Disinfect Your Portfolio With Massively Undervalued TOMI Environmental Solutions (TOMZ)

Oct. 5, 2020

Summary
  • TOMI Environmental Solutions, Inc. specializes in disinfection and decontamination, owning patented technology invented under a grant from DARPA, a branch of the U.S. Department of Defense.
  • TOMZ’s revenues have increased an astounding 512% in Q2 of 2020 over last year for all-time record company revenues of $10,028,000 in Q2 alone.
  • TOMZ is profitable, earning $0.24 per share in Q2. On an annualized basis, TOMZ would have a P/E of only 7.
  • With the COVID-19 pandemic showing no signs of slowing and, in fact, increasing, TOMZ’s superior disinfecting products and solutions, proven to kill SARS-CoV-2 on contact, are needed more than ever.
  • TOMZ just uplisted to the NASDAQ, which will introduce TOMZ’s story to a much larger pool of investors at a time when their industry is in focus. I expect these investors to see the extraordinary value that TOMZ’s current share price presents, and I am a buyer in advance of the discovery of TOMZ by other market participants.

Investment Thesis

With the SARS-CoV-2 pandemic showing no near-term signs of abating, the “new normal” globally will mean a fundamental change to the way that people go about their daily lives. In addition to personal protection (masks, gloves, hand washing and disinfection of surfaces), all businesses, schools, hospitals, hotels, restaurants, supermarkets and practically every location will be using some form of disinfection/decontamination process if they plan to keep customers, workers, and students healthy.

Not only that, but before backpedalling on the statement, the US Centers for Disease Control and Prevention temporarily acknowledged that SARS-CoV-2 is not solely transmitted through droplets by way of coughs or sneezes. The CDC updated its guidance on its webpage on Friday, September 18 to state that people can get COVID-19 simply through the following types of transmission:

…through respiratory droplets or small particles, such as those in aerosols, produced when an infected person coughs, sneezes, sings, talks or breathes.”

Then, the language including “sings” or “breathes” as culprits responsible for spreading the virus was removed, and a note at the top of the webpage as of September 21 states:

“A draft version of proposed changes to these recommendations was posted in error to the agency’s official website. CDC is currently updating its recommendations regarding airborne transmission of SARS-CoV-2 (the virus that causes COVID-19).”

Regardless how the CDC chooses to parse it, 239 scientists signed on to an article that warns COVID-19 infection is caused by airborne transmission not only from coughing or sneezing but though micro droplets that can be transmitted via talking and breathing, and much farther than 6 feet in indoor environments.

For true disinfection, applications are needed that don’t just disinfect surfaces, but also the air. Not all disinfection processes are the same, and TOMZ’s process stands head-and-shoulders above the rest as I will explain shortly.

After TOMZ’s share consolidation, the earnings per share for Q2 ended June 30, 2020 was $0.24. With an astounding 512% growth in revenues from Q2 of the previous year and signs that demand for services are increasing, it is not unreasonable to extrapolate a forward looking net profit of $0.96 per share on an annual basis. This translates to a price to earnings ratio of only 7.

For comparison, the average P/E ratio of the S&P 500 index is currently 22.2, almost 4 times higher. TOMZ would be conservatively valued at $22 per share, just to come up with a value consistent with the S&P average. This doesn’t take into account any future earnings growth, while the S&P average earnings growth beyond the median S&P 500 earnings growth rate of 12.01% (from 2009 onward).

So, why isn’t TOMZ currently priced at $22 per share?

I think there are a few reasons for this.

  1. They are a largely unknown and under-followed company;
  2. They were until October 1 trading on the Over-the-Counter exchange, typically limiting participation to a much smaller portion of the investing world;
  3. Investors have not yet contemplated the continuing impact that the SARS-CoV-2 pandemic will have on society going forward as it relates to disinfection/decontamination.

TOMZ did indeed have an extraordinary run-up, hitting a high of $17.04 per share on 8/11/2020 on a split-adjusted basis, but after Q2 earnings were released on 8/13/2020, the stock made an inexorable descent to where it is now. I am not sure why the stock fell after earnings, perhaps because of some unrealistic expectations for revenue growth coming off of a record Q1 into an all-time record revenue Q2. Regardless, I believe that at the current price TOMZ is extremely undervalued. It represents the rarest of finds, both a growth stock and a value stock.

Chart

TOMZ’s Superior Technology

TOMZ technology is a combination of its proprietary sprayer or “fogging” device and a specially formulated and EPA registered low-percentage hydrogen peroxide solution. At the tip of the sprayer, a cold plasma arc is created between electrodes, and as the sprayed hydrogen peroxide solution passes through the cold plasma arc, the double bond of hydrogen peroxide is broken, converting to hydroxyl radicals, a type of reactive oxygen species (ROS). These hydroxyl radicals kill even the most deadly pathogens: Ebola, SARS-CoV-2, MRSA, you name it.

