Bridger Aerospace Group Holdings (NASDAQ:BAER) provides aerial firefighting services for fighting wildfires in the western part of the US. The company became public recently as part of a SPAC deal. I see several opportunities in front of the company that could allow it to grow to a nice size in the future.
The company seems to serve a noble cause of fighting wildfires while using eco-friendly and sustainable methods to minimize long-term damage to the environment. BAER has a small fleet of specialized firefighting planes that can collect water from nearby lakes or rivers and dump it onto wildfires to help suppress those fires.
The company’s customer base includes both federal and local government entities including the USDA Forest Service, US Department of the Interior, CAL Fire, states of Alaska, Oregon, Nevada, Montana, Washington and Minnesota and the company has contractual long-term relations with each party and it enjoys a contract renewal rate of 100%. Recently the company also started getting some contracts in Canada so there are some growth opportunities there.
In addition to fire suppressant aircraft, the company also has a fleet of surveillance aircraft that are equipped with infrared mapping technology and these also have real-time data transfer to detect any fire activity before it gets too large so that firefighters can get to them in a timely manner. The company’s surveillance activity starts in early spring and lasts until mid-fall while most of the fire-suppressing activity happens in the summer when most fires are active.
In recent years we started seeing more fires and each fire is gaining size and intensity as compared to the past. Scientists believe that this could be due to climate change but regardless of what caused it, we know that there will be need for more firefighting activity from surveillance to suppressing fire across the country in coming years which will keep demand steady. The company is facing no demand issues but it may not have enough planes in its fleet to address all this demand. Recently the company added four Canadair CL-215T Amphibious Aircraft (also known as Super Scoopers) to its fleet for a cost of €40 million ($42 million). The company will make technological upgrades to those planes to ensure that they are ready for next year’s fire season and it will likely keep adding more firefighting planes to its fleet as the demand will continue to rise for them.
Furthermore, fighting wildfires becomes increasingly important not only for local regions affected by those fires but also for all communities across the continent. In the last 2 summers, we witnessed how the northern half of the US was covered in smoke from wildfires in Canada for a good portion of the summer which could have a serious impact on the health of millions of people. This means being able to manage wildfires and eliminate or minimize their impact in a timely manner will be important for everyone even those who might not live anywhere near a forest.
There is also the obvious loop cycle between wildfires and global climate change. Climate change makes wildfires bigger and more frequent while these fires release too much carbon dioxide into the air while reducing the amount of trees in the environment which can help fight climate change. Thus, wildfires can affect climate change and climate change can affect wildfires in a feedback loop where one feeds the other. This makes it more important to fight fires in an efficient manner.
The company now has 10 CL-415EAF Super Scoopers, another 10 Air Attack & Surveillance aircraft and 12 Smoke Jumping & Special Mission aircraft. This fleet makes BAER the company with the largest fleet in the US and ensures that it can keep those government contracts coming. In addition to acquiring new aircraft, the company also acquired a software company called Ignis Technologies which will improve the company’s surveillance and tracking capabilities. This is particularly important because the sooner a fire can be tracker, the less resources it will require to be put out. Many times wildfires will go on for a long time and become extremely destructive because they couldn’t be detected fast enough and by the time they were detected, they were already growing exponentially.
The western half of the US is a massive land and while the southern half of it might mostly consist of desert-like land, north half of it is mostly forested. There are huge amounts of forest land where there aren’t enough resources to keep an eye on in a sufficient manner. In the future, we will have to rely more on innovative solutions such as AI to be able to watch all fire activity and achieve early detection. In addition to data from aircraft, satellite images can also be used to monitor huge amounts of forest land to determine where risk areas are in real-time. This means being able to collect and analyze billions of points of data in real-time. BAER currently doesn’t have all this capability but the company is working on improving its software offerings and this is something they are likely to make a lot of progress in coming years and possibly result in more juicy contracts from the government.
In the last 30 years, federal spending on wildfire management more than tripled from $2 billion to $7.5 trillion and this excludes spending by local governments such as states and counties. This also excludes any government spending in Canada or amounts spent by non-government entities that own large amounts of forestland such as Weyerhaeuser Company (WY). More importantly, this excludes massive amounts being spent to repair or replace fire-damaged properties by insurance companies and the amount spent on healthcare to battle the effects of inhaling smoke. It’s clear that fighting fires will remain a high-priority item with increasing money amounts in the future for both governments and non-government entities. The big question is if this company can get a slice out of this ever-growing pie.
Now comes the difficult part of finding a good valuation for this company. The company has a short history of being a public company and currently there are no analysts covering it so it’s difficult to value the company based on analyst estimates. We will have to treat this company like a start-up. Below are some of the number estimates provided by the company where the total addressable market size is $9.3 billion and 43% of it is dedicated to aerial suppression spend so that would be $4 billion. In addition, the company says that its aircraft usually cost $32 billion and amortize themselves in 3.8 years as they generate $6-11 million of EBITDA per year. Since they have a service life of 30 years, that’s 26 years of pure profits for each plane. If the company can increase its fleet size to a respectable 40 aircraft from its current 32 aircraft, it would be looking at $280 million of EBITDA from aircraft alone. There is also money to be made from software and other services. This would make the company’s current market cap of $350 million pretty cheap in comparison.
Of course, no investment is risk-free and there are some risks involved with this investment as well. At the end of the day, we are talking about a small-cap company in a niche industry which makes it riskier than a blue chip. Also, the company might need to have access to plenty of liquidity in order to be able to grow its fleet and this may be difficult in an environment with tightening monetary policies driven by central banks around the world. The company already has about $205 million in debt which will need to be rolled or paid off at some time. This can easily eat into the company’s profits for a while. Another risk is execution risk. While the company has so far done very well on the execution front, there is no guarantee that it will continue to do so.
Given the future potential of the company, I wouldn’t mind initiating a small position in it and seeing where it goes. Of course, this isn’t for investors who don’t have a strong risk appetite.
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