Fire Retardant + Printed Circuit Boards = A Mess

Deciphering Perimeter Solutions’ Most Recent Acquisition

Perimeter Solutions’ fire-retardant business is an amazing monopolistic business that gushes cash. This is not in doubt. In fact, the company blew away estimates for earnings in the fourth quarter and is set for a blockbuster Q1. And yet the stock sold off by 15% in the two days after reporting earnings. The reason was this:

On December 24, 2024, the Company acquired 100% of the shares of IMS DE Holdings, LLC ("IMS") for $32.8 million. Based in Manchester, New Hampshire, IMS is a manufacturer of highly specialized printed circuit boards (PCBs).

Umm, what?

In the Mindset Value annual letter, I discussed that Perimeter was a small position for the fund because we were uncertain about the company’s capital allocation strategy:

However, the stock is still a small position for us, why? Because we would like to see what management does with the cash they are generating. Do they buy back stock, or do they acquire another company? Is that acquisition in fire management?

This was precisely the risk we were worried about. What would Perimeter do with the almost $200 million in free cash flow they generated in 2024? Buying a printed circuit board company was not on our bingo card. The question is why did they make this acquisition?

We think the best explanation is that Perimeter’s fire-retardant business is too good.

Management may feel the need to hide this cash cow and pair it with normal businesses to hide just how good this business is. The principal customers are the state of California and the US Forest Service. The risk, especially in an Elon Musk and DOGE world that is on the hunt for costs to cut, is the government finds this cash cow and plays hardball somehow with Perimeter. Or another competitor again enters the scene. Sure, the retardant is only 2-3% of the cost of fighting a fire, but the risk is still there.

This leaves investors in a state of uncertainty. The company is not what investors hoped it would be, a way to invest in firefighting in a world where insurance is problematic, and fires are becoming more dangerous. Investors didn’t necessarily sign up for buying semiconductors, and management has stated that they continue to look for acquisitions outside their existing business lines.

One thing I have learned from over 25 years of investing is that when outlooks go from certain to uncertain, multiples fall and so do stock prices. Unfortunately, Perimeter might be in the penalty box for a while until investors judge the results of acquisitions outside of its monopoly fire business and that could take years. Without dividends or buybacks, we have sold our position. We wanted to invest in the fire monopoly, not printed circuit boards.