Tuesday, February 02, 2016

CDTI: When Encouraging News is Not Enough

Last month Clean Diesel Technologies (CDTI:  Nasdaq) began shipping the latest innovation in its line of vehicle emissions control products to a new customer with assembly operations in China.  The diesel oxidation catalyst will be used by Panasonic Ecology Systems for products aimed at the retrofit market for heavy duty vehicles.  The relationship is expected to generate annual revenue in the ‘low single digits’ once ordering from Panasonic has ramped to full-rate by the end of 2016.  Responsible for Panasonic Group’s environmental systems, Panasonic Ecology Systems is an excellent customer.
The news seemed encouraging and stock bargain hunters might find attractive the low price quoted for CDTI.  We revisited Clean Diesel Technologies, a company that has long been listed in our Mothers of Invention Index of companies with innovative energy, efficiency and environmental technology.with iWe

Clean Diesel sells emissions catalysts and emission control products for heavy duty vehicles using diesel fuel.  There are also products for emissions control at facilities producing liquefied petroleum gas (LPG) and compressed natural gas (CNG).  The product line is supported by broad portfolio of catalyst technologies that Clean Diesel has been working on for decades. 

The company’s products help owners comply with emissions control standards set by federal and state authorities such as the U.S. Environmental Protection Agency (US-EPA) and the California Air Regulatory Board (CARB).  Virtually every developed and most emerging countries in the world have some sort of emissions standards in place.

The product line is supported by a rich portfolio of catalyst technologies that have been under development by Clean Diesel’s founders for decades.  The company holds patents on its ‘synergized-platinum group metal diesel oxidation catalyst’ technology, which is being used in the products shipped to Panasonic.  Knowledge of platinum is also incorporated into the company’s ‘platinum plus’ fuel-borne catalyst that can be used as a diesel additive.  

Given the high cost of platinum Clean Diesels’s scientists developed and patented ‘spinel’ technology that uses a combination of base metals as an alternative to platinum in catalytic converters.  There is also the ‘base-metal activated rhodium support’ technology to improve the functionality of rhodium in particular.  The company has even perfected and patented its own catalyst manufacturing process using a ceramic oxide matrix with lower cost catalytic base metals.

The Clean Diesel story sounds quite appealing on the surface.  First there is a large market opportunity in diesel vehicles supported by pollution control imperatives around the world.  Then there is a highly differentiated product line protected by a fortress of patents.  On first acquaintance, many investors might wonder why the stock languishes at prices below a dollar.

The reason is quite simple.  Clean Diesel Technologies has never been able to consistently turn a profit, reporting net losses in every year over the last twenty years.  It is understandable that a developing company would incur losses while new technologies and products are under development.  Clean Diesel was spun out of Fuel Tech in 1995 through a rights offering.    In 1997 Clean Diesel recorded its first sales of fuel additives and systems for emissions control in internal combustion engines and in 1999 management declared the company was no longer a developmental stage company.      

However, it was not until 2006 that revenue finally broke above $10 million per year.  Profitability still appeared a long way off.  Indeed, Clean Diesel’s financial performance took a negative turn.  Still having never reported a net profit and never generating operating cash flow, Clean Diesel’s sales peaked in the year 2011, at $61.6 million.  The net loss that year was $7.8 million and continuing operations required $14.6 million to keep going.  In the trailing twelve months ending September 2015, Clean Diesel recorded $38.7 million in total sales and a net loss of $10.3 million.  Operations used $11.5 million during the period.

With only $3.0 million in cash on its balance sheet at the end of September 2015, Clean Diesel appeared to be backed into a corner.  In late November 2015, the company enlisted the help of investment bankers to raise capital through the sale of registered stock.  Clean Diesel is to receive an estimated $2.6 million net of expenses.  The money is intended for working capital to enable fulfillment of recent commitments, including the order from Panasonic.  There is also a new distribution relationships with Paccar and new orders from the largest fleet of municipal vehicles in the U.S. in New York.

Even with a string of announcements of to new customer relationships and orders , the stock has been on a steady decline.  Of course, the broader market was has been undergoing its own correction and CDTI is immune to the turmoil.  The offering shares are being sold at a premium to the prevailing stock price, but shareholders might also be reacting to the potential for dilution presented by the warrants issued in the November private placement.

The company recently hired a new chief executive officer, who, like the string of CEO’s who have gone before him in the company, appears to be making all the right moves.  The headquarters have been moved and manufacturing operations shuttered.  As encouraging as these actions might seem, Clean Diesel has had a history of leadership change, headquarter moves and operations changes over the years.  It has never been enough.

Clean Diesel is a company with a lengthy and uninterrupted history of erratic sales and net losses.  The only thing steady in the company’s financial performance is the usage of cash to support operations.  CDTI is a stock to be avoided until operations finally generate cash.     

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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