Pod Insights The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network TIP833: Perimeter Solutions (PRM): A Niche Monopoly, One Acquisition at a Time w/ Kyle Grieve & Shawn O’Malley About this episode In today’s episode, Kyle Grieve and Shawn O’Malley analyze Perimeter Solutions, a niche industrial conglomerate built by Transdigm’s legendary founder Nick Howley using the same playbook that turned Transdigm into a multi-decade compounder. They break down how the company operates two very different segments, from wildfire retardants and airbase logistics to specialty chemicals and precision medical manufacturing equipment, each built around sticky, mission-critical customer relationships. They’ll also cover the company’s acquisition strategy, its unusual founder’s advisory fee, and the debt and litigation risks that complicate an otherwise compelling capital allocation story.
IN THIS EPISODE YOU’LL LEARN:
(00:00:00) Intro
(00:01:19) Why the Transdigm playbook is worth cloning
(00:05:02) How this management team built a public compounding machine
(00:08:24) Why one segment profits directly from worsening wildfires
(00:16:51) The chemical monopoly hiding inside a boring business
(00:29:39) What makes these niche products nearly impossible to replace
(00:39:05) How disciplined acquisitions have created so much shareholder value
(00:45:16) The controversial fee structure investors aren’t big fans of
(01:13:26) Valuation discussion of PRM
(01:16:06) Intrinsic value of PRM
(01:18:03) Whether Kyle and Shawn will add PRM to the Intrinsic Value Portfolio
Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.
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Transcript 14,913 words · 4 speakers
0:00 Speaker 00 You're listening to TIP.
0:03 Speaker 01 Before we get started on this business today, I think I need an explanation.
0:06 Speaker 02 Uh oh, that's never a good way to start an episode.
0:10 Speaker 01 So you know exactly how I feel about dilution and this business pays fees to its founders, similar to what you'd find in a 220 hedge fund structure, just for the privilege of owning a stock. So what gives?
0:21 Speaker 02 Yeah, I mean, probably because the guy collecting that fee is the same guy who turned TransDigm into a compounder that outperformed the market for a couple of decades.
0:33 Speaker 00 Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve.
1:19 Speaker 01 We have discussed many holding companies on this show and we own a few of them in our intrinsic value portfolio, businesses like Exor, EXOR and LithCo. But you know, you can make the argument that Amazon, Berkshire and Google are holding companies as well, just with massive, massive business units and trillion dollar market caps. And anyway, you look at it, we clearly think holding companies can be good businesses as long as they're anchored by high quality assets that generate cash consistently with top notch management teams allocating capital. And so when it comes to Exor, the main reason we own that holding company in the portfolio is because of its Ferrari stake. And so even though the other assets are just okay, the Ferrari position is again, the real reason we own it.
2:04 Speaker 01 We get to own Ferrari shares at really a very steep discount relative to what. It would cost to own the shares directly with the ticker R A C E. But Kyle, I know you're a big fan of serial acquirers, which is why we also now own Lifco. And one business we don't own, however, that is probably one of the best examples of what we've been talking about because its founder Nicholas Howley was wildly successful with TransDigm and also with a company known as Perimeter Solutions.
2:35 Speaker 02 And Nick Howley is really only the start of Perimeter Solutions superstar board and executive team. This team also includes the likes of William Thorndike, who wrote the exceptional book that I know that you're a big fan of, Shaun, The Outsiders. And he's actually also a really good investor himself with a net worth of a few hundred million dollars, much of that invested specifically into the business that we'll be covering today, Perimeter Solutions. Then you have Tracy Britt Cool. So Cool worked at Berkshire Hathaway for 11 years prior to opening her own fund, Cambrook. While at Berkshire, she spent about five years working in their HQ, specifically with Warren Buffett. She was also the CEO of one of their subsidiaries, Pampered Chef, which I got a chance to check out this year at the AGM. And then she was also on the board of multiple Berkshire Hathaway subsidiaries like Kraft Heinz, Benjamin Moore, and Johns Manville.
3:18 Speaker 02 But the Howley connection is where I think the real story is because Howley just created a ton of shareholder value at TransDigm. And that business has compounded its share price at 22% since 2006, not including dividends. To compound at a rate that high for two decades is definitely what I would call an anomaly.
3:35 Speaker 01 And part of Howley's strategy with TransDigm was to sell products that were niche aircraft industry parts, which he did strategically by buying up more and more businesses to complement that product stack in this very narrow niche. But the secret sauce was in buying businesses that had a very sticky customer base, didn't cost more than 1% of their customers' total spend. So they were a small fraction of the cost input structure in these B2B sales. And yet they were very integral to their customers' businesses. So what is an example of that? Well, imagine the most boring essential parts of a plane, like the seat belts.
4:20 Speaker 01 Pumps, valves, ignition systems, and even things like cockpit security systems. They're really, really mundane, but essential for flying a plane safely. And because TransDigm owns businesses that sell these products, and famously so, they have sort of a quasi monopoly in the industry. And that's allowed them to compound at incredible returns for a long, long time.
4:44 Speaker 02 Yeah, and that's really the vital connection here. You know, Howley has a background specifically in private equity. And TransDigm was a private business doing the exact same on a much smaller scale before it went public. The strategy was pretty simple. Buy small, highly profitable niche businesses inside the aircraft parts industry, then just roll them up and use the cash flows to buy more.
5:02 Speaker 01 Howley clearly had a lot of success with TransDigm. But what I'm having a hard time figuring out is why he has decided to diversify himself into a totally new business and perimeter solutions. I mean, isn't his plate full enough with TransDigm? Or is he just one of these entrepreneurs with an endless engine and energy?
5:19 Speaker 02 Yeah, I think that's probably the correct answer there. Also, keep in mind that he is on TransDigm's board and is no longer an actual executive of that company. So it's not like Elon Musk, who's acting as the CEO of these two gigantic companies. I think, you know, he probably has more than enough time to put a large focus now on perimeter solutions. But let's go back to how perimeter solutions was formed. So Howley and Thorndike were friends and they figured, you know, why not just copy the TransDigm playbook as a public market PE style operator? Howley then helped found an SPV or special purpose vehicle that was called Everark Holdings, along with Thorndike, Cool, Perimeter's now CEO Hytham Kuri, and a couple of other people. Now, when they look to screen for a business that they want to add to their portfolio,
6:01 Speaker 02 they look at about five key attributes that they cloned basically directly from TransDigm. And that's recurring revenue streams, long-term secular growth tailwinds, high value yet low cost products and services, high returns on tangible capital, and then lastly, accretive growth through acquisitions. In 2021, they found the business that ticked all these boxes and merged with perimeter solutions for about $2 billion. Now with perimeter solutions today, having a market cap of about $5.5 billion, you can think of perimeter as kind of an early stage version of TransDigm, which now has a market cap of about $75 billion. The goal is to target private equity-like returns of about 15% or greater per year.
6:38 Speaker 01 I'm biased because I'm such a big fan of Thorndike, but it is a great framework they have with these five attributes. And honestly, I think the hardest one to grade is that accretive growth through acquisitions. So, you know, it can sometimes take many years to be able to determine whether an acquisition created more value for shareholders and if the money had been reinvested back into existing business segments, or paid out its dividends, or just kept its cash on the balance sheet. But I wanted to mention that when I first looked up perimeter solutions. I got all these pictures of planes dropping fire retardant on forest fires. And so is that a fair characterization of what the business primarily does? Do they only acquire businesses in the fire safety industry?
7:21 Speaker 02 Yeah, I think the answer to that is yes, but with a major caveat. So I was just speaking with a friend in Hawaii and this exact kind of subject came up. So he told me that perimeter solutions had fundamentally changed in terms of its business thesis compared to when he had first bought it. But the thesis hadn't necessarily gotten a lot worse, so he still owns it. Now, when you think about perimeter solutions in its infancy, it really didn't have very much diversification in terms of its business unit. So the original perimeter solutions is kind of exactly what you just said. You know, it was primarily a fire retardant product business. They had firefighting foams and they helped deal with customer equipment. But you know, fire safety was the crown jewel of the entire perimeter solutions business.