Delivered from the sprayer after the arc in an extremely fine mist that moves like a gas, the microscopic hydroxyl radicals penetrate all areas easily, such as corners, crevices, seams, etc. The hydroxyl radicals attach to bacteria, viruses, and molds, destroying their proteins, carbohydrates and/or lipids immediately via oxidation. This renders them inert or harmless on contact.

TOMI Environmental Solutions Products

Source: TOMI Website

Here is an example of the built-in SteraMist disinfection system in a laboratory setting:https://seekingalpha.com/embed/11174

If you have a bit more time, here’s a 5-minute overview of TOMZ’ system:https://seekingalpha.com/embed/11173

TOMZ process is ideal for practically all locations that need disinfection and decontamination, because it is

  1. rapid;
  2. non-corrosive;
  3. safe/non-toxic;
  4. leaves no residue at all.

The end result of using TOMZ’s product is simply oxygen and humidity.

TOMZ refers to their technology as Binary Ionization Technology (BIT) and the fog produced by the sprayer as ionized Hydrogen Peroxide (iHP). They call their combined solution of sprayer and solution SteraMist iHP technology.

TOMZ’s product was initially developed with a grant from the Defense Advanced Research Products Agency (DARPA) after 9-11 as a method of protection against weaponized anthrax. In 2013, TOMZ purchased all assets of the technology platform from L3, the massive aerospace and defense technology company, now even more massive after a merger with Harris Technologies to become L3Harris Technologies (NYSE:LHX). L3 had previously acquired the technology from developer Titan Defense.

TOMZ has strong intellectual property protection for its device and method in the form of U.S. and international utility and design patents.

They have an EPA registered product for every category of pathogen and practically every use case imaginable, a testament to TOMZ’s diligence in expanding into new market verticals and a reflection of the utility and elegant simplicity of the product itself.

Aren’t there a lot of competing disinfectants, such as sodium hypochlorite (aka bleach), ammonium, and chlorine?

Yes, there are, but try convincing major TOMZ customer Pfizer (NYSE:PFE) to spray highly corrosive bleach on all of their multi-million dollar lab equipment. Or try suggesting that a hospital apply repeated high-strength bleach treatments day-in and day-out to their sensitive electronics and metal surfaces, or fill their hospital rooms with chlorine gas. Chlorine gas may be a good disinfectant, but it is also a good enough killer that it was used as a chemical warfare agent in WWI.

Allied Soldiers in WWI

Allied soldiers preparing for chlorine gas attacks in WWI – Source: kumc.edu

Now, full strength Hydrogen Peroxide is no lightweight either, but TOMZ product and application process allows for a very low-percentage concentration of H2O2 to disinfect an entire area, both surfaces and the air, extremely effectively with very high safety. Honestly, some of these chemicals are decent when used for specific tasks, as you can read in this detailed guide from the CDC. I found when I reviewed the research that TOMZ’s ionized Hydrogen Peroxide stands out as ideal.

The ratings and certifications of the EPA focus on organism reduction, without specific reference to the corrosiveness or caustic nature of the product.According to this study produced for TOMZ:

Unfortunately, the healthcare environment is not just composed of hard, non-porous surfaces. A patient’s environment is filled with a variety of soft fabrics (linen, cotton, polyester, and blends) and plastic polymers found on wheel chairs, mattresses, curtains, window treatments, and other items such as blood pressure cuffs, stethoscopes, etc. Instrumentation including monitors, computers, basinets, and other items are made of plastic(s) that can be damaged and pitted by the disinfectant interaction with the material.”

Stated damage associated with the traditional disinfectants…includes discoloration, hardening and cracking of plastics, associated brittleness, cracking of rubberized materials, and oxidation of metals, etc. As the damage occurs, there is opportunity for bacteria and other agents to become embedded in the seams and tears of the fabrics and pitting or cracking of other surfaces, adding to the risk of contamination and infection for the user.”

Given its safety, lack of corrosiveness, lack of residue, rapid effectiveness, and ease of use, TOMZ’s SteraMist is naturally a leading selection for disinfection/decontamination. Furthermore, SteraMist has a coveted six log kill claim against the nastiest of pathogens.

What Does Six Log Kill Mean

‘Log’ is short for logarithm. A log reduction of 1 is equivalent to a 10-fold reduction or, to put it another way, a 90% reduction. A log 2 reduction is a 99% reduction. A log 3 reduction is a 99.9% reduction. A log 6 reduction means that 99.9999% of all colony forming units (CFUs) of a given pathogen present have been eradicated.

log reduction chart

Source: InfectionControl.tips

A six log kill is the gold standard by which all disinfectants are measured. TOMZ’ SteraMist product provides for a rapid 6 log kill of the worst pathogens, including SARS-CoV-2, Ebola, C. difficile, and MRSA.

