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CUI Global Fourth Quarter: Slowly inflecting

I’ve had a small position in CUI Global since last summer.  I first wrote about it here.  The thesis has been that their gas measurement technology (called GasPTi) is quite a bit better solution than traditional measurement techniques, that slower than anticipated adoption from utilities has punished the stock but that adoption of the technology is on the verge of inflection.  But even at the time I wrote rather presciently:

Given this trajectory, it’s most likely that even if the story works out it will A. be delayed longer than anyone would have expected and B. have a number of false-starts and hiccups before finally showing consistent growth.

Since that time the corner of that inflection continues to be turned, just not very quickly.  Not surprisingly the stock hasn’t done much.

Until the recent quarter the company gave me little reason to add.  In fact, prior to the quarterly release I reduced my position a little on anticipation that the market would react negatively to what seemed like a near certainty to me: that their major customer for the GasPT product, Snam Rete, would continue to be delayed in installing gasPT units because of a regulatory hang-up, making the  fourth quarter and likely first quarter guidance sub-optimal.  Even though this should have been widely anticipated, small caps are forever inefficient and so I thought it probably wouldn’t be.

That is exactly what happened.   The company reported a crummy fourth quarter revenue number ($19 million versus $23 million in the third quarter), and much reduced sales from their energy segment ($5.6 million versus $7.1 million in the third quarter).  The first quarter guidance was no better.  The stock has sold off since.

Yet I feel tentatively optimistic about the company’s prospects.  I added to my position, but just a little.  Here is my reasoning.

First, though Snam Rete continues to be held up by a regulatory hurdle, I am inclined to believe management when they say that this will be resolved.  They commented that Sanm Rete has a team working with the regulator, that they have worked through similar issues before, and that Sanm Rete is close enough to resolution to have originally thought it would be resolved by year end.

As long as you believe the management story, it doesn’t seem like this is anything insurmountable.  And a single news release noting that the hurdle has been cleared will likely lead to a resumption of Snam Rete’s run rate of 100 GasPT unit installations a month and a significant pop in the stock.

(100 units at $15,000 per unit is $4.5 million per quarter, which would boost their energy segment to almost double the fourth quarter level)

While the poor results and stand still on Snam Rete have taken the focus, the news that has been ignored is that CUI Global did get another big player on-board.  I was way off in my original write-up, thinking such an event would be a huge catalyst for the stock.  I wrote:

I don’t think you can sit on the sidelines and wait and see how it plays out.  Because the next contract, if it happens, will likely be the big move when it happens, and the stock will gap before you can react.

Well they announced that next big player, ENGIE, a large French grid operator, but obviously the stock did not respond as I had anticipated back then.  To be fair they don’t have a signed PO in hand, only an agreement for collaboration and a lot of positive color around the deal on the conference call.  The market probably wants more.

In addition to France, ENGIE also has ties to PetroChina and owns pipelines and LNG in China, a market where there have been discussions about taking the GasPT product into.  So this are potentially two markets that the company can penetrate.  The CEO, Bill Clough, didn’t put a lot of numbers to ENGIE on the call, but in the past has said that the opportunity in France is around 2,500 GasPT units (these would be higher pressure units requiring the VE probe for analysis and that therefore would have a higher ASP then the units they sell to Snam Rete in Italy), and he did on the call refer to negotiations of a 1,000 unit project that are ongoing.

One other development mentioned both in the release and on the call was a change in regulation by the UK gas regulator, OFGEM, which will make GasPT units acceptable for smaller installations.  Clough said that “once approved our European and UK customers will be able to replace gas chromatographs with our GasPT simply because the economics favor our solution”.  I’m not sure how big this opportunity will be, but it is expected to materialize into POs shortly.  They also have the previously announced $40 million engagement with National Grid, a UK utility.

Finally, in the electro-mechanical business they continue to talk enthusiastically about their ICE block solution, which is a software/hardware solution for data centers that is intended to reduce power consumption.  They said that this year they have ICE block units being tested by “several industry-leading data center operators”, mentioning on the conference call  a Fortune 100 DC operator, Fortune 500 DC operator, top tier data center hardware provider (this was all previously announced in this February press release).  They also added fourth company in one of largest ecommerce platforms in the world

I’m not as sure about the ICE block opportunity as the GasPT one.  They are a partnership with a company called VPS, where they are essentially the hardware provider for the VPS software.  VPS describes the ICE Block here, and it doesn’t sound like the hardware is a very important part of it, so what exactly the upside is isn’t clear to me.

Nevertheless even without ICE block, the opportunities with GasPT are enough to keep me interested for now.

While none of this has translated into a positive revenue number or a guidance breakout yet, it all feels very directionally positive to me, and seems more and more like the hockey stick of the inflection is just a matter of time.

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