Small-cap stocks can experience big ups and downs that require more attention from investors and a more active investing approach. For instance, Xebec Adsorption (TSX: XBC) stock quadrupled in 2020, only to decline as much as 60% in 2021.
There was no doubt some euphoria in there when the stock appreciated to as high as $11 per share in early 2021 from below $2 in 2020. When the company did not meet its growth expectations, it came tumbling down.
Why Xebec stock climbed more than 9% yesterday
Small caps can experience big upward movements on good news because positive news has bigger impacts on smaller companies than on bigger ones.
Xebec stock appreciated more than 9% yesterday because it announced that it signed a contract to deliver initially 18 BGX Biostream units to a renewable natural gas (RNG) dairy farm in the United States. The units’ total revenue of about US$27 million, which is a big boost to its top line.
Over the last two years, the Xebec team developed the Biostream containerized system, which benefits customers in the following ways: short delivery times, fast installation, modularity, ability to automatically handle fluctuating flow rates, low operating costs, and a competitive price.
This agreement is an excellent validation of Xebec’s new Biostream product that focuses on animal manure feedstocks. The agreement also represents the single largest unit order the company has received to date for Biostream and the largest in the number of systems ever awarded in North America for dairy farm biogas upgrading projects.
Because of this new agreement, Xebec aims to produce and deliver 30 Biostream units over the next year for total revenue of roughly US$45 million.
Growing need leading to expanding manufacturing capacity
There’s a growing need for biogas as a renewable source of natural gas generated from waste materials in landfills, wastewater treatment plants, industrial organic waste, and anaerobic digesters processing agricultural wastes and manure. These are some markets that Xebec serves.
The company has increased its manufacturing capacity through its acquisition of Tennessee-based Nortec. It’s also upgrading its manufacturing facility in Canada to be able to handle producing 30 to 40 Biostream units per year.
Additionally, as more purchase orders are signed, Xebec is exploring new capacity in the United States.
The business
Other than for RNG, the company also specializes in deploying proprietary technologies for the distributed production of hydrogen, oxygen, and nitrogen. By focusing on environmentally responsible gas generation, Xebec has helped thousands of customers around the world reduce their carbon footprints and operating costs.
Xebec has six manufacturing facilities (three in North America, two in Europe and the Middle East, and one in Asia). It has invested more than $208 million in research and development and owns 14 patents across its proprietary technologies.
Potentially a turnaround in progress
Xebec’s trailing-12-month revenue is $64 million (up 24% year over year) with a gross margin of 0.7%. Gross margins improved substantially to 20% in Q1.
The small-cap stock’s market cap is almost $700 million. Since its major correction this year, the TSX stock has consolidated roughly in the $4-5 per share range.
Breaking sustainably above the $5 level could lead to further upside. This will require the help of signing new contracts leading to revenue recognition and sustainable gross profit margins.
