Perimeter Solutions (PRM)
Thesis
Perimeter Solutions (PRM) is a unique specialty chemicals producer that experienced an incredibly rally in 2024 as an immediate competitive threat disappeared and demand recovered for the company’s lucrative wildfire retardant products. Today, PRM is at a cyclical peak and, at a full multiple of 9.5x trailing EBITDA, is priced with the assumption that these elevated earnings will continue for the coming 2025 fire season (typically June through early September).
Modest demand normalization along with the possible return of competitive pressures, growth of substitute solutions, and aggressive share dilution all pose considerable downside risk.
Assuming a moderately less severe- but high relative to recent history- 2025 fire season, PRM could see EBITDA fall 35% to $175M. At a constant multiple, fair value by the end of 2025 is $7.50 per share, for more than a 35% downside. If competitive or other terminal value concerns re-emerge and catalyze a half turn downward re-rate, the new 9x multiple would net a $7.00 share price, or a 40%+ decline.
If 2025 proves to be another intense fire season, PRM could print a record ~$300M of EBITDA, issue a $200M / $1.25 per share special dividend, and see a 20%+ return. However, a strong 2025 would greatly increase the chances of a sharp downcycle in 2026. On an assumed $165M in 2026 EBITDA, the stock could drop below $6.50 for a negative 20% two-year IRR, or a 30% downside including dividends.
While Perimeter’s earnings trajectory in 2025 is highly uncertain, there exists an asymmetry as the stock is fully priced and the probable downside outcomes following a cyclical turn more than offset the limited upside if the current peak were to persist- making PRM an attractive short opportunity.
Background
Perimeter is a specialty chemicals manufacturer with two main businesses*:
Fire Safety (70-80% of sales / EBITDA): comprised of suppressants and retardants.
Specialty Products (20-30% of sales / EBITDA): produces P2S5 (phosphorus pentasulfide), an additive for engine lubricating oils. Specialty Products had a difficult 2023 on the back of customer destocking. However, the segment has since recovered and management believes 2024 “represents a normalized end market demand year.”
Given the relative unimportance to the broader business, this thesis assumes the normalization claim is valid and that Specialty Products grows at low single digits+ (LSD) off of the 2024 base. The remainder of this piece will focus exclusively on Perimeter’s core Fire Safety segment.
Fire Safety
Suppressants: foams directly applied to fires to extinguish the flames. This sub-segment has seen nice growth over the past few years (high teen CAGR since 2019) as the industry pivots away from harmful PFAS-based foams to Fluorine-Free ones.
Retardants: sold under the PHOS-CHEK and FIRE-TROL brands, long term fire retardants (LTR) are deployed by both ground crews and aircraft along the perimeters of fires to prevent further spread (Perimeter has a worthwhile, lay-person’s whitepaper on the history of retardants and application methods). USDA’s Forestry Service (USFS), Bureau of Land Management, and CAL FIRE are far and away the largest customers, collectively accounting for 75%+ of sales. PRM frequently stations its own staff and equipment at these agencies’ firefighting air bases.
This is PRM’s largest, most volatile, and lucrative business, generating approximately two-thirds of the company’s total EBITDA.
*Speedwell Research has an excellent in-depth overview of PRM, its products, and history.
Retardants and the Wildfire Cycle
Retardants are a secular growth market driven by a combination of the increasing frequency and severity of wildfires, a 3 to 4% annual growth in LTR-deploying airtanker capacity, and LSD pricing (on top of pass through pricing for any raw material costs).
However, retardants are typically ordered on an as-needed basis (end users often carrying only a single day’s inventory). So, on a shorter time horizon, retardant sales are a function of a given year’s number and size of wildfires, as well as the fires’ proximity to people, infrastructure, and airbases.
As these are complicated, difficult to quantify variables, the count of acres burned in the United States, excluding Alaska (where fires can be large, but remote and not requiring human intervention), is used as a proxy for the severity of a wildfire season. The more severe the season, the more gallons of retardant required, and the higher PRM’s sales.
