Speculative Bargains: Why Payfare and Mammoth Energy Deserve a Closer Look

Cash rich companies

In the current market, certain companies present intriguing speculative opportunities due to strong cash reserves and strategic catalysts. Payfare and Mammoth Energy are two such examples, both positioned with substantial cash holdings and unique growth prospects that could enhance shareholder value. While Payfare navigates the aftermath of losing its largest client, DoorDash, through a strategic review and strengthened partnerships with Lyft and Uber, Mammoth Energy’s recent settlement with the Puerto Rico Electric Power Authority (PREPA) infuses cash into its operations, allowing for debt reduction and expansion of its infrastructure segment. In both cases, these cash-rich companies offer potential upside amid market headwinds, making them compelling considerations for speculative investors.

Payfare (PAY)

Payfare's strategic review after losing DoorDash as a client has opened up a range of options, especially given their strong cash position and potential for shareholder value enhancement. Here’s a breakdown of the key points I’m considering:

1. Strong Cash Position: Payfare’s market cap sits around 100 million CAD, with cash and equivalents just as high. This gives them a solid foundation to support various strategic initiatives, acquisitions, or other value-enhancing moves. Given the projected cash generation over the next two quarters, I expect an additional 10 million CAD in cash, boosting liquidity and flexibility for their strategic review.

2. Ongoing Revenue Streams with Lyft and Uber: With long-term renewals from Lyft and Uber, I see some resilience against the revenue hit from DoorDash’s exit. There’s been strong user growth—Lyft Direct users are up 50% year-to-date, and active Uber Pro Card users are five times higher than previous program figures. This continued traction should help stabilize revenue.

3. Strategic Review Potential: Since the board is considering partnerships, mergers, acquisitions, or other business combinations, I think they have solid incentives to maximize shareholder value, given that 16.22% of the company is insider-owned. With this cash reserve, they have flexibility for accretive acquisitions or other growth-enhancing moves.

4. Valuation and Upside:

   • Cash Value: If Payfare ends up with around 110 million CAD in net cash, it nearly matches the current market cap, providing some downside protection.

   • Core Business Valuation: If Payfare can remain profitable, which I believe is likely since most of their costs are variable COGS rather than fixed SG&A, the company should stabilize as a 50 million CAD per year business. With an adjusted net margin of 5% (a conservative reduction from the current 10%), I estimate annual profits of about 2.5 million CAD. This profit level, growing at double digits, provides a strong basis for valuing the remaining business at around 25-40 million CAD.

   • Given these assumptions, I see the core business as reasonably valued at that 25-40 million CAD range, providing a potential 35-50% upside. Adding this to the company’s substantial cash reserves, I believe Payfare’s current setup offers a net cash-backed opportunity with solid growth potential if management executes well on acquisitions or strategic initiatives.

   • Growth Potential: If they continue achieving a high ROIC (20% over the last year), Payfare’s ability to deploy capital effectively could yield impressive returns, especially if interest rates stay high and they make the right moves.

In summary, I see Payfare as a strong net cash opportunity. With their cash reserves, strategic review, and continued traction with Lyft and Uber, there’s limited downside with solid potential for a gain, especially if management executes well on any acquisition or strategic partnership.

Mammoth energies (TUSK)

Mammoth Energy (TUSK) presents an intriguing investment opportunity with substantial hedge fund ownership and insider holdings of 4.98%. A key catalyst for the company lies in its infrastructure segment, notably due to its extensive disaster recovery efforts in Puerto Rico. After being owed nearly $200 million by the Puerto Rico Electric Power Authority (PREPA), TUSK recently reached a settlement for $188 million, of which $168 million has already been received as of October 29, with the remainder expected soon.

At a current market cap of approximately $210 million and net debt of $37 million, TUSK’s operations are effectively valued at only $59 million, post-debt repayment and cash adjustments. This cash inflow positions the company to fully pay down its debt and increase capital expenditures, which will be directed toward expanding its infrastructure segment.

Business Segments:

• Oil & Gas: Focused on products and services that support North American onshore unconventional oil and gas development.

• Infrastructure: Concentrated on constructing and repairing electric grids for various utility clients, which remains TUSK’s largest revenue contributor.

• Additional Services: Includes well completion, natural sand and proppant services (4.4 million tons of annual production capacity), dual fuel pumps for oilfield services, and drilling services.

Given the cyclical nature of TUSK’s operations, particularly with infrastructure being sensitive to natural disasters, this segment is likely to grow as the demand for grid repairs increases amid climate-related events. The recent hurricanes affecting the southern U.S. could also lead to additional contracts for restoration services, further bolstering revenue.

Valuation and Outlook: In 2023, TUSK reported $71 million in adjusted EBITDA (down from $86.1 million in 2022). With the stock currently trading at a substantial discount, this cyclical yet cash-rich setup offers a potentially valuable speculative opportunity as earnings approach.

Conclusion

These companies are not high quality companies, they are facing quite a few problems to say the least, however they are really interesting bets going into the next earnings reports as these company’s managements could guide the market towards what are they going to do with all of this cash.

Remember that this is not financial advice and that you should do your own due dilligence before buying any stock.