PureCycle Technologies (NYSE: PCT) is a small-cap materials stock that has gone on a true tear this year. The stock is up over 250%, a head-turning number that has caught the attention of many investors. That includes analysts at Cantor Fitzgerald, who placed an overweight rating and a $14 price target on the stock.
After shares skyrocketed by nearly 30% in one day on Oct. 24, they have now reached that target. However, it’s entirely possible that new and higher targets will emerge for the company after this strong single-day rise. I’ll dive into what exactly this company does and how I see it going forward.
PureCycle: Working to Revolutionize Plastic Recycling
PureCycle is working to commercialize a technology that recycles plastic trash into what it calls "ultra-pure recycled (UPR) resin." This resin can then be used to create new plastic products. The company is specifically focused on recycling polypropylene (PP). This is the type of plastic used to make things like bottle caps, pill containers, and car bumpers.
In contrast, manufacturers use polyethylene terephthalate (PET) to make plastic soda bottles, for example. PP is a harder plastic, which can increase the difficulty of recycling it due to factors like its higher melting point. The difficulty in recycling PP is shown in the data. According to Cleantech Group, it has approximately a 3% recycling rate, compared to 15% for PET. This leaves millions of tons of PP going to the landfill.
Parker Bovee at Cleantech points out that not only is recycling PP more difficult on a physical level, but it is also highly uneconomical at this point. Recycled PP costs around 80% more than new (referred to as virgin) PP. This results in manufacturers having a much higher incentive to create new PP, contributing to the further buildup of waste. However, there is hope that recycled PP could become price competitive with virgin PP, as this is now the case with PET.
PureCycle is using an advanced method of recycling to try and fix this problem. Mechanical recycling is the traditional method used for things like plastic bottles. It cleans, shreds, and then melts down material for reuse. This process doesn’t work well for PP. It weakens the material very quickly, making it unusable after just 2-3 recycling cycles. PureCycle’s method is called solvent dissolution.
Chemicals strip away impurities like dye and adhesive from the plastic, leaving the pure plastic afterward. Researchers have shown that the process is highly energy-efficient compared to other methods, but it still remains very costly.
PureCycle’s Financial Situation and Business Developments
PureCycle currently has no revenue. It aims to achieve revenue once it can scale up processing operations to a reasonably economical point and can provide customers with a consistent source of URP to use in their operations. The company calls its flagship processing facility Ironton.
As of right now, PureCycle is primarily working to increase its processing up to the goal of 107 million pounds annually at Ironton. The company is making progress. It called June its “most successful operating month"; it produced 1.1 million pounds of plastic pellets. However, it is still far from meeting its short-term goal, which is to produce 1 million pounds of plastic pellets per week.
From a liquidity perspective, PureCycle is burning a significant amount of cash on a quarterly basis and will require infusions of cash over time, diluting current investors. Over the last three quarters, the company’s cash from operations averaged -$38 million. It would not have had enough cash to continue operating for another quarter based on its balance sheet. However, in September, the company said it expects to raise an additional $90 million from equity issuance to Sylebra Capital and Samlyn Capital.
PureCycle Is Cutting Edge, But Is Investing in Recycling a Flawed Idea?
Overall, I feel that PureCycle is an innovative company that can provide a large environmental benefit one day. However, from a business perspective, it’s hard for me to see the light at the end of the tunnel. Indorama Ventures, one of the largest PET processors, has struggled to stay profitable throughout the years despite its immense scale.
This shows there may be a fundamental issue with investing in plastic recycling. That doesn’t mean PureCycle’s stock price can’t rise; it just might be a challenging industry to get behind.