Acres burned exhibits a clear cyclical pattern:
A Perimeter former explains:
“In 2019 the rainfall amounts and eventually the snowpack over the winter in these high fire-prone areas in the mountains were significant. Then, spring was cooler than expected. So, what happened after was a very slow thaw and by the time things thawed out, it was July and there was no real fire season.
You’ll see this in Perimeter’s numbers- (2019) was a (low earnings) year. But there was lots of moisture and water, creating a lot of vegetation in these high fire-prone areas, which ultimately creates fuel in future years. Guess what? 2020 and 2021 were record fire seasons for Perimeter.”
Acknowledging acres burned is a crude heuristic to gauge LTR demand/sales*, there is still a reasonable correlation between the two**. PRM also demonstrates operating leverage as fixed costs (e.g., retardant mixing equipment at an airbase) are amortized over the larger volume base.
*PRM’s public data only extends back to 2019
**Along with the discussed annual price hikes, capacity increases, locations of the fires, etc., further complicating the relationship is that PRM’s customers generally have a tiered pricing structure- paying a higher rate for the first tranche of gallons, and a lower rate for the second. See pages 5 (B-2), 25 (B-22), & 110 (D-5) on the USDA’s 2024 Perimeter contract.
Scenario Analysis
Forecasting the severity of a fire season- much less reliably translating that forecast to Perimeter’s financial performance- is impossible with any serious degree of accuracy.
However, past cycles can inform probable upper and lower bounds of acres burned. Again, understanding the relationship between acreage and PRM’s Fire Safety sales is instructive, though highly flawed, incomplete, and non-linear, the below explores some plausible scenarios for 2025 and 2026.
Consensus: using street estimates as a proxy for embedded investor expectations*, Fire Safety’s topline is projected to decline slightly in 2025, with some recovery in 2026 largely on the back of pricing actions (~6% from PRM’s LSD price increases plus an assumed LSD raw materials pass through) and structural volume growth (mid-single digits [MSD] from tanker capacity additions, more airbases, more retardant per acre as society increasing moves into fire prone areas, etc.).
For 2025, holding the 10-year cumulative average acres burned (that is, the average of the sum of acres burned in the trailing 10 years for every year between 2009 and 2024- one measurement for a “normalized” amount of acres burned across multiple fire cycles) at a low double digit (LDD) premium to its historical average implies Fire Safety’s revenue per acre burned** must increase by 20%+ versus 2024- this is high, but not out of line with past values adjusted for inflation/pricing.
To 2026, if the 10-year cumulative average were to move back towards a single digit premium (maintaining the premium as wildfires are a secular growth phenomenon), revenue per acre would have to ~double (an unprecedented rate of increase to an unprecedented dollar value).
This seems unreasonable and suggests (1) PRM will either take an extraordinary amount of price (doubtful), (2) suppression and retardant demand suddenly greatly increases per acre burned (also doubtful), (3) North America is entering a markedly new paradigm of more severe wildfires across multiple-cycles (perhaps- but this indicates an abrupt departure from recent history), or (4) that consensus estimates are overly optimistic
If the consensus-derived path seems unlikely, what are other possibilities?
Downside: if 2025 turns out to be a less severe season, with only 5M acres burned- still at a 10% premium to the 10-year cumulative average- and adjusting for the higher revenue per acre dynamic, Fire Safety revenue could drop by over 20%. 2026 then conservatively assumes a recovery to maintain the 10-year cumulative premium.
Upside: 2025 turns out to be another bad year with the cumulative 10-year premium at its highest point ever (the previous high was 14% in 2020). But even holding revenue per acre burned roughly flat to 2024’s, Fire Safety revenue only increases by high single digits (HSD) year over year.
However, come 2026, there is a dramatic reversion back to the LDD acres burned premium as the fire cycle turns. Although revenue per acre doubles, total Fire Safety sales plunge 40%.