8:01 Speaker 02 But as to my friend's point, he basically said that even though the fire safety segment of perimeter is still a very, very good business, as of the last quarter, the revenue mix has actually shifted quite drastically. So the other segment of the business that has been developing is called the specialty product section. Now, specialty products shifted from about 48% of revenue all the way up to 64% today, just year over year.
8:24 Speaker 01 And it makes sense for them to move in that direction intuitively. While the fire safety segment has very nice adjusted EBITDA margins north of 40% as of last year, the business clearly has significant exposure to the cyclicality of the fire industry, which is sort of a weird thing to say. But if there are more forest fires, the company will sell more fire retardant products. And if there are fewer fires, then revenue would take a hit. And if you're comparing a busy season to a non-busy season, that could significantly impact your revenue. And of course, the number of wildfires that occur is an external variable beyond their control, which is why I say it's somewhat cyclical.
9:05 Speaker 02 Exactly. And so let me cover these two segments in a little more detail. So the fire safety segment involves many tasks that are related specifically to fire safety. So yes, they manufacture and sell fire retardants, they do fire suppressants, and they also focus on related equipment and services that are specifically used in fighting wildfires and in industrial and structural firefighting as well. So the firefighting retardants come in multiple product lines and can be deployed by a variety of different vehicles. You've got airplanes, helicopters, and even on the ground via fire engines, rail cars, or their specialized ground deployment units. Now, the customers in this segment are pretty vast. You have a lot of governmental customers on the federal, state, and provincial levels, as well as going all the way down to local municipalities,
9:50 Speaker 02 and then going all the way back up to these global commercial customers. Perimeter's products are the leading supplier of fire retardants listed by the USDA's Forest Services Qualified Products List as well.
10:01 Speaker 01 The part of that I find interesting is how they've made profits during seasons when there are actually fewer fires. And so I'd love to believe the world will have fewer and fewer fires going forward, but it does feel like in the summertime, the exact opposite is happening, at least here in North America. It was just a few summers ago that the wildfires in Canada pretty much blocked out the sun down here in Virginia. The smoke was so thick. So yeah, it's certainly a growing problem, it feels like.
10:33 Speaker 02 Yeah, and you know, even though that event happened a few years ago, unfortunately, it's not a problem that's going away. Just it feels like whenever I open up my news app on my trusty iPhone here, I'm basically hit with a whole bunch of new areas, specifically in my province of British Columbia, that are being evacuated for forest fires, and especially in July and August when it's the worst. And unfortunately, just every year, it just never goes away. It just seems to be getting worse and worse. So when I first looked at this business, I kind of got a weird feeling. You know, obviously, I don't want to see more forest fires by any means, but you know, for the fire safety segment to really take off, they need fires to happen so they can deploy more of their product. And I can honestly say I'll never cheer for wildfires to happen as I know the damage they can cause is very, very severe
11:18 Speaker 02 and can be life-changing for a large amount of people. Specifically, we've had entire towns that were decimated by fires. But you know, to kind of answer your question, management has definitely stayed true to its characteristics of looking for businesses that have these kind of recurring revenue aspects to the business. So we have to remember that when a fire happens, you can't just wait around for your retardant to come and show up. You need it, and preferably you need it yesterday. So to make deployment as quick as possible, Perimeter offers a bunch of different solutions like airbase retardant storage, mobile retardant bases, and supportive emergency air tankers and ground crew operations. So essentially, when you have these different airbases that will put product on fires, Perimeter is basically directly in the infrastructure of those bases.
12:03 Speaker 01 Just so I understand the segment a little better, I mean, could you take me through maybe an example of what Perimeter would offer for something like an airbase firefighting operation?
12:14 Speaker 02 Yeah, so let's say we look at the California Department of Forestry or CAL FIRE. So in April of 2026, Perimeter signed a five-year contract with CAL FIRE to provide fire retardant products and related services. Now, the contract is both usage-based, but also has a service revenue segment. Now, the usage of fire retardant is really up to Mother Nature, like you already outlined there. You know, obviously, if it happens, it happens. If it doesn't, it doesn't. So if there's an especially bad fire season, then obviously, there's going to be more retardant that's used, and Perimeter is going to make more money than it would in a slower season. But because these airbase contracts do have these service portions, it actually doesn't matter if they service zero fires or 100. Perimeter is still going to be paid as they have operators on standby for the duration of the contract. The airbase will basically
12:57 Speaker 02 have its own Perimeter staff that help service it. So what does Perimeter do on those airbases? They do things like designing the infrastructure, they manufacture it, they install it, then they maintain it, and then they operate the storage units, they perform the mixing of the different agents before it needs to be used, and then they load up the equipment to be used on-site. And it's this service segment that is recurring in nature, which I think has increased the value proposition of that segment. Also, a lot of the equipment that is on a base is leased to them specifically by Perimeter, which has another recurring revenue aspect to it. Now, it's kind of impossible to get the actual recurring revenue of Perimeter based on their Disclosures. So on their annual statements, they do break down product revenue and services and other revenue specifically in the fire safety segment,
13:42 Speaker 02 which is kind of the best that we can do. The good news is that the services are increasing as a percent of fire safety revenue from about 13% in 2022 to 22% in 2025. And this is kind of the closest thing that we can get to a recurring revenue number. But the product revenue would still be part of some of the recurring revenue. So it's a little bit obfuscated.
14:02 Speaker 01 I think that's an incredibly important shift. And I think what it highlights is, or at least what comes to mind for me is this kind of classic razor, razor blade business model. And so by leasing out the base equipment and putting their own operators on standby to handle setup and mixing and maintenance. Perimeter is essentially installing the permanent razor infrastructure at these air bases. And then the razor blades are the mission critical fire retardant products that get heavily consumed whenever wildfires break out. And so you can see how this resembles, you know, if you have people with razor blades already, their ability to consume razors expands dramatically.
14:45 Speaker 01 And so seeing this service segment grow nine percentage points as a share of revenue in three years proves that they are successfully expanding what is a highly predictable recurring revenue stream. That basically locks in customer relationships regardless of how severe a given particular fire season turns out to be. So they're, they're sort of stripping some of the cyclicality out of the business.
15:08 Speaker 02 Yeah, exactly. I think that's exactly what they're trying to do. And clearly they're doing a pretty good job of it. So the next thing I want to discuss here though, is the other segment to the business, which is the specialty product segment. So up until recently, the specialty product segment was the smaller perimeter solutions. But that has really changed over the past few quarters. So the specialty product segment accounted for about 25% of revenue as of the end of Q4 of 2025. But for the first quarter of 2026, that jumped up to 63%. So, you know, the narrative for this business has really shifted from being based primarily on fire safety segment to the special product segment. But what assets are there in this segment? It's pretty diverse. So the initial. Product was something called phosphorus pentasulfide, which I'll refer to here just as PS. So this is an unglamorous chemical that's actually found in engine oil.
15:53 Speaker 02 It basically acts as a key input for a product called ZDDP, which is an anti-wear lubricant additive, which helps engines basically just avoid catastrophic failure. Up until 2022, this segment was labeled oil additives, but it was renamed to specialty products to signal that the PS product had use cases beyond lubricants. And I think also to just signal that they were going to move away from just oil additives. For instance, it's also used in things like pesticide and mining applications, as well as emerging electric battery technologies. Now, when I first saw the asset was a chemical, I was kind of like, okay, but can't anyone just go and manufacture that? And the answer to that actually is no. So it requires a pretty significant amount of technical expertise as it's very highly reactive, dangerous to transport,
16:38 Speaker 02 and very tightly regulated. So this makes it a product with very high barriers to entry, something that we know that Perimeter has basically based its business model around. It's also deeply entrenched, having been the market leader now for about 70 years.
