I write about these guys I'll bring you on for a consultation!
I also asked about their windfall cash position in the Q&A and that question was avoided as well.
Not sure why he didn't answer where are you going to spend the cash.important to know is he sensible or wreck less with capital
I took the failure to answer as a good sign and a tell. Maybe on the next call he'll have carefully prepared something anodyne and meaningless as an answer, but for this call he wasn't expecting the question. Just the way he didn't answer had me immediately think that he was surprised, that he totally knew what he was planning but that he best not say. Just a vibe I got.
I like the current management, so take it to mean that whatever the thinking is would be good news for shareholders rather than some value destroying ego trip. I hope to not be disappointed. Of course, this is at best speculation. It is too soon in the company growth cycle for a dividend. If it was a share buyback they'd have responded differently and we'd see/have seen news soonish. It doesn't take long to get share buybacks approved so that we haven't seen news suggests there isn't one planned. A share buyback would be kind of dumb at this stage and they need the cash as a war chest for something better...
Based on the CEO talking several times about mergers and acquisitions, he is looking hard in both directions. He's placing the company as an attractive takeover target at a premium to current prices. The CEO was at Solventum (then 3M Health) prior to Covelon, so he knows all the execs. A big chunk of Solventum is in the same space as Covelon, yet Covelon is growing >20% top line while Solventum is stagnant. J&J is a good fit as well. If either thought the other was interested, urgency would be created.
I suspect the CEO is also looking a similar microcaps in the same space that are struggling but would fit nicely with Covalon's existing niche and sales network. Sales people in the field love having extra products to sell that tie in nicely with the existing offering. He could trade cash for a new product or two that would grow revenue with minimal increases in SG&A or Sales and Marketing. Win for Covelon, win for the heath microcap looking at either running out of cash or raising money and further diluting.
Regardless, Covelon's Q1 will be out in late February or so. Since it's coming off a terrible Q1 last year, they'll report something eye-popping like 100% revenue growth. That ought to kick the stock up to a new level even as it makes the staid larger players pay attention.
Thanks for your details reply I appreciate it. I'm not in the vestor I've looked at it just haven't convinced myself yet. I own kraken and Enterprise and it's difficult to move from one to another when one has more potential at least for me I've learned my lessons. Doesn't mean that I'm not going to invest in this but I learned fomo is not the way to go hopefully the CEO knows how to use profits properly and not buying DVD players thinking because I bought something it's of value or good for the company. Allocating cash is super important in the right way
I'm just in it for the short term win. I doubt a takeover is imminent, though I'll do well if it happens. Rather, I figure it'll pop up to $4ish or more after its next earnings in late February show nearly 100% revenue growth off last year's terrible first quarter (right before the new management had refocused the company). At that point I'll take my profits.
[not for this thread about Covalon, but Kraken seems dead money. It's a good company that has done well for long time shareholders but now thoroughly discovered and already priced more than fairly. What is the upside I'm missing that could take it higher? Enterprise I don't know.]
Thanks for the conversation I appreciate learning
thanks for sharing
Nice, mate. My blood pressure has come down a bit
Happy to help. 😂