While the figures and scenarios above are contrived, they illustrate that any further material increase in Fire Safety revenue (again- 80% of firm-wide sales & EBITDA) would mark a noted divergence from recent historical patterns. Even the slight decline in the consensus case implies an above trend fire season.
This is not to say these outcomes are impossible (and certainly not predictable!). Rather, they indicate that the upside is reasonably capped, and that chances of an imminent downcycle and corresponding decline in PRM’s Fire Safety earnings are increasingly likely- lending to the stock’s downside skew.
*PRM has minimal sell side coverage with only Morgan Stanley and UBS publishing estimates.
**The inverse relationship between acres burned and Fire Safety sale per acre is due to the tiered pricing structure along with other factors such as retardant drops being a one-dimensional line versus fires that burn a two-dimensional area. When a greater number of acres burn, it is usually due to individual fires becoming larger, rather than higher count of distinct fires (see chart below). However, retardant demands depend on the number of separate, societally threatening fires around which these retardant lines need to be “drawn.”
Competition
In December 2022, Compass Minerals (CMP)-owned Fortress saw its aerial retardant formula added to the US Forest Service’s (USFS) coveted Qualified Products List (QPL)- allowing a variety of agencies, states, and cooperating countries (e.g., Canada) to purchase the LTR. This marked the first time in over 20 years a non-Perimeter product was featured on the list.
A viable competitor finally challenging PRM’s long standing monopoly was an overhang that, coupled with a weak fire season, contributed to the stock’s drawdown in 2023. Unfortunately for CMP, after a series of limited field evaluations in the summer of 2023, in March 2024, Fortress announced that it would not receive a contract for the 2024 season due to corrosion in airtankers that had flown with the Fortress retardant.
In mid-December 2024, Compass tersely stated they were working on an alternative product and were “planning to finalize discussions with the USFS regarding the potential for a 2025 contract.” This impressively non-committal language also needs to be taken with the context that CMP has struggled recently in its primary de-icing business and seems to be in general state of disarray with problems including accounting restatements and executive turnover.
Given its more pressing issues and that Fortress is a non-core business, it is very unlikely CMP will have a competing product at scale for the 2025 season. The more acute threat on a 12-to-18-month timeline would be an announcement of significant progress in Fortress’ formula and/or customers trialing (or talking about trialing) the reworked product*. This could raise concerns surrounding PRM’s terminal value and drive multiple contraction.
*Federal agencies (Perimeter’s customers) are required by Federal Acquisition Regulation (FAR) Section 6.202 to at least consider alternative sources to maintain a competitive vendor selection process- affording Fortress an automatic toehold/benefit of the doubt.
A PRM former explains:
“(FAR 6.202) is rooted in this idea that if you are successful in getting on the QPL, at a minimum (federal customers) must entertain negotiations. The literature is less clear around whether or not (the agencies) can make it so difficult for you to contract with them that maybe you never get there or it takes a little bit longer.”
Additional Downside Contributors
These will not be material in the short term, but could swing sentiment and consequentially Perimeter’s multiple:
Non-LTR modalities gain traction: there have been studies advocating for replacing much of the retardant tanker fleet with water scooping Fire Boss or Canadair (which captured headlines in LA’s Palisades Fire) aircraft that eschew LTRs and instead suppress fires with direct (water) drops.
Founder Advisory Fee Agreement: Perimeter has an (in)famously unique (for public markets!) compensation structure that amounts to “1.5 & 18.” Perimeter went public via SPAC in 2021 and the company’s niche-celebrity sponsors instituted a scheme whereby they are paid 1.5% of a fixed amount of shares annually (up to 50% payable in cash, if paid 100% in stock, it represents a roughly 1.5% annual dilution) and 18% of the share price increase over a high water mark (HWM). PRM has breached its $13.63 per share HWM several times over the past few months, though it does not appear to have qualified for the 2024 compensation year.
Going forward, if fundamentals (say, in a banner fire year) support a share price above the HWM, there will be a notable dilutive effect.