16:52 Speaker 01 I remember during a school project in college on Albemarle Corporation as part of the, it was a CFA school competition, investing competition. And you know, Albemarle is mostly known for its lithium mining, but they have a chemicals and fire retardant business too, or at least they did when I was looking at the company years ago. So I'm having some sort of flashbacks to that. And I remember at the time thinking, gosh, there are just so many ways to make money. And I don't know how someone gets into the business of selling anti-wear lubricant additives made of phosphorus pentasulfide, but more power to them. These are the kinds of niche products that make the world go around and can be incredible businesses if they have monopoly-like positioning
17:37 Speaker 01 for being an essential chemical input into, you know, some sort of industrial process. So I want to learn more here, though, about how the specialty products segment has diversified, because it is no longer just an oil additives play. Is that, is that fair to say?
17:54 Speaker 02 That's completely fair to say, yeah. So the specialty product segment first diversified out of oil additives with intelligent manufacturing solutions, which I'll refer to here as IMS. So IMS was acquired not that long ago in 2024. It's a vertically integrated print circuit board manufacturer. So I'm normally not a fan of print circuit board businesses, simply because they appear to me to be a completely commoditized product. But where I think IMS differentiates itself a little bit is that its customers are in the defense, energy, infrastructure and medical system sector. And this tilts them towards more service and maintenance, which kind of gives them that stickier recurring revenue that they are always looking for in new businesses. They've also added two bolt-on acquisitions to IMS.
18:35 Speaker 02 But I think what really became a big part of why the specialty product segment has grown so much is this business called Medical Manufacturing Technologies or MMT. So MMT was purchased for nearly $700 million in cash. The business makes this kind of precision machinery for the medical manufacturing industry. The machinery that they manufacture includes things like stand crimpers and catheter tube cutters used by their customers. So this business also has a service segment and a consumable segment, providing some more recurring revenue. Now with these additions to the specialty product segment, Perimeter definitely has moved away from having so much exposure just to wildfires. And now they're much more diversified. However, you know, the margins on the segment are
19:17 Speaker 02 still not the most stable. Adjusted EBITDA margins have fluctuated between 21% to 36% over the years due to the PS pricing, which can drastically affect the company's margins. But now that they've diversified a little bit more, hopefully some of that volatility will come down.
19:33 Speaker 01 So chemicals and printed circuit boards definitely sound like they have an air of commoditization to them. But I'm most interested in that MMT segment, that Medical Manufacturing Technologies business. And so any business manufacturing medical devices, especially the ones that you named, will pretty clearly have a lot of demand and it should be relatively consistent demand too. So the fact that these medical manufacturing technologies helps make the machinery for the manufacturing process of those products, I would imagine makes the business overall a bit less cyclical.
20:12 Speaker 02 Yeah, so MMT appears to me to be the business with the most upside and probably the least cyclicality. You know, people are always going to need those instruments. So management is also insinuating that they're actually accelerating new product launches from about two in 2025 to nine in 2026. So you know, this appears to be a business that also has some really nice organic growth tailwinds as well. Now, in the latest earnings call, Perimeter's CFO said that MMT's integration is going really, really well and that their conviction and their underwriting in the business has actually gone up. They now expect the first full year results of MMT will actually exceed their initial expectations, which at the time that they bought it was about $140 million in revenue and adjusted EBITDA about $50 million.
20:54 Speaker 02 This business should also do a good job of maintaining margins for the specialty product segment, since it appears that the PS segment is currently going through some weaknesses, which I'll discuss a little later here in the episode. And lastly, here on MMT, you know, it's a business that really strikes four of the value drivers that Perimeter looks for. They're a leader in a specialized industry. They have a track record of high organic growth. They have a large install base requiring regular servicing and maintenance. And then lastly, they have a track record of success in tuck-in M and A.
21:21 Speaker 01 I think you've done a pretty good job articulating some of the competitive advantages of both the fire safety and specialty product segment. And from what I can tell, it looks like they are selling products and services that their customers really need. But how about we look a little more at the the specific advantages that this business has in the fire safety segment? And so you already mentioned that they signed a new five-year contract with CAL FIRE. And so I like the length of that contract. That definitely provides some earnings stability looking out. But I would like to know more about how the contract is structured and whether Perimeter has any sort of pricing power baked into that contract.
21:59 Speaker 02 Yeah. So given the five key characteristics that management looks for in new acquisitions, I think it really makes sense that some of these businesses would hopefully have some kind of, you know, Modi characteristics. Now, let's start with your question here regarding the duration of the CAL FIRE contract. So in Perimeter's latest presentation, they actually disclosed two contract wins, one with CAL FIRE and one with the U.S. Defense Logistics Agency. Now, both of these contracts are five years in duration, which I also like. And I think this is a nice length as it locks perimeter into some recurring revenue over that time period. But I'll focus more here on the CAL FIRE contract. So it includes both a usage-based and a service-based revenue segment. Now, as for pricing, it specifically discloses that they can increase in prices in alignment with other large fire retardant customers.
22:43 Speaker 02 Now, it's actually kind of tough to define what this actually means, but my assumption is that CAL FIRE will pay similar prices to the US Defense Logistics Agency, meaning that they may have gotten some volume-based discounts in the past, which are now increasing in price to parity with the Defense Logistics Agency. They do state that they have an annual price escalator with key customers, but they actually don't disclose exactly what those numbers are.
23:06 Speaker 01 It doesn't look like the fire safety segment then has as much pricing power compared with some of the prior businesses we've looked at on this show. VeriSign, FICO, AMT come to mind. And so that doesn't mean the business isn't good, but it does mean that they have to find advantages in other areas.
23:27 Speaker 02 Yeah, and one advantage that I think they have in the fire safety is in the barriers to entry. So I mentioned earlier that the fire retardants products must pass the USDA for services qualified products list. Now, to be approved, you must undergo a very rigorous evaluation process. So this includes things like toxicity checks, checking for corrosion, stability, and then field evaluations. Now, this process takes multiple years to complete and requires government sign-off before an approved product is actually eligible to bid on contracts. So I would say that Perimeter most definitely has a lead in this area, having been on that list now for a number of years and having that contract already with the US government. But they have a couple of other key competitive advantages, too, that I wanted to mention here. So one is switching costs. So I already discussed how an airbase is outfitted with Perimeter's own staff.
24:12 Speaker 02 Now, switching would mean re-outfitting, getting accustomed to a new company's staff, reinstalling the necessary equipment, and then just aligning needs. Perimeter staffing only works with Perimeter's products, so there are embedded switching costs right there. Additionally, you can't breach the contract without some form of litigation, and Perimeter's customers have a high degree of trust in Perimeter's ability to perform at a pretty high level, as people's lives really depend on the effectiveness of its product. And second here is emission critical products and services. So as I mentioned, the fact that people's lives depend on fire retardants working as advertised is vital. If a fire starts, you can't make your way to the nearest Home Depot to go buy a fire extinguisher and call it a day. You need a properly planned logistics network. The retardant needs to be
24:56 Speaker 02 available quickly, and it needs to be able to be transported exactly to where it needs to go via aircraft or land-based vehicles. If a fire occurs, they will use as much fire retardant as necessary to protect people and property, which means more fire retardant is consumed, resulting in Perimeter making more revenue.
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28:20 Speaker 03 All right, back to the show.
28:22 Speaker 01 I think you're definitely selling me here on some of the advantages of the fire segment. And I do like the mission critical nature of their products. It's always attractive from an investment perspective. And the fact that they have boots on the ground and over 150 air tanker bases in North America does imply to me that they probably understand very well what their customers want. They're getting a lot of face time with their customers and replicating that logistics network would be not a very easy thing to do. And displacing them would probably be nearly impossible, given the depth of these relationships that they clearly have with some very large customers.
28:58 Speaker 01 But how about we get into the specialty products side of things a little more? Let's talk some more chemicals.
