PyroGenesis Canada (TSX:PYR) has been quite a high-flying TSX growth stock in 2020. The high-tech company’s share price rose from a low of $0.19 during the market crash in March 2020 to a high of $6.15 by late July in a 3,136% rally that has since cooled off a bit. PyroGenesis Canada’s stock recently graduated to the TSX and chances are that the growth stock could double in 2021 if shares regain momentum back to their 2020 all-time highs.
What does PyroGenesis Canada’s stock tick?
PyroGenesis designs and manufactures advanced plasma processes and products for customers in the defense, metallurgical, mining and advanced materials, oil and gas, and environmental industries. Products include plasma torches, waste processing systems, high-temperature metallurgical processes, and engineering services. Its customers continued to buy during a market crash in 2020.
The company reported a massive revenue surge during the second and third quarters of 2020. Third-quarter sales of $8.15 million were a record, representing a 288.5% increase year-over-year. Gross margins expanded to 67.9% from 45% and operating earnings turned positive for the first time ever.
The Montreal-based company’s income statement has shown significant improvements during the past two consecutive quarters. The company became net earnings positive this year. Its cash flows from operations turned positive in a potentially more sustainable way and leverage improved in 2020 too.
Potential growth drivers in 2021
In a recent Management Discussion and Analysis (MD&A) filed last month, management reported that PyroGenesis Canada’s revenue backlog stood at “a healthy” $36.4 million on November 25. The company signed a huge contract with the U.S. Navy in 2020 and is winning new customers and penetrating new industries with its cutting-edge offerings.
The company has also emerged as a credible provider of greenhouse gas (GHG) reducing technologies to the iron ore industry. The iron ore industry has historically relied on fossil fuel burners. PyroGenesis’s patented plasma torch technology could gain traction in this new industry vertical and help environmentally conscious customers reduce their carbon footprint. I wait to see how sales to this vertical turn out to be in 2021.
Encouragingly, the plasma torch technology is also transferable to the cement, aluminum and glass manufacturing industries. I would be keen to see if the company can start gaining new customers in these new industry verticals in 2021.
Most noteworthy, the company recently signed an additional contract with a U.S. based tunneling client for about $1.1 million, bringing the total value of contracts signed with the same client to over $3.6m. This new industry vertical could be a sustainable growth driver. However, both companies reportedly prefer an exclusive relationship. Sales would thus be restricted to just one customer.
My concern is that exclusivity may limit long term growth potential for the company in the tunneling and Earth drilling vertical. I would be interested to see how things turn out in this segment in 2021 too.
Other issues to watch and evaluate going forward
PyroGenesis Canada’s revenues have been historically volatile. It’s not a given that the company could sustain an $8 million quarterly revenue run-rate. The majority of its revenue is recognized using the “percentage of completion basis” and will thus be dependent on the timing of project initiation and execution. Shares are richly valued now. Any “surprise” dip in sales could trigger a sell-off.
The risk of sustained high sales volatility remains elevated given high revenue concentration. The company had a small number of customers that account for a majority (77%) of its 2019 revenues. Investors could welcome continued revenue diversification as the business expands in 2021.
PyroGenesis is a closely held company. CEO Peter Pascali controls more than 53.6% of the company’s equity on a fully diluted basis, rendering the stock thinly traded and extremely volatile.
That said, PyroGenesis Canada’s stock has traded mostly sideways over the past three months and retained a 676% gain for 2020 so far. Shares could still double and flirt with all-time highs if recent growth momentum is sustained.
Winners usually continue to win, and PYR is expanding its total addressable market. It could pay to watch this emerging growth stock closely in 2021.
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Fool contributor Brian Paradza has no position in any of the stocks mentioned.