A Member of Pat McKeough’s Inner Circlerecently asked about a stock that claims to be “doing it right.” This Canadian stock is building its future on 3-D office software that it claims can deliver customized office interiors better than the competition.
Pat points out one significant plus for DIRTT Environmental: a CEO with excellent credentials in the office furniture business. And the firm’s revenue and earnings rose in the latest quarter. Still, concludes Pat, the company must prove that it can continue to compete in a crowded and highly fragmented business.
Q: Pat: Could you please comment regarding future prospects for DIRTT Environmental Solutions? Your advice is always greatly appreciated.
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A: DIRTT Environmental Solutions Ltd., $5.88, symbol DRT on Toronto (Shares outstanding: 84.7 million; Market cap: $485.4 million; www.dirtt.net), designs and builds customized office interiors. DIRTT stands for “doing it right this time.”
The company believes its ICE 3-D software lets it deliver pre-made, customizable interiors faster and more efficiently than traditional construction methods. DIRTT first sold shares to the public at $3 each and began trading on Toronto in November 2013.
In the three months ended September 30, 2017, the company’s revenue rose 17.5%, to $84.0 million from $71.5 million a year earlier. That gain was mainly due to strong demand from clients in the healthcare, financial services and technology fields.
DIRTT gets 80% of its revenue from clients in the U.S., so it suffers from a higher Canadian dollar. If you exclude the impact of exchange rates, revenue in the quarter jumped over 21%.
Earnings rose 3.7% in the quarter, to $4.2 million from $4.0 million. Per-share profits were unchanged at $0.05 on more shares outstanding. The company’s higher spending on new salespeople and other initiatives to spur long-term growth offset the improved revenue.
DIRTT holds cash of $70.7 million, or $0.84 a share, and its long-term debt is just $14.1 million, or 2.9% of its market cap.
Growth stocks: Company’s CEO has record of success in same industry
Mogens Falk Smed, who founded SMED Manufacturing in 1983, has been DIRTT’s CEO since May 2004. SMED designed, made and sold office furniture.
SMED was one of the first recommendations of our Stock Pickers Digest newsletter. We first recommended it in the November 1998 issue at $8. In January 2000, SMED entered into an agreement with U.S.-based Haworth Inc., which acquired the company for $24 a share.
The involvement of Smed gives DIRTT some speculative appeal, but the company operates in a competitive market and may have trouble reporting consistent profits.
However, the customized office interior construction business is highly fragmented. DIRTT’s specialized software, and Smed’s business contacts, may provide a competitive advantage.
Inner Circle recommendation: DIRTT Environmental Solutions is okay to hold for aggressive investors.
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