29:06 Speaker 02 Let's do it, Sean. So I think the specialty products have some nice competitive advantages as well that complement the fire safety segment. So in terms of looking specifically at the oil additives or the PS, you know, the legacy core business, they're basically in a duopoly, both in the U.S. and in Europe. So, you know, this means that there just isn't that much competition. And similar to the fire safety segment, this industry is highly regulated, given the dangers of transporting the chemicals. So I think this business has some very high barriers to entry. Now, the way I see it, IMS might be the weakest segment of perimeter in terms of any true competitive advantages. You know, print circuit board manufacturers, in my opinion, are kind of a dime a dozen. It looks like at least IMS has customers who specifically depend on them. And then they have this heavy weighting towards aftermarket and replacement parts.
29:51 Speaker 02 But, you know, it's kind of hard to nail down a specific competitive advantage here that I could really easily defend. But if we go to the MMT segment, I think this is probably the business segment that most closely aligns with what Howley did at TransDigm. So the industry is highly regulated, which offers it natural barriers to entry. And since this business doesn't just manufacture machines, but also services them as well as having this consumables angle, they're going to continue to generate more and more revenues from current customers instead of having to find, you know, just new customers to try and generate revenue from. It's also important to consider that many of their products are proprietary. So any service and maintenance can't be offloaded to a third party. With MMT, I think it probably is going to become more clear over time, what kind of competitive advantages they have.
30:35 Speaker 02 Once it's fully integrated, but you know, we only really have a quarter here to look at so far.
30:40 Speaker 01 It makes sense here to contrast perimeter somewhat with TransDigm. As we've done a little bit implicitly and explicitly at the beginning of the episode, but they both face these barriers to entry due to regulatory constraints. They both have products that don't have multiple competitors vying for the same set of customers, which is an enviable position to be in. And once a customer is paying perimeter, they're unlikely to go elsewhere. So there's a stickiness to a customer relation. But to be clear, there are definitely differences too. Transigm is a much larger business than Perimeter with a market cap that is about 15 times as big. And because of this, they have an advantage that Perimeter just can't quite fully make up for yet,
31:25 Speaker 01 or take advantage of yet, and that's scale economies. And so there may come a day when Perimeter has much more scale to use to their advantage, but it's kind of hard to tell exactly how much organic growth these businesses really have while inside of of Perimeter.
31:42 Speaker 02 The scale issue is definitely an interesting point. And I agree that since Perimeter operates in these really niche industries, there may never be a point at which they can truly take advantage of economies of scale as a larger business such as Transigm can. Now, since these businesses are disassociated from each other, there's also no cross-selling potential either. Although bolt-on acquisitions could definitely help increase, you know, maybe IMS or MMT's product offerings, bundling them might yield, you know, a little bit of cross-selling benefits within their respective business segments. But to be honest, I wouldn't be surprised if they never take a large advantage of economies of scale. But I think that's really okay, because it appears that the businesses that they have today all have some degree of organic growth left in them.
32:25 Speaker 02 And if they can continue to accrue more and more cash, that money will be put to work buying even more businesses, buying even more bolt-ons, and then just adding value to their current businesses inside their portfolio, or even buying back their own stock.
32:39 Speaker 01 Perimeter operates in highly niche industries, as we've said, where traditional SaaS-like scale economies or massive network effects, like those underlying companies like Uber or Airbnb, they just don't apply in the same way, since their business units are completely dissociated from one another. There is no real opportunity for cross-selling across the different segments within Perimeter. And yeah, they can still achieve significant scale through disciplined capital allocation or serial acquisition, as we've alluded to a few times, rather than just pure operational expansion, as you might expect. With Uber Airbnb where you sort of know exactly what their playbook is and they're
33:22 Speaker 01 just incrementally expanding out into these different verticals that are closely related to or complementary of the core business that those companies run. So like Airbnb, for example, expanding out into services and experiences so that you can book a massage while you're away on your trip at an Airbnb. And so by focusing on asset light business models that generate these sticky recurring revenue streams, they can accumulate a lot of cash, speaking about perimeter here, to fund value add bolt on acquisitions within their existing segments or to aggressively buy back stock, which you mentioned. And so
34:02 Speaker 01 it is sort of a different model for scaling, you know, clone directly from the trans time playbook where the goal is long term value creation through compounding cash flows in protected niches. Then again, rather than building a single massive platform, a super app in the way that Uber and Airbnb are taking that approach to organic growth.
34:27 Speaker 02 Yeah. And another competitive advantage that I see for perimeter that isn't actually tied to any specific segment. And I'd say this is more of a corner resource and that's just really the team that makes up the advisory team that makes these acquisitions. So they have clearly done just a really, really good job at creating shareholder value so far with shares compounding at nearly 25% annually since it went public. This is a very, very good return for any business. So when I look at serial choirs, I like to ask myself, okay, well, if they were to buy a business, why is it better that the serial choir owns it versus just leaving it alone and having the original owner or founder of that business own it? And so you kind of have to look at, okay, well, what are the value adds that the management of the serial choirs adds and kind of the ones that I see here for perimeter are three.
35:12 Speaker 02 So the first one is the ability to just buy really, really exceptional businesses. So The businesses that they do buy all generate EBITDA. They sell these mission critical products. They solve challenging products for their customers and they tend to be industry leaders and have attractive organic growth prospects. So, okay, I will admit this isn't necessarily a value add specifically for the business, but for the holding company as a whole, of course, I think it's a major value add. Now, looking specifically at the businesses that they buy, you know, they are looking to basically target these 15% returns and so far have exceeded that number. But on top of that, they're also focusing on businesses that are already profitable and that they can actually improve margins on by doing things like improving the efficiency of those businesses and finding ways to reduce costs.
35:55 Speaker 02 And then just by increasing or improving the pricing strategy that the businesses have, like we said with the FIRE segment, obviously they've moved more and more towards the recurring revenue segment. So that's an area where maybe you can make the argument that the original business wouldn't have done that, but perimeter solutions as it is now would do that. And then the third here is more again towards the parent company and that's looking at decentralization. So by putting the right people in charge than just letting them do their thing, they have helped create autonomy that has clearly worked very, very well. And they've also done a good job of aligning incentives, which we're going to go to in a little more detail later today.
36:28 Speaker 01 So we've already discussed how perimeter solutions has been built out by M&A and it sort of is in the process of building out its business through M&A. So how about we take a closer look at what those deals look like and the details of them in terms of how accretive they have been to shareholders?
36:49 Speaker 02 Great idea. So let's first look at exactly how they became perimeter solutions. So perimeter solutions, the FIRE segment was purchased for about $2 billion back in 2021. So as SK Invictus actually owned 100% of perimeter solutions, it was basically just a holdings company. So for full year 2021, the FIRE safety segment generated revenue of approximately $261 million and adjusted EBITDA of $118 million. This means a purchase price was somewhere in that 17x adjusted EBITDA range. Now, keep in mind that the FIRE safety is a pretty good business to be in and I hope that we've made abundantly clear today. While it's not a SaaS business, there are fires literally every year. So there's a large component of both product revenue and recurring revenue.
37:32 Speaker 02 Now, the business additionally has had a very nice organic growth narrative that has happened since they bought it as well. So trailing 12 month revenue for this business segment is now about 500 million with adjusted EBITDA of about 290 million. So adjusted EBITDA margins have also expanded from about 45% to 60% as of the latest quarter. So they've done a really good job of improving this business and I already mentioned that they've excelled at restructuring the contract. So they had this growing weighting towards more and more recurring revenue. But it's also important to keep in mind that fire safety margins definitely are volatile. So margins, you know, if I've looked over the past few years, they fluctuated from 27% to 65% just in the past two years, if you look at it from a quarterly basis.
38:15 Speaker 01 So I don't want to hear anybody say that we're too focused on large cap tech stocks because today we're doing a deep dive into the fire retardant industry and fire safety. So, you know, we're not a lot, we're not averse to flipping over a lot of different types of rocks to find intrinsic value. And the margin swing here does seem to be cyclical due to the nature of fire seasons where Q1 tends to be the weakest quarter. And then since the fire segment has these fixed costs, like maintaining the air bases, margins will suffer if they aren't using the product, they aren't using the fire retardant. And so basically there's a deleveraging that occurs.
