YB new stock pitches (Fri, Jul 3)

Kerrisdale is long Regal Rexnord (RRX), a $15 billion market cap industrial power transmission and motion control leader that has undergone a dramatic transformation via the $3.7 billion Rexnord Process & Motion Control (2021) and $5.1 billion Altra Industrial Motion (2023) acquisitions, which doubled revenue to $5.9 billion (2025), added ~$4 billion of higher-margin revenue, cut PES/HVAC exposure from 77% to 28%, reduced customer concentration from 24% to 11%, and expanded gross and EBITDA margins by 11 and 7 points respectively since 2018; the Altra deal coincided with a three-year industrial recession and left Regal saddled with $6.5 billion in debt and a 'overleveraged' stigma, obscuring the transformation and depressing the stock. The key catalyst is an underappreciated data center inflection: Regal entered the ePOD (energy point of delivery) power module market in early 2025, exited Q4 with $735 million of orders (shipping in 2027), and its switchgear business (30% five-year CAGR, $120M in 2025) is set to double, driving total data center revenue from ~$130 million in 2025 to over $900 million in 2027 (potentially 16% of revenue by 2028). Additional secular growth drivers (over 50% of revenue exposed) include industrial automation/physical AI (discrete automation orders +18% YoY in Q1), aerospace & defense (orders +76% YoY in Q1), medical/surgical robots (orders +53% YoY), and humanoid robotics optionality (~$40M of prototype orders in 2025, motion control comprising 40-60% of humanoid BOM, excluded from forecasts but a potential ~$5 billion incremental market value or $102M-$1.5B cumulative 2026-2030 revenue opportunity); an emerging short-cycle industrial recovery (ISM PMI hit 54 in May, short-cycle OEM orders +9% in Q1) and cross-selling synergies ($90M in 2025, targeting $250M+ in 2026, with <20% of customers buying multiple product families) provide further upside. Kerrisdale views consensus as far too conservative (implying just 1-2% ex-data-center revenue growth in 2027-2028 vs. ~6% peer median and only 76bps of EBITDA margin expansion through 2028), forecasting EPS of ~$15 in 2027 and ~$18 in 2028 (10% and 17% above consensus). Regal trades at just 11.5x 2027E EBITDA, a steep 30-41% discount to diversified industrial peers (17.5x median) and near historic-high discounts to RBC Bearings and Parker-Hannifin, despite margin/data center peers seeing ~60% median multiple expansion; deleveraging from 3.3x to a targeted 1.5x by early 2028 (over $1.6 billion of free cash flow over two years, boosting 2028E EPS by $1.20+) plus resumed buybacks (at 2.5x leverage, expected by YE 2026) and a possible dividend increase (0.7% yield vs. 1.0% peer median) should drive a re-rating. Risks include commodity/rare earth exposure (China controls 90% of supply, a 50bps AMC headwind), tariffs ($127M unmitigated 2026 impact, expected neutral by year-end), weak residential HVAC, medical destocking, PES cyclicality/potential divestiture, and humanoid/eVTOL uncertainty. Valuation via sum-of-the-parts (81% upside, $397.75), discounted 2028E EBITDA (123% upside, $491.17), and DCF (93% upside, $424.02) average ~99% upside (~$437.65 price target), implying at least 100% upside from ~$220.

