Boring Company, Exciting Future
Greystone Logistics is a tiny nanocap company trading at 7.8x my 2024 estimated earnings and at a LTM 12% FCF yield and going forward up to 20% yield as growth capex decreases with decent growth prospects and a highly motivated CEO with high insider ownership. Greystone designs, manufactures, and sells recycled plastic pallets to big corporations and distributors in the pharmaceutical, food, beverage, automotive, and retail industries. Some of their notable customers include iGPS( largest plastic pallet leasing company), Walmart, Molson Coors, Berry Plastics, etc. Some of these customers reach out to Greystone for customized pallets specific to their industry and their needs. For example, Walmart signed a 3-year contract with Greystone and they asked them if they could redesign their pallets for them with specific handles for better ergonomics. They have the scale and capacity to do these at a lower cost than competitors. They are now expanding into extruded lines for odd sized pallets.
Greystone is the lowest cost producer thanks to their vertical integration and capacity. They are vertically integrated by recycling and BBing plastics themselves. To a competitor that might buy processed plastics it can come in at $0.20/pound, but for Greystone, it comes way cheaper than that because they do it themselves. So, what they do is they buy it unprocessed for cheaper and then they BB the plastic and make the pallets. You can also attribute this recent change to the increase in margins and explains the fact on why I am confident they can go above 20% margins as volumes increase. Another interesting fact is a new agreement with Berry Plastics. They are now taking their plastics and recycling it and making new plastics for them. I assume it is still a small operation as the relationship still has to grow, but over time, I expect it to become bigger. Special thing with Greystone is that they can to a certain extent control raw material costs.
The plastic pallet industry is very interesting actually. They compete with the wooden pallet industry, and it has been a fierce competition. The wooden guys talk trash on the plastic guys and the plastic guys talk trash about the wooden guys. Now this dispute goes on because wood has basically all of the market share of the pallet industry because it’s cheaper and they don’t want their market share taken away. Wooden pallets are 10x more used than plastic pallets due to their lower cost. However, the plastic pallet total cost far outweighs the wooden pallet total cost. Let’s start with the initial price, yes wood is cheaper initially, but it also lasts way less. Greystone pallets last 7x more than a wooden pallet which drives the total cost down because when that wooden pallet breaks, you have to use another one or fix that one and it’s going to cost you. Second, the plastic pallet is cleaner. Unlike wood, plastic does not absorb any liquid and does not rot which makes it perfect for the food and pharmaceutical industries which are regulated industries when it comes to sanitation and hygiene. Third, plastic pallets are safer. They don’t have nails or wood splints that come out and can harm people and the product. Finally, they are lighter. Saves you money on fuel and transportation costs. They are around 30% lighter than wood.
I believe plastic pallets will end up taking more market share from the wood industry slowly as ESG becomes more important for companies and efficiency, along with automation, is essential to reduce costs in a competitive environment. Greystone is well positioned with heavy capacity and an opportunistic management to take on the shift from wood to plastic pallets.
The thesis’s main driver is sales. The company made some purchases on extrusion lines with the acquisition of Paradigm Plastic Pallets and a couple of tonnage injection machines that have to be filled. Right now, they are sitting down on some empty equipment and Warren said these empty equipment should generate additional revenue to get to the $100m revenue mark. Now some of you may think, “How do you know this equipment will be filled?”.
Well, there are various factors. First the shift from wood to plastic will bring additional revenue over time to Greystone and as they are one of the industry leaders and lowest cost producers, they will be the main choice. They don’t have a lot of competition. There are only half a dozen competitors of size that compete with Greystone and even with that, only 2 compete directly. While others have more resources and are bigger, they don’t focus solely on pallets, they manufacture other products, so they don’t compete in price with Greystone. Also, in addition to growth with iGPS, as iGPS grows so will Greystone. They have the manufacturing capacity and relationships to fill that equipment. I already mentioned iGPS, but Walmart will also be an important customer in the coming years. They just signed a 3-year deal with them but that is only in one distribution center. Walmart has 210 distribution centers. I believe they will expand into more Walmart DCs over time as the need for plastic pallets increases with automation needs. Some auto customers as well in talks. In general, they have a huge pipeline of opportunities in the coming years. Warren Kruger stated “I will say I’ve never had as much in our pipeline in terms of sales opportunity since in the last 20 years. It’s very encouraging. My belief and what I’ve told our folks is, we’ve got to fill, we’ve got to get to that $100 million mark, and the only way to do that is fill equipment.” This optimism from the CEO is encouraging and I do believe they will be able to achieve this milestone.
Second reason why I believe they will achieve that revenue mark is because the CEO knows what he is doing and is very motivated. He has plenty of skin in the game owning more than 30% of the company and has been operating it since 2003. He has extensive relationships in the industry that helps form business relationships, and that is an underrated asset to have as a CEO.
Third reason is the expansion of the sales team. They have hired 2 additional salespeople. Those people have brought in relationships to the table. One of them brought Walmart while the other brought relationships at Honda, Bery Plastics, Toyota, etc.
Now, let’s talk about financials and valuation. Greystone has $4m in cash and $13m debt. Not worried at all about debt levels, they mentioned that their focus is paying down debt aggressively and they are a FCF machine. They spit out cash every year. Now that growth capex stabilized from an investment of around $10m in equipment in 2023, we should see capex go down. I expect around $2.7m in capex ending 2024 and similar in 2025 as they invested on equipment to expand capacity and now, they have to fill that equipment. I estimate maintenance capex to be in the range of $3m. As cash flow grows with a decrease in capex, debt can be paid down. A $1m buyback was announced on an earnings call. Management is very opportunistic with buybacks. I expect 20% margins moving forward based on management statements and vertical integration with the BBs of their own plastics.
Greystone is currently trading at a P/E of 9 TTM. Based on my 2024 estimates, it is trading at 7.8x and in 2025 5.8x. On an EV/EBITDA basis, it is trading at 4.47x (normalized, had abnormal gains in 2023), based on 2024 estimates trading at 3.3x and 2025 3x. I believe these estimates are very conservative and for 2025 included the lower range guidance from the extrusion business that will come out this June. I believe Greystone is in my opinion, significantly undervalued.
