July 27, 2015    6 minute read

Greystone Logistics: An Opportunity or Liability?

   July 27, 2015    6 minute read

Greystone Logistics: An Opportunity or Liability?

Greystone Logistics (GL) is a nano-cap publicly traded manufacturer, designer and distributor of recycled plastic shipping pallets, which are becoming an increasingly important sector of the $6 billion pallet industry. Whilst an estimated 97% of pallets are manufactured from wood, which offers a far cheaper purchase price at the expense of greatly diminished durability, GL’s plastic pallets are able to be reused for protracted periods of time, offering not only direct savings, but also improved efficiency to its clients through preventing the need for continual pallet replacement.

The potential cost savings for GL’s clients, as a result of using plastic pallets, are substantial. Whilst a wooden pallet is cheaper initially, often costing as little as $8 in comparison to around $60 for a plastic alternative, the aforementioned durability of a plastic pallet, typically lasting more than 100 trips, can yield a net benefit for a GL client in a short period of time, since the typical wooden pallet costs $3 to maintain for every three trips. Not only are there financial benefits to GL clients , but the 100% recycled nature of GL’s pallets is undoubtedly attractive for companies aiming to minimise their carbon footprint in a world increasingly concerned with corporate citizenship.

GL has, in recent years, shown consistently strong trailing twelve month (TTM) earnings, having sprung back from near bankruptcy in 2003, when current CEO Warren F Kruger was appointed. Despite having a great deal of debt, holding $17 million of liabilities relative to $13 million in assets, GL has a number of idiosyncracies which ameliorate this issue. Firstly, GL has made great progress in repaying its debt, with the current negative book value of $4 million paling in comparison to the $8 million negative value just a few short years ago. Furthermore, the CEO has personally guaranteed a number of loans to the company , resulting in greatly diminished interest rates for GL, at 4.5%, compared to the 10% + which a small-cap company such as GL would typically be required to pay. GL currently trades at a 7.32 P/E ratio based on TTM earnings, which is remarkably low for a business with a great deal of potential.

The Pallet industry

Much of this potential lies in a more detailed analysis or insight into the pallet industry. The global recession and financial crisis has had a significant knock-on effect on both the wood industry, and indeed the wooden pallet industry. Volumes of production have fallen significantly, at a time when demand from certain sectors for hard wood has actually increased, with railroads and specific construction sectors willing to pay more than wooden pallet manufacturers. This significant disruption in the traditional wooden pallet industry is an undoubted benefit to GL.

Indeed, with supply of wooden pallets falling 25%, and repair/maintenance costs increasing 33% for wooden pallets, it is difficult to see a way in which GL will not benefit from an industry shake-up. Furthermore, these changes have led to an increased reliance and investment in the burgeoning pallet rental industry, which whilst being relatively small in size, offers a great deal of potential revenue expansion for GL.

A global economy in a recovering and expansionary post recession state, in addition to a recovering American manufacturing industry, will also be beneficial for GL. Increasing global trade volumes will mean increasing demand for pallets, which augment the opportunity afforded to GL from potential cost increases and supply difficulties arising from the previously mentioned contraction in the wood production industry.

Evidence for an undervaluation

At the time of writing, GL currently trades at around a 7.32 PE ratio based upon TTM earnings. This is a remarkably low valuation, which appears to completely neglect to reflect a number of lucrative possibilities for GL in the imminent future. One of the main opportunities for GL would appear to be the acquisition of new clients. Whilst the majority of GL’s revenue is derived from Miller-Coors, one of the main alcoholic beverage manufacturers in the US, GL has reported shipping pallets to Anheuser Beusch, a company with larger revenues than Miller-Coors. Assuming the same scale of adoption, and the same gross profit margins, a successful partnership with Anheuser Beusch would raise profits to $7.5 million dollars ; Remarkable for a company with only around a $15 million market capitalisation, yet the market appears to not have factored this in to the current company valuation whatsoever , likely due to GL being a nano-cap company with little to no analyst coverage.

Furthermore, not only is GL a market leader in the plastic pallets sector, but they also benefit from a field largely bereft of competition. Despite there being a plethora of plastic pallet manufacturers, such as Rehrig, GL is almost unique in its’ ability to offer 100% recycled plastic pallets , which, as mentioned in the earlier summary, is an important selling point for the increasing number of companies aiming to meet environmental goals and standards. It is my opinion that business inertia is one of the driving factors behind companies’ indecisiveness and indecision to adopt GL’s pallets, given their multitude of advantages relative to wooden ones. Once companies begin to reconsider their pallet suppliers, this will no doubt be a significant selling point, especially given the complexity and difficulty of implementation of the recycling technology, which account for much of GL’s losses in the years 2003-2005, thus mitigating the risk of competition.

Furthermore, GL shows strong revenue growth in its’ non MillerCoors businesses, averaging in excess of 20% year on year ( YOY) growth in revenues from its’ other clients, mitigating its reliance on MillerCoors.

Problems and observations

It would appear that holding 50% of revenue with one client, MillerCoors, could potentially present a problem for GL, the extent to which being contingent on the nature of the contract between the two entities. If, for example, the contract is a long-term, fixed, and legally binding one, this would be an excellent argument for the company being significantly undervalued, since a level of revenue and profitability would be almost guaranteed for GL. If, however, the contract is one that can be terminated at short notice , this would appear to present a serious problem for GL, and would significantly undermine the stability and functionality of the company. Sadly, the nature of the contract is not publicly available.

Furthermore, whilst one can look at the huge levels of debt currently held by the company in a less negative light, with emphasis being placed on the strong rate of repayment which GL is currently upholding, the fact is that it remains a significant problem for the company going forward, and will greatly inhibit any future expansion plans which the company may have. In addition, being a small-cap stock with more than 50% owned by a number of board members, any potential investor will struggle with liquidity and price volatility issues, lowering the attractiveness for speculators.

It is the opinion of the author that Greystone Logistics represents a severely undervalued stock due to the strong possibility of future expansion and a growing industry with an evolving nature which will undoubtedly benefit the company and others of its kind. Only time will tell whether Greystone is able to capitalise on these opportunities and reach its full potential.

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