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Sparing you with the double email for both of these names, I’ve just decided to consolidate them into one email post (separate PDFs). Below you can find RCAT commentary with a PDF update on the model and also the whole PDF for WW International (WW); both post-earnings.
Red Cat Holdings (RCAT)
If you were able to see our initial post on Red Cat Holdings (below) and decided to go along for the ride, congrats, you’re up 53% in ~3 weeks.
I broke out the (correct) math regarding the U.S. Army contract and the valuation under three different scenarios; a no-win situation, with a T2 contract win solely on the first fiscal year after, and then if the market prices in the full contract at a discounted rate upfront.
The math looked good at the time and it seemed with underlying growth in the core business without a win, the downside seemed limited. With earnings that came out last week, the downside math in my opinion has changed dramatically.
Before I dive into the new valuation math, let me first quickly go over the sales and cash position comparison.
Revenue FY’24 (ends April 30): mine = $17.9 million for / RCAT = $17.83 million
Cash estimate as of July: mine = $6.1 million / RCAT Est = $8.9 million ($6.1 million (April 30) + $4.4 million UMAC share sale - $1.6 million cash burn)
So I was pretty spot on with the sales but happily wrong on the cash position. It seems that the contracts for the remainder of the fiscal year had materialized and that the cash burn was reduced more than I thought it would which if held steady, gets you to the $8.9 million estimate.
The biggest issue that was addressed was that they are still in the running for the SRR T2 drone contract and are anticipating a decision to be made by the end of September.
Aside from not getting punched in the face with bad news, it was also reassuring that Jeffrey Thompson (CEO) highlighted some NATO programs that in aggregate, are far bigger than the SRR program. SRR T2 is looking at 6,000 drone systems (12,000 drones) while the NATO contracts are for at least 25,000 systems (50,000 drones).
Now while there are no hard numbers or wins here on what RCAT could win, just yet, it’s good news that there’s still lots of interest on the NATO side of defense spending specifically for drones. That good news + the recently diverted $500 million in government funds to the Replicator program (what I mentioned in the last post) keeps bringing the total pool of possible contracts even larger — total now ~$1.5 billion.
Factoring in even a sliver of the possibility of winning a small portion of those contracts would be incredibly bullish for RCAT, though I have not modeled that into my valuation since I can’t confidently account for something I’m unsure of. It is implied that smaller, one-off contract wins are baked into future sales estimates.
Despite this, the company has 22 positions open since the end of June at the time of writing this report with 30 reported corporate employees on LinkedIn. The confidence in needed support for these hires seems very high based on the commentary given on the recent call.
Additionally, Jeffrey believes that their recent acquisition of FlightWave will hopefully bring in anywhere from $10 - $20 million in CY’25 which would mostly be their FY’26. This is where the new math comes in which I’ve broken down below.
Biggest Takeaways
We can’t assume the FlightWave contract estimations by Jeffrey are accurate but we can’t not account for them, so we’ve modeled $12M in incremental sales for CY’25 ($2M in FY’25 in the final quarter and $10M in the first 3 quarters in FY’26).
Increased y/y growth rates from FY'26 onwards to account for the increased contract possibilities in FlightWave, NATO, and Replicator.
Held constant forward multiple on both a standalone basis (3.5x fwd sales) and a contract win basis (5.0x fwd sales).
Cash and debt reflect new assumptions from the recent 10-K.
This puts the new (no)win contract math at $2.20 vs $1.74 that I previously had — revised from $1.37 to reflect FY’26 vs FY’25 since FY’25 is almost over. Given the stock price is currently trading for $2.81, the implied downside is now 22% from current prices but still above when I initially published my research.
Despite the downside goalposts moving, the upside has also changed to reflect a similar adjustment above which are still very favorable in my opinion.
New potential upside from today’s prices could be anywhere from ~104% to ~138%. The risk-reward here is still interesting as the company continues to grow though I will caveat that with no guidance, we’re still shooting relatively blind until the SRR contract news officially comes through.
Can see the takeaway math below in the PDF. Feel free to message me with any questions.
WW International (WW)
I’ve consolidated my commentary on WW in the below PDF. This short has been quite the home run, >80% drawdown since my first initial report on them on January 15th.
For access to the most recent commentary, click through for the PDF below. As always, any questions, you can either leave a comment or message me.
Until next time,
Paul Cerro | Cedar Grove Capital
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm