“If you don‘t have the free cash flow, you don‘t have anything.” – Leon Cooperman
Cash is the lifeblood of any business. It allows one to support/maintain their assets and expand the operations beyond their current scope, providing stakeholders with a degree of stability and productivity that all organizations strive for.
That is why it is so impressive that Vertex Resource Group (TSX-V: VTX), a leader in environmental consulting and solutions, trading at a market cap of just $42 million, generated over $18 million of free cash flow in a single year (FY2023).
But this is not a one-off event. Vertex has consistently produced a positive free cash flow since 2018 and earns more than $250 million annually in sales. This steady cash stream enables it to offer a wide range of solutions and expertise, withstand economic headwinds, and extend its services to more markets than any other competitor, making it the only business of its kind.
So what’s the secret sauce?
The key is unmatched versatility and expertise. In this article, you will learn how Vertex developed a highly adaptable and scalable business all the while being a cash flow-generating machine. Let’s dive in.
Business Overview: How Does Vertex Resource Make Money?
To generate a whopping $250 million in sales, Vertex built a two-pronged business model that provides customers in the energy, mining, utilities, private development, public infrastructure, telecommunications, forestry, agriculture, and government sectors with environmental consulting and field-related services, using in-house solutions that the company built organically and through strategic tuck-in acquisitions over the years.
Vertex’s main source of revenue stems from its Environmental Services unit which accounted for approximately 75% (~$191.43 million) of the company’s sales in 2023; up from 69% in 2022.
The Environmental Services unit is comprised of a variety of solutions related to transportation, removal, storage, waste management and recycling, site services, and industrial cleaning, as well as the maintenance of a customer’s facilities. In total, it provides 28 unique services that range from Water Hauling and Chemical Cleaning to Enviro Waste Bins and Hydro-vac Trucks.
To offer such a comprehensive solution, Vertex leverages paid employees (~650/1000 Vertex employees), lease operators, subcontractors, and consultants. Additionally, the company maintains a modern fleet of specialized equipment that includes:
- 454 power units
- 609 trailers
- 1,444 pieces of industrial equipment
- A fleet of light trucks
Through vertical integration, this mixture of human capital and specialized equipment guarantees that Vertex’s customers have access to nearly everything they need to complete a project.
However, this is only one part of the equation.
Utilizing Vertex’s vast array of consulting services, a client is no longer forced to navigate the maintenance and development of a project on their own. From site selection to environmental cleanup, Vertex is there every step of the way ensuring that they maximize a project’s potential while complying with all environmental legislation and standards.
This includes over 32 advisory-related services such as Subsurface Engineering & Design, Remote Sensing & Geomatics, Pipeline Integrity, Phase I & II Assessments, and others. In 2023, Vertex’s consulting unit generated roughly $63.81 million in revenue, making up approximately 25% of its gross sales.
Combined with its Environmental Services unit, the company provides customers with an all-encompassing service that merges unparalleled expertise with innovative solutions across multiple verticals. This gives every stakeholder, including the several Indigenous Groups it partners with, the confidence needed to create sustainable projects that maximize economic benefit without compromising safety and the environment.
Today, Vertex operates in both Canada and the United States, serving clients in Alberta, British Columbia, Saskatchewan, Manitoba, Ontario, Colorado, Minnesota, Montana, North Dakota, New Mexico, and Texas. It is the only company of its kind providing both the equipment and expertise required to meet the needs of its diverse customers.
To understand what makes it so unique, let’s explore the company’s competitive advantages and how it differentiates itself from the competition.
Understanding Vertex’s Moat & Competitors
In its 2023 Annual Information Form, Vertex lists its primary competitors in the Environmental Services segment as Clean Harbors, Mullen Trucking, and GFL Environmental while Stantec and WSP Global make up its competition in the Environmental Consulting unit. Though each is a respectable player that fulfills select needs for its customers, none provides the degree of expertise and service optionality that Vertex brings to the table.
When it comes to industrial projects such as those that Vertex clients take on, costs can compound quickly, especially when a developer chooses multiple contractors to carry out the project. Moreover, they may run into additional conflicts if the contractors fail to coordinate effectively with each other or prefer a certain process/strategy over another. This leads to greater friction, weaker communication, less productivity, and overall, greater challenges for the developer.
That is where a player like Vertex, whose consulting and environmental services operate under the same organization, becomes an invaluable asset for its customers. By choosing one contractor whose services include everything from the economic and environmental assessment to the equipment and labor required to carry out the project, a developer saves time and money that is otherwise wasted.
However, there are more advantages to this business model than its service breadth and integration alone.
Given the diversity of customers Vertex serves, the company has accumulated significant experience and expertise throughout a wide range of markets. This provides the company with unique insights into various industry best practices and enables them to access solutions (i.e. specialized equipment) that would otherwise be difficult to obtain.
What’s more, the company heavily focuses on ensuring that its professionals and equipment operators receive proper certification and training to ensure that they have the necessary skills and experience to meet the demands of its customers. This added level of expertise helps further distinguish itself from the competition as its employees provide broader perspectives and experience than most professionals in the industry.