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Energy Recovery ($ERII), trading around $9 (vs. a $18 52-week high and $30 all-time high), holds a ~90% global market share (near 100% in mega-projects >50,000 m³/day) in isobaric pressure exchangers—bright yellow ceramic-rotor devices that recycle high-pressure brine in seawater reverse osmosis desalination plants, cutting energy use 30-60% and driving industry energy consumption from ~8 to ~2 kWh/m³. The stock sold off across two brutal earnings reports: in February 2026 management wound down its CO2 refrigeration business (taking a one-time charge that compressed GAAP margins from 69.6% to 65.1%) and flagged delayed desalination projects, and in May the CEO retired, the CFO left, and 2026 guidance was pulled since ~50% of revenue comes from a war-torn Middle East/Africa; the popular framing is a 'peace-deal bounce' where guidance returns once the Iran conflict clears. The deeper thesis rests on a secular water-scarcity megatrend—the UN declared 'water bankruptcy' in January 2026, ~4B people face scarcity, demand rises ~1%/year toward a 40% supply gap by 2030, water is now geopolitical/national-security spending, and the World Bank estimates $7T of water spend needed by 2030 ($22T by 2050) while ~91% of spending is public and <2% private, leaving a ~$3T deficit—with capital flowing to the cheapest options first (efficiency, reuse) before desalination, the only category that physically creates new water and the backbone of MENA. The desalination market (~$20B today, ~22,000 plants, ~95-115M m³/day capacity expected to triple by 2050, heading to $40-60B by early 2030s) grows the business mechanically since ERII essentially is its own TAM. The moat rests on ceramic material science (frictionless, decades-long life vs. cavitation-prone metal rivals), design-stage integration into plants, and steep switching costs (the device is only 2-3% of a $500M plant's capex but drives ~50% of 30-year opex, paying back in 12-20 months), yielding mid-to-high 60s% gross margins ('software margins on heavy hardware'), no long-term debt, and ~$90M cash. Catalysts include ~$130M in buyback authorizations since Nov 2024 (~9% of shares retired, ~14% EPS uplift estimated on guidance reinstatement, ~$28.5M remaining), discretionary insider buying near lows (Chair Tondreau 20,000 shares at ~$8.34, director Sabol 11,180 at ~$8.88, while apparent 2026 selling was forced margin-call liquidation by director Hanstveit and expiring-option exercise by interim CEO Buehler), wastewater/ZLD optionality (a $18B market growing ~10% to ~$30B by 2030, ZLD ~$8B to $12B, with new India wins adding 30,000 m³/day and pushing its India installed base past 230,000 m³ across 50+ projects, plus AI data-center cooling demand), planned overseas Q400 assembly by Q1 2027 amid local-content mandates (Saudi/UAE) that turn MENA exposure into a moat, at least 9 MENA megaprojects with procurement cycles in H2 2026/H1 2027 (Casablanca, Az-Zour, Grand Basra, Ras al-Khair, Jubail, etc.), the new PX Q650 (99% efficiency, 650 gpm, ~38% fewer units per plant), and Grundfos partnership/M&A optionality. Bear risks are the leadership vacuum (retired CEO plus departed CFO amid pulled guidance signals a real execution gap), Middle East revenue concentration (a double-edged war risk making near-term numbers unforecastable), the CO2 and prior VorTeq/Schlumberger failures showing recurring go-to-market walls beyond water, and opportunity-cost 'dead money' while capital chases the AI trade. The author concludes that only the forecast broke, not the franchise—the 90% share, ceramic lead, switching math, and margins remain intact—and is long, viewing $ERII as a multi-bagger.

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Merlin (MRLN), a publicly listed Series C-stage 'physical AI' company developing the first autonomous pilot platform that retrofits to existing planes ('Waymo for planes'), is drawn as a direct parallel to AST Spacemobile (ASTS) three years ago, when ASTS traded around $5 before bottoming at $2 in April 2024 and subsequently rallying to $89 today (peaking at $133), representing a potential 100-bagger with $100bn+ market cap upside if the tech scales. MRLN targets a ~$100bn/year global fully-burdened pilot employment cost TAM, currently trades under $1bn fully diluted market cap, and follows a high-margin licensing model where customers pay for hardware/installation and Merlin collects recurring high-margin licensing fees at high ROIC, creating high switching costs and data network effects once commercialized, with a patented tech and regulatory-pathway moat (Reliable Robots being the key competitor). It partners with industry heavyweights including GE Aerospace, General Dynamics, Honeywell, and the DoD, has strong founder/CEO alignment (material equity stake, minimal salary, all-primary SPAC proceeds), and pursues a dual-use (defense-first, then commercial) strategy. The key inflection catalyst is anticipated commercialization progress around 2027 (analogous to ASTS's May 2024 AT&T agreement), including C-130J critical design review completion and the proposed $55bn 2027 Defense Autonomous Warfare Group (DAWG) budget, with comparison to Waymo's $126bn valuation. Risks include real, multi-faceted downside potential (100% impairment possible), dilution from warrants and convertible preferreds raising the 96m basic share count by 50-80% fully diluted, regulatory, execution, delay, and competition risks; borrow cost exceeds 50% (a material, variable dividend-like source of downside protection for holders), and a passionate retail 'pilotmob' shareholder base is emerging, mirroring ASTS's 'spacemob.' The author, a 5-year ASTS holder, views MRLN as a grossly mispriced open-ended call option with asymmetric risk/reward and appears willing to hold long-term.

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