More broadly, the hedge fund-like compensation structure is (ironically) regarded with disdain by many public market investors and may depress the multiple or prevent an otherwise deserved upward re-rate.
Timing and Sizing
Timing: PRM reports its Q4 (12/31) earnings February 20th. Although the company does not guide on revenue or profitability, it is likely they discuss the unseasonably high demand thus far in Q1 stemming from the January LA fires. Recognizing that street coverage is limited, Q1 2025 estimates are still flat with 2024’s. So, following the Q4 call, Q1 estimates may be revised higher - possibly pulling the stock up along with them.
However, Q1 Fire Safety revenues typically only make up a single digit percentage of full-year segment sales (and negative EBITDA with fixed cost deleveraging). If the stock rises on this update that is immaterial and non-informative as to the fire season/bulk of annual earnings, it may be an opportune time to initiate a short position soon after the Q4 results.
Sizing: although Perimeter has a promising downside set up, the severity of the fire season (and PRM’s earnings) remains an unknown until later in the calendar year (~post September). Initial position sizing for the short should be small and added to as and if the year progresses with minimal fires and retardant drops (of course, this is also contingent on the stock’s price throughout).
If 2025 trends towards another bad fire year, as in the Upside scenario, then a short should be revisited in the fall on the basis that 2026 would then have a stronger chance of being a corrective down year (particularly if estimates do not reflect this probable drop in acres burned and Fire Safety product demand).
Valuation
In both the upside and downside cases, Specialty Products grows at a LSD+ rate on flat mid-30%s EBITDA margins.
Upside Scenario: HSD revenue in 2025 growth to just under $600M, with ~$300M of EBITDA at a record 50% margin and 70% incrementals. The company makes good on its tacitly telegraphed special dividend, returning $200M ($1.25 / share) to shareholders and holding net leverage below 2x. On a constant 9.5x EBITDA multiple, upside including the payout is north of 20%.
As the cycle turns in 2026, EBITDA drops to $165M on lower topline and deleveraging. Cashflow receives a slightly working capital benefit as inventories do not need to be restocked. The company issues another $100M special dividend, but the share value collapses on lower earnings. Even with generous cash returns and baring a multiple re-rate, the implied two-year IRR is a negative 20%.
Downside Scenario: a weak season sees company-wide sales fall to $450M. EBITDA drops to $175 on (whiplash) deleveraging following its strong 2024. Cash conversion improves slightly for similar reasons to the upside 2026 case as inventories do not need to be immediately replenished. On the flat 9.5x multiple, 2025 year-end fair value is $7.50 per share, a 35% drawdown. If Fortress announce breakthrough progress with the USFS and the multiple contracts to 9x. The shares could fall 40% to $7.00.
At this point, the risk/reward skew is not as favorable and short should be exited or re-evaluated. A recovery in 2026 to a level well below that of 2024 could still see shares appreciate 30%+.
Bottom line: Perimeter may be a secular grower with desirable TransDigm-like characteristics. However, in the near term, PRM remains an overearning specialty chemical producer operating on a unique and unpredictable cycle. While a downturn and accompanying fall in the stock price is uncertain, the company seems to be nearing a peak and is priced such that further upside is limited. The capped upside and inevitable downcycle make PRM an appealing, risk-adjusted short.
Risks
As this piece has hopefully made abundantly clear, the fire season and Perimeter’s earnings are impossible to predict. If fire severity absconds from historical trend and the upside case proves too conservative, the short will fail (especially if the sizing is inappropriate relative to how much of the fire season and potential for large, lumpy retardant sales remains).
PRM’s management team has also shown themselves to be prudent capital allocators- ignoring the optically high (trailing) leverage and leaning into the buyback during the cyclical and share price lows in 2023. Similar behavior might partially offset a future downturn. The company (drawing from the TransDigm influence) has also long discussed a desire to engage in meaningful M&A. Any well-received acquisitions that dilute the cyclicality of the retardants business may warrant a re-rate in the short term (demonstrating that PRM can function as an acquisition platform) before stabilizing earnings in subsequent years.