Competition and Customers

Competition in the disinfection business comes from global behemoths such as Ecolab (NYSE:ECL), ServiceMaster Global Holdings (SERV), The Clorox Company (NYSE:CLX), ABM Industries (NYSE:ABM), Servpro (private) as well as others such as Neogen (NASDAQ:NEOG), Ocean Bio-Chem (NASDAQ:OBCI). Companies in this space either provide decontamination services, disinfectant products, or both.

TOMZ works with a global network of service providers that purchase the TOMZ sprayers and SteraMist liquid to provide disinfection services, and they also sell directly and through agents to worldwide customers in the private sector and governments. While it is a competitive space, nobody in the field provides the level of disinfection that TOMZ does combined with the safety and non-corrosiveness of the SteraMist product.

Here are just some of TOMZ’ customers that rely on SteraMist in their facilities and operations:

TOMI Environmental Solutions Customers

Source: tomimist.com

In this partial list of clients, we have the who’s-who of sterile drug production and drug development here. Names like Pfizer, Catalent (CTLT), Nephron, Merck (MRK). The use cases here include drug development labs, clean rooms, and sterile production lines. Other customers include Harvard’s Dana Farber Cancer Institute, where TOMZ installed the first custom built-in sanitation system.

In the most recent earnings call, CEO Dr. Halden Shane revealed some additional customers:

SteraMist is being used throughout six National Institute of Health(NIH) facilities, and continues to expand usage of SteraMist as a superior solution to mobilize and respond as needed to a site where six-log kill is required.”

Dr. Shane also highlighted some customers who are relying on TOMZ offerings in critical circumstances:

We continue to expand the use of SteraMist in support of pharmaceutical drug manufacturing, cell and gene therapy, and to maintain a sterile environment for key United States manufacturers. Many of our current SteraMist customers are working to produce COVID-19 vaccines. Companies like Pfizer, Sanofi, Merck, AstraZeneca (NASDAQ:AZN)and MedImmune continue to disinfect with a safe SteraMist BIT chemical protecting their operators, facility and the environment, while providing the confidence to the American population that we will produce sterile vaccines.”

Dr. Shane also mentioned Gilead Sciences (NASDAQ:GILD) as a recent customer on the earnings call.

TOMZ lists the following as its wide-ranging customer base:

Source: tomimist.com

Product Demand

It is obvious that, as a result of a resurgence in COVID-19 infection rates, the demand for TOMZ’s products and services is going to increase once again. Here is a Google Trends chart of the search term “covid 19 cleaning services” in English speaking countries, which indicates more customer enquiries:

Source: Google Trends

Here is a search of the term “Covid” in France. Note the search volume has spiked even higher than when the horrible initial wave hit France:

Source: Google Trends

Google Trends also reflects a recent uptick in U.S. demand for “Covid cleaning services”:

Current infection rates in Europe overall are now hitting all-time highs:

Covid-19 infection rates in Europe - March to September 2020

Source: Statista

It is clear that another wave of coronavirus has already swept into Europe, and the daily case count is already 150% of the March/April 2020 peak. Fortunately, the death rate is far lower in most areas, attributed by many to improved care and an increased understanding of early treatment of the virus.

In the United States as well, recent reports are showing an alarming rise in infection rates and hospitalization rates in parts of the country.

This pattern has been playing out globally, where an increase in vigilance leads to a reduction of cases, which leads to a reduction of vigilance and a corresponding return of infections. The virus will not just go away on its own, and even vaccines will not be the whole solution. As most are aware, vaccines, if they work and receive approval, are expected to be 50% effective, and most of the furthest along require two doses to reach that 50% effectiveness threshold.

So, I believe that, even after the approval of certain extremely promising therapeutics (please see my previous article about Relief Therapeutics (OTCQB:RLFTF): Relief Therapeutics Discovers A Promising COVID-19 Killer, and even after vaccines are hopefully proven effective and safe enough to distribute, there will still be a steady need for the disinfection products and services provided by TOMZ. The best solution to the risk of contracting COVID-19 is prevention, and disinfection/decontamination is part of that protocol.

TOMZ’ products and services are no doubt seen by their customers as vital to keep their operations going. It can be argued that the infection-limiting behaviors that the world is engaged in and “partially-open” business strategies is increasing the need for TOMZ’ products and services more than total shutdowns would. For example, a restaurant that wants to keep operations going while keeping workers safe and customers confident has a great interest in demonstrating a consistent disinfection/decontamination routine. Retail stores, schools, offices, and anywhere people congregate must demonstrate that they are engaged in protective procedures.

Anybody who has recently stayed at a hotel will see the importance hotels are putting on messaging about disinfection and cleanliness. Those with children in school are also experiencing the emphasis that many schools are putting on disinfection procedures.

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