38:57 Speaker 01 But looking back at the perimeter solutions deal, it does seem like it only happened at about seven times adjusted EBITDA today. So that seems insanely cheap for a business that is a near monopoly in the US and dealing with a problem that probably has a long-term tailwind behind it in the sense that forest fires aren't going away. And if you ask a lot of, you know, people, they're likely to only increase with time.
39:27 Speaker 02 Yeah, that's exactly right, Sean. If you can find me another business trading at this low multiple today that has this much of competitive advantage and barrier to entry, I would be very, very interested in learning more about that. So with that said, I want to go and look at the other business unit that we can look at in IMS. So, so I said earlier that I wasn't crazy about the segment specifically because it's kind of hard to view what type of competitive advantages it really has. But let's go over what the numbers actually tell us. So first, it was a little tougher to see where this business is today because IMS is consolidated specifically with the PS product as well as MMT. But let's go back to the end of 2024 when IMS was purchased by Perimeter Solutions for just about $33 million, so a pretty small acquisition.
40:10 Speaker 02 Now, interestingly, the business was actually purchased with no contingent considerations, which isn't very typical for many serial acquirers that I've looked at. Usually they structure the deals so that the existing management shares in some of the upside after they're acquired, which the hope is will ensure that the business continues to run smoothly after the acquisition is complete. Now, aside from the purchase price, it's really difficult to determine the multiple that they paid for the business as well. So in Perimeter's Q1 2025 earnings release, it was noted that specialty product sales increased by about $7.5 million due to the recent acquisition of IMS. Now, this implies about a 1.1 EBITDA revenue multiple, but we don't unfortunately get any of that data for adjusted EBITDA. So Perimeter has also made two additional tuck-in acquisitions for a combined $22 million.
40:54 Speaker 02 So you know, this business segment looks to be pretty small, especially compared to the fire safety segment or even MMT, which was purchased more recently.
41:03 Speaker 01 So I know MMT, which is again the medical manufacturing technologies business closed in Q4 2025. So that's very, very recent, but it is probably worth going over that acquisition in a little more detail. And it is, after all, the biggest driver right now in increasing this specialty product segment.
41:23 Speaker 02 Yeah, so the deal was announced in December of 2025 for $685 million in cash. Now, the assumptions for MMT were, as I mentioned, revenue of 140 million and 50 million in adjusted EBITDA. Now, this implies an adjusted EBITDA multiple of about 14x, putting it in the same general field as the original, you know, perimeter solutions, fire safety business. Now, I mentioned earlier that management says that the acquisition of MMT is going very, very well and exceeding their initial projections. So probably that gets the multiple down in the first year and who knows just how much lower that number will go in, say, three to five years from now. Now, this business looks like a major shift for perimeter. It's helping to significantly increase the specialty products services revenue mix.
42:07 Speaker 02 So since the deal closed, revenue for the quarter and adjusted EBITDA have exploded by triple digits, while adjusted EBITDA margins have also expanded by mid-single digits. So, you know, it just looks really promising so far. However, as with other areas of this business, it's kind of hard to annualize these numbers until we get a full year of financials to look for, just given the cyclicality of some of the business segments. But my immediate reaction is this has been a very, very good acquisition.
42:31 Speaker 01 So all three of these businesses have helped increase the value of perimeter solutions as a company. I think we can say that fairly confidently. And the fact that the fire safety segment has clearly improved and compounded its value since it was acquired is a great sign that management is going to be able to really optimize the performance of these different business units and generate organic growth over time, which is a wonderful thing for a serial acquire as it effectively cheapens the purchase price of those acquisitions and allows the business to grow in other ways beyond just being so dependent on mergers and acquisitions of other businesses and ultimately gives the business more cash to redeploy into its existing business segments and to those new acquisitions.
43:16 Speaker 01 But what similarities would you say that you see between these three acquisitions?
43:22 Speaker 02 So I really love the organic growth that Perimeter was able to get from the fire safety segment. You know, I think they just did a wonderful job on that. If they can do something even somewhat similar for MMT, then that acquisition will probably turn out to be cheap, too. But we will need to wait and see as this is an entirely new industry that they're getting into. So a few things really stand out to me here, though. First, you have the vertical integration of manufacturing. Then you have the fact that their products are mission critical and in technically demanding niche industries. Then finally, they're all really just capital light businesses. Just to give you an idea of how capital light businesses, all of them are. In 2022, capex was about 2.4% of revenue, which has steadily climbed to a still very, very low, in my opinion, 4.6% in the latest quarter. So from a capital allocation perspective, this pays complete sense. You know, you don't necessarily
44:06 Speaker 02 want to tie up your capital in your business segments just to keep generating very, very similar returns. If you don't need to reinvest much and can generate similar returns or even greater returns, then you're doing really good capital allocation. This is why Buffett likes a business like Seize County so much. You know, you don't have to put much money back into the business and it just keeps generating more and more incremental cash.
44:27 Speaker 01 We've mentioned adjusted EBITDA a few times today, which is a metric I'm not crazy about. And one reason I'm not so fond of it is many businesses use this figure when they aren't turning a GAAP accounting profit. And from the looks of things, Perimeter does sort of fit that bill, right? With trailing 12 month net income coming in at negative $190 million. So it is worth noting that that since the MMT deal closed, they have turned a GAAP profit. But still, is this a situation where they're using these manipulated non-GAAP numbers to make the business look more profitable than that it actually is?
45:10 Speaker 02 Yeah, that's a great question. And this is probably as good a time as ever to discuss exactly why that is, because it's actually a big part of the thesis here. So just like you, I personally Tend to stay away from businesses that overly rely on adjusted EBITDA numbers. So when I first actually heard about perimeter solutions, it was way back in Omaha in Berkshire in 2025. And the investor who was telling me about it basically said that the primary reason that he passed on investing on it was specifically because of this very unique incentive structure that perimeter solutions has called the founders advisory fee. Now, this advisory fee is correctly added as an operating expense, but boy, oh, boy,
45:54 Speaker 02 it's a large, large expense. So in the latest quarter, it was $76 million on $125 million in sales. So in order for this business to just turn a profit, they need to really scale up revenue or reduce the advisory fee. And you can really think of the advisory fee as a fixed expense. So having it go down is not really a function that is under their control, which I'll go over in a little more detail. Hopefully I haven't confused you too much.
46:21 Speaker 01 Gosh, I'm not sure I've ever seen a line item like that before. I would love to dig more into it. I think we will, but I also want to hear a little bit of how you would get to an ROIC number for perimeter, right? Looking at the returns on invested capital and what direction that's been moving in when the reported net income is negative.
46:43 Speaker 02 Yeah, it's, it's definitely a new line item for me as well. But yeah, so the founders advisory fee is a massive drag on the P and L statement, even though it doesn't actually have anything to do with the ability for perimeter solutions, ability to generate profits as it's a non cash, non operating fair value remeasurement. So the only way to really get a usable ROIC number is to just unfortunately use an adjusted number where we only use the cash that's settled in the advisory fee as it can be paid out both in shares and in cash. That's why it's a non cash expense. So if we make this adjustment, NOPAT has actually risen steadily because management has been taking a larger and larger share of the founders fees as shares rather than cash, as well as the business starting to get better and better and making more and more money. So we can argue all
47:26 Speaker 02 day whether the fee in options is a real expense. I would argue that it is. But for the sake of looking at ROIC, we kind of just have to rely on these adjusted numbers to get a number that's actually usable. So if we do that, then we get a ROIC of about 11% for 2025, and this is trending up from about 9% in 2024. But, you know, take these numbers with a grain of salt as the advisory fees obviously highly impact the numbers.