Altogether, the combination of service breadth, business diversification, and industry expertise serve as major competitive advantages that are nearly impossible to replicate. For a competitor to replicate Vertex’s business model, they are required to invest heavily in the resources, networks, knowledge, and expertise it possesses. Not only is this extremely capital-intensive but it does not account for the deep relationships the company has built over decades, with its customers and the in-depth understanding of their unique needs.
It takes time to earn the trust of a client and given that Vertex already provides them with these services, you are unlikely to find an alternative player of its caliber any time soon.
What is Vertex’s Biggest Risk?
Many of the industries Vertex operates in are cyclical by nature. Whether it is energy, mining, forestry, or public infrastructure, these industries face periods of contraction whereby business slows down and capital becomes scarce. As a service provider for these businesses, Vertex can run into episodes where its revenue may decline if its customers cut back on project spending; this is amplified when multiple markets are affected at once.
However, the company has done an effective job of mitigating these risks by establishing a highly diversified business model. By serving multiple customers in several different markets, Vertex minimizes the impact that comes from an economic downturn. On the flip side, it benefits tremendously when things turn around and business begins to accelerate in the other direction.
Boom and bust cycles are an inevitable condition associated with most businesses. Those who survive during the tough times and thrive on the upswing are those businesses that spend wisely and position themselves to capitalize on the most lucrative opportunities available to them. Vertex appears to be one such business.
Dissecting Vertex Resource Group’s Financials
You will rarely, if ever, see a micro-cap stock generate the type of revenue Vertex has. But to truly understand the company’s operational excellence, you must take a broader look at its financial track record.
From 2019 to 2023, Vertex Resource Group generated a:
- Revenue CAGR of 11.01%
- EBITDA CAGR of 25.48%
- Book Value CAGR of 5.72%
- Operating Cash Flow CAGR of 19.32%
These performance metrics are typically reserved for multi-billion dollar companies. Yet, Vertex accomplished this at a market cap of just $42 million.
By pursuing a growth strategy focused on strong technical expertise and dependable solutions in a wide range of markets, the company has set itself up for long-term success. This is propelled by an acquisition blueprint that hones in on natural synergies that complement its existing operations. Based on these fundamentals, Vertex’s financial condition is expected to improve further as it solidifies its relationship with customers and achieves economies of scale that no competitor can touch.
If I were to offer one point of criticism, it is that the company has roughly $78 million in debt. However, management is working diligently to pay down these borrowings and aims to reach a debt to EBITDA below 2x, shortly. In 2023 alone, the company slashed its total debt by over $13 million from the previous year. As the debt situation improves, Vertex will likely improve its net profits as it minimizes its interest expense. These efforts by management will have a positive impact on the company’s fundamentals and potentially increase the intrinsic value of Vertex and its shares.
In all, with the company’s proven growth model and clean balance sheet, it has the foundation to withstand the most difficult economic periods and capitalize on the exponential returns fueling the environmental revolution sweeping the markets today.
Exploring Vertex’s Leadership Team
From a management standpoint, there is no better vote of confidence than when the founder sits at the helm of a business. This is the case with Director, President, and Chief Executive Officer, Terry Stephenson who founded Vertex Resource Group back in 2005 and has led the company since.
As Vertex’s CEO, Terry is responsible for its strategic direction, business planning and operations, and overall financial success. So far, he has done an effective job as reflected by the sustained growth of the business and the long-term performance of the company’s strategic acquisitions.
Terry’s accomplishments as a business manager stem from his time and experience at KPMG and Flint–the top industry supplier and service provider for conventional oil & gas and oilsands-related industries across Western Canada–(Director of Finance) where he developed expertise in audit, due diligence, valuations, taxation, mergers and acquisitions, public company compliance, and more. While at KPMG, many of his clients were in the construction industry. He currently serves on the board of several private construction, retail, and hospitality ventures as well.
This broad exposure as an account manager, director, and investor demonstrates his extensive experience in the markets Vertex currently serves. Moreover, his time as a financial professional provided him with unique insight into how one can maximize their capital allocation strategies. Together, it gives Vertex a unique advantage as their leader not only understands the industry well but also how to optimize for long-term success.
Final Thoughts: Should You Add Vertex to Your Radar?
Vertex Resource Group is not your typical small-cap business. The company’s versatile service offering, technical expertise, and fruitful financial condition serve as key catalysts for its long-term success.
Terry Stephenson and his team have done an excellent job developing a business model that prioritizes stakeholder interests while being difficult for competitors to replicate. Moreover, Vertex is a business that possesses the talent and resources to serve customers across multiple environmental verticals. Combined, it is one of the most refined operations we have explored to date and we are excited to follow its journey moving forward.
Remember, this is a business that brought in $250 million in revenue and $18 million in free cash flow despite trading at a market cap of $42 million. This financial performance is unlike anything we’ve seen before.
If you’d like to learn more about Vertex Resource Group (TSX-V: VTX), you can access its website here.
Disclosure/Disclaimer:
We are not brokers, investment, or financial advisers; you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Edge Investments has been compensated for content creation, amounting to $19,200. Edge Investments and its owners reserve the right to buy and sell shares in Vertex Resource Group without further notice, which may impact the share price. Please do your research before investing, including reading the companies’ public filings, press releases, and risk disclosures. The company provided information in this profile, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your research
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