Roth Says Quest Resource (QRHC) Q2 Results Inline, but SG&A Continues to Run High

August 16, 2016 10:59 AM EDT
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Roth Capital affirms Quest Resource Holding (Nasdaq: QRHC) with a Buy rating and $6 price target following Q2 results issued Monday.

Analyst Gerry Sweeney commented, Quest reported revenue and gross profit in line with our expectations; however, SG&A continues to run higher than modeled as Earth911 continues to be evaluated for profitability or potential monetization. Gross margins are being driven by existing contract review of “up or out” new contract wins and deployment of select hard assets to support Quest's core recycling initiatives. We believe we are in the early cycle of margin expansion opportunity and will watch closely for operating line expense controls.

On pperating costs, Sweeney elaborated, Quest’s core business is profitable, but public costs and Earth911 weigh down profitability. We estimate public costs are $2.5 – $3.0mm and Earth911 is $1mm annually. Earth911 is a unique asset with thousands of views a month; however, monetizing the site remains a challenge. Management is exploring opportunities to bring the site to cost neutral and if not will likely explore strategic alternatives. We believe either event should occur in the next 6-9 months. The key moving forward is to leverage the existing operations base as new, more profitable business is added and existing contracts are improved. Revenue and gross margin was up 11% y/y while costs were up 7%; as gross margin ticks up towards 10% this spread should increase.

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