47:49 Speaker 01 It really does muddy the water. And from a capital allocation perspective, the sheer scale of the founder's advisory fee makes it incredibly difficult for us to assess the true return profile of the business. And when you have non-cash, non-operating, fair value remeasurements that swing wildly based on the stock price, like the $200 million in 2024 and 400 million plus in 2025, I mean, that just completely distorts any generally accepted accounting principles, profit and loss or income statement. And so traditional ROIC, traditional returns on invested capital relies on a clear view of net operating profit. But here, the economic reality of their high-quality assets is really very heavily obscured by
48:34 Speaker 01 accounting noise, if we haven't made that abundantly clear. And even if we use adjusted metrics to show an upward trend from 9% to 11% in ROIC, the lack of clarity remains a major issue. And so for a strategy built on disciplined capital allocation, having to continuously adjust for hundreds of millions in management fees does make it tough for shareholders and potential shareholders to evaluate the true capital efficiency of the business. So that's a little bit of a rant. But on that note, maybe we should go over why the founder's advisory fee even exists in the first place and how it's structured.
49:12 Speaker 02 So the whole reason the founder's fee exists is basically to align management with shareholders as best as they thought. So basically, to give management more skin in the game if they allocate capital well. And this bred the founder advisory agreement. So it has basically two pieces to it. So the first piece is a fixed annual advisory amount. So it's a flat fee equal to about 1.5% of the shares set at the IPO. And this comes out to about 2.3 million shares per year. And it's payable in common stock or partly in cash, but it must be paid at least 50% in stock. Second, you have this variable annual advisory amount. So this is based on the appreciation specifically in perimeter stock price. So if the stock price exceeds a specific minimum,
49:54 Speaker 02 they are also paid in stock or cash, again, with at least 50% paid in stock. They're paid about 18% of the increase in market value above $10. Now, the fixed annual advisory amount expires on December 31st, 2027. So I like the fact that it expires and hopefully isn't going to be continuing in perpetuity. The variable interest amount expires on December 31st of 2031. Now, since management is required to accept a large portion of this compensation in shares, shareholders can absolutely be expected to be diluted. Now, the founders advisory fees were especially large in 2024 and 2025, as you just alluded to, at 200 million and over $400 million, respectively. But that was when the stock performed exceptionally well. So in a gigantic paradox, the better the stock does,
50:38 Speaker 02 the worse GAAP earnings is actually going to look because the company has to book a larger liability for that fee.
50:44 Speaker 03 Let's take a quick break and hear from today's sponsors.
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53:01 Speaker 01 Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables have only known each other from our calls in the Mastermind Community. That is the community I host with Kyle Greve and Daniel Manca. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall, in Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com/mastermind.
53:43 Speaker 01 If your application stands out, I'll be the one to reach out to you personally. All right, back to the show. I would say that the more companies I look at, and the longer that I've been actively investing in individual stocks, the more strongly against significant dilution, I feel, Kyle. So it probably doesn't surprise you to hear that this founder's advisory fee is very off-putting. And I think, to be fair to you, I don't think you're exactly excited about it either. But from the looks of it, you're paying a one And 1.5% and 18% fee structure, which is basically very similar to what you would pay a management team to manage funds and a hedge fund based on the AUM, which is this
54:26 Speaker 01 consistent management fee, the 1.5% and, and performance over a hurdle rate, which is the, the 18%. But how has it affected the actual shares outstanding? Are we seeing a significant uptick in the number of shares spread across the shareholder base?
54:44 Speaker 02 Yeah. So you probably won't be surprised that yes, I tend to agree with your sentiment on this advisory fee here. But getting to your question here, when you look at it, it's actually not as bad as you'd think. And that's because part of perimeter's capital allocation policy is to use share repurchases as well, which definitely helped to offset dilution. So if you look at diluted shares outstanding, they've gone from about 157 million at the IPO to 165 million today. This is actually much lower than I expected, given that management has been increasing its ownership stake specifically with these advisory fees. So just looking at buybacks a little door, they've been buying back shares basically on a annual basis since 2022, which has definitely helped offset the dilution from the advisory fee. And they currently are still buying back shares as they currently have a stock repurchase plan open right now
55:28 Speaker 02 to repurchase approximately a hundred million dollars in shares.
55:32 Speaker 01 With the amount of shares that management has gotten from this advisory fee, have they at least held on to them to have skin in the game? I mean, if they accepted the shares and just immediately sold them, I would not feel great about the alignment or really just the overall fee structure in general.
55:49 Speaker 02 Yeah, I wouldn't either, Sean, but insiders actually own about 13% of the business with their CEO Hytham Query owning about 3%, which I think is quite healthy. And the founders of Everark all invested about $11 million each into this business before it merged. So they haven't gotten all of their stock from options. Some of it was owned as part of that merger. Base salaries for all executives are very reasonable, ranging between 350 and $700,000. They have a cash based incentive program that's based on the adjusted EBITDA of the business and the individual performance of each executive. The compensation structure here, you know, not my favorite, given the advisory fee and the executive comp structure. You know, adjusted EBITDA tends to give a lot of room to get creative with numbers as I think we've already outlined a lot here today.
56:32 Speaker 02 And it's not my favorite KPI to base performance on. And I think I can speak for you, Sean, that you, you think very similarly to me.
56:38 Speaker 01 Well, ironically. As William Thorndike discusses in his book, The Outsiders, metrics based on value creation for shareholders per share of stock are typically much more preferable because it's harder to manipulate the accounting than with something like adjusted EBITDA. And there's a reason Buffett called EBITDA utter nonsense. And so this is not just EBITDA, but it's adjusted EBITDA, whatever that means. So we haven't spoken much, though, about cash flow. And that is really sort of at the heart of what EBITDA, adjusted EBITDA numbers are trying to capture. You know, you're stripping out things like stock-based comp to get an idea for the operating cash flows of the business.
57:23 Speaker 01 And looking at Perimeter Solutions, they have generated nearly $240 million in cash from operations within 2025. And given their latest acquisition of this medical manufacturing technologies business and the fact that it was paid in cash, I would assume that they raised debt for the deal. So how about we go over Perimeter's balance sheet in more detail and how you think about the debt?
57:48 Speaker 02 So currently, Perimeter has about $91 million in cash and cash equivalents, which is down from $325 million at the end of 2025. Now, I assume they drew down on this cash worth as part of the MMT acquisition. Long-term debt is currently at about $1.2 billion. Now, since cash generation is pretty volatile right now due to the big acquisition kind of obfuscating some of their numbers, it's really hard to see if this business is getting below my three times debt to free cash flow number. But we do know they are servicing their debt with an interest coverage ratio of three times. It's definitely not super high by any means, but I think it's somewhat manageable for now. As with all CRO acquirers, I would assume that they're going to continue to always carry some form of debt as long as they have ideas to invest in. They should be able to fund these new deals with the cash that they already have on their books,
58:33 Speaker 02 cash generated from their current business and then from leverage.
58:36 Speaker 01 With that interest coverage ratio three times, that is not a lot of room for error if the business hits really any turbulence. And so ultimately as shareholders, you want to know that they can service their debt without missing any payments. Because if they miss payments, then the whole business could be forced into bankruptcy and the equity of shareholders could be wiped out. And that's something that we don't want to be a part of. But given how volatile their operating profits are because of these founder fees that we're not superfund of, are you worried at all about their ability to grow, let's say, sustainably and safely?
59:13 Speaker 02 Yeah, so I mean, we have to look at this kind of in their ability to access capital. And I think that they've been able to access it at some very reasonable rates. So they have these senior notes that range from about 5% to 6%, which I think is quite a reasonable cost of debt. And the fact that they were recently issued means that their lenders are probably willing to give them more money if another good acquisition were to come up. So with more cash generation likely to come online from the MMT acquisition, I think they are in a pretty decent position here to continue to grow. But, you know, given the size of the MMT deal, if they decide to make another one, well, they would certainly have to use leverage to continue building this business. So, you know, if you are uneasy with leverage, this probably isn't a business that you're going to find very interesting. Now, on the advisory fee volatility, that's going to unfortunately just continue to be a drag on earnings
59:58 Speaker 02 as long as the stock price is doing very, very well, which as we mentioned, pushes that advisory fee even higher. And I think it's kind of up to investors whether they want to include it in their calculations. I think they can be adjusted for when looking at things like servicing debt, which should probably be removed when looking at the intrinsic value of the company. So, you know, if you adjust them for the fiscal year 2025, interest coverage ratio is about six times, which makes it a little bit better. And at least we're zooming out a little bit to see how they can service that debt.
