Hi there,
Pinnacle Renewables had one of its worst days on record following disappointing quarterly results. There were three major factors that caused the stock price to lose 33% of its value:
- The dividend was cut by 75%
- Softer outlook
- Higher input costs due to the lumber industry’s struggles.
You combine all three of these with the company’s high debt-load and it doesn’t make for an attractive investment proposition. It is therefore not surprising the stock cratered.
Is it a good buy today? This is a tougher question to answer. On their quarterly call, management didn’t seem too optimistic about the immediate future which remains relatively unknown. The lumber industry remains under pressure which is disrupting fibre supply and leading to higher costs. Realistically, this can persist for months – even through end of year. It is also important to note that it was a headwind before COVID-19 hit – and won’t necessarily resolve itself once the pandemic subsides.
The debt also remains an issue with a debt to EBIDTA ratio of 7.7 times – and with increase costs, it could cause liquidity issues down the road.
On the bright side, management did say that demand was strong and supported by long-term contracts. This is the lone bright spot at the moment. The danger here, is that if fibre supply is impacted at a rate that impedes their ability to deliver on these contracts.
All this to say – there are many unknowns with Pinnacle. I like the space in which it operates, but it has a very difficult time with input prices given the flux of the lumber industry. Likewise, it has a spotty history and is highly volatile. Since it went public, it has missed on earnings by an average of 50% in half the quarters, and beat by an average of 50% in the other half.
It is not a reliable industry player – at least not yet.
Mat