Bottom 100 Stocks to Buy: Does Innovate Corp. Qualify as a Sum-of-the-Parts Play?

Barchart’s Bottom 100 Stocks to Buy had 71 penny stocks ($5 or less) in Monday trading. Innovate Corp. (VATE), a New York City-based holding company controlled by Avram Glazier, one of the owners of the Tampa Bay Bucs and controlling shareholder in Manchester United (MANU), was in the 64th position. 

VATE has a weighted alpha of 79.71, higher than its 52-week loss of 74.58%, which suggests the losses could keep coming. Its shares have dropped over 46% in the last six months alone.

The company has three operating segments: Infrastructure, Life Sciences, and Spectrum. The holding company aspect combined with a well-known controlling shareholder—Avram Glazier owns nearly 52% of the micro-cap stock—has me wondering if Innovate is a sum-of-the-parts play worth scooping up at bargain prices. 

Here are some of my thoughts. 

Innovate’s Infrastructure Business Has a History

On a non-GAAP basis, Innovate is a profitable company with a 6-month adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $39.5 million, 85% higher than a year earlier.

As I said in the intro, it has three operating segments, with Infrastructure accounting for most of the revenue and EBITDA earnings. 

So, let’s get into the Infrastructure segment first, and then I’ll touch on the two other segments.

The Infrastructure business is DBM Global (DBMG), whose history dates back to 2014 when Innovate --- then operating as HC2 Holdings -- acquired 92.4% of Schuff International, an integrated steel construction services company, for approximately $122 million. In September 2016, Schuff International became DBMG.

DBMG Is Handsdown Its Biggest Business

At the end of 2016, DBMG had revenue of $503 million, nearly $50 million in operating income, and adjusted EBITDA of $59.9 million. By the end of 2023, DBM had five business units generating $1.42 billion in revenue, operating income of $64.4 million, and adjusted EBITDA of $100.6 million.

So, on the surface, the adjusted EBITDA margin falling to 7.2% in 2023 from 11.9% in 2016 is not good news if you’re looking for profitable growth. 

What happened? According to the company, projects got pushed into 2024. 

On the bright side, it finished 2023 with an adjusted backlog of $1.2 billion. Given DBMG’s Q2 2024 revenue of $305 million, it has at least a year’s worth of future business. 

According to S&P Global Market Intelligence, DBMG’s long-term debt was just $178 million at the end of June, and it was paying reasonable interest between 3% and 4%. Its annualized adjusted EBITDA of $101.6 million is 1.8x its long-term debt.

Mueller Industries (MLI) makes steel products for the construction industry, although it’s best known for its copper products. Its enterprise value is 2.2x sales. Meanwhile, Innovate’s enterprise value of $746 million is just 0.5x sales.

The Other Segments Are Non-Factors

Meanwhile, Innovate’s Life Sciences and Spectrum businesses accounted for less than 2% of its overall revenue of $1.42 billion in 2023. 

The former owns controlling interests in several development-stage healthcare businesses—80.0% in Genovel Orthopedics, a developer of products to treat early osteoarthritis of the knee and 56.6% in R2 Technologies, which develops aesthetic and medical technologies for the skin—while the latter owns 251 full-power, Class A, and low-power TV stations across 106 U.S. markets. 

There’s not much on the bone for its other two operating segments. I suppose one or the other may hit pay dirt in the future. 

However, in the first six months of 2024, Life Sciences had $2.7 million in revenue, while Spectrum was a whopping $12.5 million. Both were up from a year ago. Their combined EBITDA loss was $5.9 million, down from $10.5 million in the first six months of 2023, so it’s not as if they are holding Innovate back.     

The Bottom Line on Valuation

Investors really want to consider whether DBMG’s enterprise value is worth more than 0.5x sales. Even a multiple of 1.0x sales for the main business would increase its enterprise value dramatically and, by extension, its market cap, which is less than $48 million presently. 

On Aug. 8, the company completed a 10-for-1 reverse stock split to comply with the minimum per share bid price requirement of trading over $1 for 30 days. It regained compliance on Sept. 3. So, until August, its shares were well below $1. 

I don’t usually look at stocks with share prices this low. However, the fact that Avram Glazer is the controlling shareholder and Chairman makes it a little more enticing as a speculative proposition. 

I definitely wouldn’t bet the farm on this one, but if you’ve got some money you would bet on NFL games in the next few weeks, you might want to reallocate a few of those dollars to this significant longshot.  

You never know.

        

 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.