1:00:26 Speaker 01 So as we're discussing their ability to balance debt payments, maybe you can paint some more color around the other key risks that stand out for you when you look at this business.
1:00:37 Speaker 02 So while it does have products in super niche industries, like we've already mentioned here, they are very regulated industries and that can pose some risk. But I actually don't think that's the biggest risk for the company. So to me, the biggest risk is really embedded in their business model. So since perimeter is a relatively new business, it was going to need to venture into industries where perimeter hasn't really operated in the past. So if we look at MMT, for instance, yes, okay, the business does look promising and it's from all for all intents and purposes, from the information we have now, looks like it's moving in the right direction, but we only really have a quarter to assess how that's going. And while MMT doesn't seem as cyclical as a fire safety segment, we can't rule out cyclicality in that business segment over shorter or longer time horizons because we just don't have that information yet.
1:01:21 Speaker 02 And then on top of that, to fund this acquisition perimeter effectively double its debt load just to enter an industry that it has limited previous experience in. Now, this is part of why larger, more diversified here requires with a longer history of success are, in my opinion, attractive, you know, a business like Liftco, which recently made into our intrinsic value portfolio is a great example. They have three primary segments that they've been operating in for a long time and they have a very strong track record of success. They also have a wide range of expertise to draw on if they want to diversify into adjacent segments. And we've actually seen this recently with their addition of two new segments, which they accomplished by just splitting off parts of their system solution segment.
1:01:57 Speaker 01 It reminds me a bit of Uber testing out new business models and things like accommodations with their recent Expedia partnership, which is something we talked about on a YouTube live stream that we did recently. And my conviction is definitely low on that front, but I do still like Uber's business anyways. And so we can connect that back to perimeter here by venturing into what is an entirely new industry. Obviously that always carries execution risk, but the crucial differentiator here is that we at least know this asset will immediately produce solid top line revenue and EBITDA for perimeter.
1:02:37 Speaker 02 Right. And so the next risk that I will address is an area that I know, Sean, you like to spend time on. And this is kind of deals specifically with regulatory risk and then partly with legal risk. So there's currently an open suit alleging that perimeter along with other large businesses in the industry like 3M, DuPont, and Amarex have caused groundwater and drinking water contamination, other things like damage to natural resources, injuries from exposure to chemicals specifically used in primers foams, which are mainly from a chemical called fluorine. So my thing with lawsuits, just in general, is that sometimes they matter and other times they don't really matter from an investor's perspective. For instance, you know, I can't tell you how many stocks I've seen where the stock price goes down and then you get these ambulance
1:03:20 Speaker 02 chaser law firms that look for a reason to do a class action lawsuit against some specific corporation. You know, these are basically useless cases that don't really affect the underlying business. But if you have a lawsuit that will cost so much that it's going to destroy a company or drastically alters business model, well, then that's definitely a strong signal and not just some useless noise. So I'm not an expert on this case by any means, but I will say that perimeter appears to be moving away from using fluorine in its foam specifically to avoid further lawsuits in this area. Now, given the fact that they are still signing large contracts with governmental agencies, it doesn't seem like it's affected the business model all that much.
1:03:57 Speaker 01 The other potential risk from lawsuits is just how much money you have to spend and continually fighting them. And if you're in an industry exposed to many lawsuits, you almost have to maintain a steady stream of expenses just to fight these cases, which hurts margins and can do damage to the company's reputation. And so if you're digging through a company's income statement in an industry that is ripe with litigation, you know, you might not want to write off some of those lawsuit expenses as just a one-time expense that you can ignore when you're trying to figure out, you know, what the normalized earnings of the business are going to be. Actually, that might be the normalized reality for that company.
1:04:39 Speaker 02 Yeah, it's a, it is completely a normalized reality for a lot of companies and it's unfortunate, but it's important to understand those fees because sometimes they are recurring in nature and unfortunately you just have to live with them. So if we look specifically back to perimeter here, so if we look at DuPont and 3M, they actually both had lawsuits that were settled with multi-billion dollar payouts. Now, obviously, these businesses have different levels of scale and I don't know how exactly these were associated with exactly what perimeter is offering. But needless to say, you know, that's a lot of money, right? You know, we're talking about a business here that has a market cap of 5.5 billion dollars. So having to pay multi-billion dollars and a potential payout would not be good at all for perimeter.
1:05:20 Speaker 02 So kind of to your point there, just looking at the fees that perimeter is having to pay, it's kind of impossible to know. So if they had that, which they probably do, it's probably internal, though it would be in their SGNA line, which was at 77 million dollars or so for 2025. So, you know, it's just kind of impossible to know how much exactly they are spending. But, you know, there is some other information that we can look at here. So to add additional risk to the fire safety segment, you also run into customer concentration risk. So revenue from the USDA for services, the US Bureau of Land Management and the state of California represents a substantial portion of perimeter's revenue. I think it's somewhere above 50%. And this concentration makes PRM subject to risks such as non-payment, non-performance,
1:06:04 Speaker 02 the renegotiation of terms, or even non-renewal. Now, to argue against the concentration risk, I think we can look at perimeter's past and specifically the allowance for doubtful accounts, just to see if, you know, customers haven't paid them. But, you know, if we look at this, the figure has actually been immaterial, both in 2025 and 2024. And even if we go back a few more years, it never actually exceeded a million dollars. So I think the renewal risk would be the biggest risk here over not really getting paid by their customers.
1:06:32 Speaker 01 So you mentioned earlier in the episode that the phosphorus pentasulfide product that we're referring to as PS has shown some weakness. And I think that weakness poses some sort of risk for for perimeter as well that we should probably talk about. So what can you add to the conversation on that front?
1:06:50 Speaker 02 Yeah. So in Perimeter's latest earnings call, they discussed the Saget Illinois facility. Now, this facility experienced significant unplanned downtime, which reduced the PS product's performance. So basically, they just don't have a controlling interest in this location. It's actually a partner, and they haven't been doing a good enough job in Perimeter's view at maintaining their performance levels. So from what I can tell about this event, Perimeter has basically attempted to actually take over operations of this plant, as obviously they want to minimize this downtime. The downtime that they're referring to actually applies to some issues in safety, as well as some operational challenges that the current operator is having. But when Perimeter tried to take it over, the transfer was actually blocked. And once again, unfortunately, Perimeter is engaged
1:07:35 Speaker 02 in litigation at some degree. So the main issue with that is that the Saget facility in Illinois is actually their primary source in North America. So you know, as long as it's underperforming, it's going to have negative effects on the PS products in North America. So in full year 2025 and the first quarter of 2026, they spent out a million dollars in legal fees on this issue. The PS product is, it's still selling, you know, they, they're still making revenue. But they did note in their annual from last year that they had about a $2 million decrease in the specialty products specifically due to this downtime. So you know, even if this issue persists, I think they're doing a decent job of diversifying their way out of the problem. And hopefully, they can fix it, which hopefully will also give back a little bit of organic growth to that business segment. Next, I
1:08:19 Speaker 02 want to mention some potential for Perimeter Solutions. It's kind of a tough business to try and nail down an available market for, since they are diversifying into completely unrelated businesses. I think the TAM is going to be very wide, even when looking at deal sizes they've done, you know, they, they've got tiny ones with these tuck-in acquisitions for $10 million, and then they purchased that first fire safety business for $2 billion. So they not only operate at cost many industries, but also have a pretty wide ranges of a purchase price. Then on top of that, you know, this isn't a purely North American business. The fire segment is global, though I'd say most of its revenue comes from North America. The PS segment sells all over the world, too. So you know, this is a business where I think it's pretty much impossible to say just how many. Acquisitions they can make, but my guess is their market is quite large.
1:09:04 Speaker 02 Basically the entire world to some degree, depending on how many platforms they want to add is part of their market. But the fact that they have these very, very stringent investing criteria of the business they want, obviously is going to shrink it substantially. But in order to actually put a number on that, I honestly think it's completely impossible. So I didn't, I didn't try doing it with this one.
1:09:24 Speaker 01 It's very interesting to me to contrast with business like perimeter with some of our other portfolio holdings like Uber, which I keep talking about for some reason today with Uber, the addressable market and the core engine are much more transparent. And let's say clearly bounded within their mobility, which is ride handling and delivery segments. And so we can pretty precisely track operational indicators of success like gross bookings and ride hailing expanding at a 20% year over year clip. Or their cross-sell flywheel where you have multi-product users, so people that are using both Uber ride hailing and Uber eats, which now make up a third of the customer base and spend three times more.
1:10:07 Speaker 01 And so their growth follows a visible scaling marketplace playbook with a very long runway for merchant penetration and a subscription engine and Uber one that has driven tens of millions of memberships. And so by comparison, a serial acquire like perimeter is rolling out completely unrelated niche assets that vary pretty wildly across different sectors from fire safety to precision medical manufacturing machinery. And so that makes their true TAM virtually impossible to define or quantify. And so that means that as investors, we have to underwrite the management team's capital allocation framework
1:10:50 Speaker 01 rather than a clear, single industry growth runway. You know, either you're bullish on ride hailing and food delivery or you're not. It's not as simple as that. And yeah, that just makes it puts more burden on us as investors, I would say.
1:11:06 Speaker 02 Yeah, I agree with you on that. And you know, looking specifically at perimeter, I actually don't really think it's a weakness that perimeter doesn't have a defined TAM. You know, they clearly have a lot of options to move in whatever direction that they really want, or wherever they're seeing really, really good opportunities. And so I think this will keep them adaptive. And if they can find high quality businesses and industries that maybe aren't a traditional fit for the business as is today, they can just, you know, add a new category or add a new platform, or they continue to make on more and more bolt on acquisitions to improve their current business segments. So the point being, you know, they have a lot of optionality and what they can do in the future, but it's just kind of hard to put a number down on exactly what that looks like.
1:11:42 Speaker 01 Okay. All right. Well, it's the time of the episode where we try to figure out what the company is worth. So what is perimeter solutions intrinsic value? How do you go about thinking about answering that question?
1:11:55 Speaker 02 Yeah. So before we go over the intrinsic value, just let me give you some general thoughts on this business. So I think there's a lot to like about in this business itself. You know, they've made some very good acquisitions. They've paid pretty reasonable prices. They've compounded revenue at a high rate and they've maintained high and steady margins. Their systematic approach to making acquisitions is a business model that I really, really like as it feels repeatable. And as you can tell from the growth in their two segments, it's worked out well so far, especially in the fire safety segment. I'm a really big fan of decentralized businesses and you know, if you have the right compensation structure, you basically are allowing people that you trust to do the heavy lifting rather than micromanaging, which can often cause failure, not success, especially in businesses that scale up.
1:12:36 Speaker 02 But you know, there are other issues I have, you know, the first thing I think is going to be pretty obvious. It's the founder's advisory fee. You're essentially paying mutual like funds just to own a stock. Now I'm just not crazy about that. You can argue that the founders have earned that fee, you know, for investors who bought at the IPO or when the price dropped to just $3 in 2023, they're not complaining about the founder's advisory fee at all. And then you have the lawsuits and the issues with the PS product in North America that I think you have to consider when you're underwriting this business.
1:13:02 Speaker 01 I'd say the founder's fee is easily the biggest issue I have honestly with with the entire business, really.
1:13:09 Speaker 02 Yeah, no arguments there. But with all that said, let me go over my base case specifically for Primer Solutions here. So I first assumed that revenue grows at about 15%. Now, this is actually a pretty steep decline from historical growth rates that are actually really high at about 46% since they IPOed. Now, my assumption is simply that they rely maybe a little bit less on M&A growth and a little more on organic growth to just continue growing this business. I also know from owning several CRO choirs that pipelines for M&A can be very, very bumpy. And if they land, you know, a number of maybe smaller acquisitions, then revenue growth can actually stall for longer periods of time than investors would like to believe. So I mentioned that adjusted EBITDA margins are very volatile. So for the base case, I'm just assuming that they stick somewhere around the midpoint
1:13:52 Speaker 02 of the historical numbers and reach around 51%. So they've gone over 60%, so you know, I think this is a reasonably conservative number. If they can find a few more good acquisitions with higher margins, perhaps this climbs, but they already have pretty high margins. So I don't think that will be a very easy task. Now, finally, I apply an exit multiple of about 17x EV to adjusted EBITDA. So today, they're trading around 19x. But I think that there's also some excitement about the corporation and the current multiple definitely seems a little higher than normal. So I think 17x is reasonable for a business with growing recurring revenue stream that should continue to grow for many years to come. Now, with that said, I get a value of about $62 per share. With these assumptions and a 25% margin safety, I get an intrinsic value of about $46,
1:14:37 Speaker 02 which represents about a 7% return from today's price.
1:14:40 Speaker 01 So what are some of the events that would factor into your bull and bear cases and have to be true for the company to either, you know, reach its most optimistic valuation or its most pessimistic valuation?
1:14:55 Speaker 02 So starting with the bear case here, I'm basically assuming that some of the litigation that they're dealing with maybe adds some more expenses, which makes them focus on areas outside of growing the business, which would then obviously impact things like revenue growth and margins. But I still assume that they're going to grow organically, make a few smaller acquisitions that maybe don't move the needle as much as something like an MMT deal. And if they were hit with a big lawsuit, that would also obviously mean a depressed multiple. So I decrease the multiple on that end. For the bull case, I assume that they continue making some just really good acquisitions. Maybe they decide to add a whole new platform outside of the fire, safety and specialty products segment, which will obviously... Vastly open up their, their market to owning more and more businesses. I also assume that they keep generating enough cash to buy back shares, but this time in a more meaningful way, which actually reduces their share count.
1:15:40 Speaker 02 And I think they can get to maybe a reduction of $10 million in shares. So when I weigh all three of these scenarios, I get a price of about $53, which turns out to be a 10% return. So, you know, not bad, but right now the price I think just isn't right to meet our return hurdle for the intrinsic value portfolio. That said, you know, this business does intrigue me. If you can factor in the dilution from the founder's fee, you can still make a return as they have so far. Now, while I'm not interested in current prices, if the business drops into the low twenties, I might consider opening a position, but I would probably have to continue doing a little more work and getting more and more familiar with the business.
1:16:19 Speaker 01 It's not often that we totally write off a business as being 100% in our too hard pile. And I don't think we should do that with perimeter solutions here and, and look away, even if the stock declines significantly, because there probably is a valuation where it becomes quite attractive. But generally for me, I tend to get most excited about businesses where I have a certain degree of consumer insights into them. And I can tangibly relate to and understand why the business is positioned well versus competitors and how they create value for customers. And so that is why I have my biases towards Uber and Airbnb. And also that's why they call them biases. You know, I try to be aware of the fact that those are biases.
1:17:00 Speaker 01 And that is sort of an investing pattern that I fall into for better or worse. And so obviously this is not an easy company to bring that mindset to. And, and when you layer over the debt and the founder's fee, on top of the fact that these are just obscure businesses that they run, I feel more comfortable opting out of this one. I mean, it's definitely a really interesting case study. Very cool to have the William Thorndike connection. We're big fans of his, but not a business I'd be hugely excited to own.
1:17:33 Speaker 02 Well, folks, that's pretty much all we have for you today. But as usual, I'd like to leave you with a quote, this one coming from William Thorndike. "Two companies with identical operating results and different approaches to allocating capital will derive two very different long-term outcomes for shareholders." And from the looks of it, Perimeter looks like a pretty good vehicle to allocate capital. And that's really what we're looking for, businesses that can properly allocate capital and do so for long periods of time. Thanks for tuning in and I'll see you next time.
1:18:00 Speaker 00 Thanks for listening to TIP. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principal, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice.
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