New Executive Order, State Mandates, State Investments, Manufacturers Turn to Cost Savings & the Allure of Developing Markets.
Many already consider today's energy efficiency market robust at $12 billion, but some are just realizing that the stars are aligned for massive future growth for this group. LBNL projects that the energy efficiency marketplace will reach practically four times its current size, at a whopping $45 billion over the next eight years. Also, energy efficiency can be considered a counter cyclical play, as economic headwinds and lower revenue at the federal, state and business level can bring a greater boom to energy efficiency fundamentals. In challenging environments, cost cutting is typically pursued and governments clamp down on expenses, which energy costs are keen targets. Meanwhile, the economic growth powerhouses of emerging markets like India, Brazil and China are largely overlooked in these initial growth equations. Hence, there is a very attractive optionality within developing markets.
The energy efficiency science is sound and surprisingly advanced. Ratepayer-funded energy efficiency spending is estimated to increase at a CAGR of 16.1% from 2010 to 2015. However, energy efficiency is no longer small scale with homeowners and small businesses, as multinational companies, schools, hospitals and government facilities are stampeding into energy savings. Large blue chip early adopters like J&J, Pfizer, Abbott, among others, have only dipped their organizational toes into this market and massive scale applications are still on the horizon.
According to the 2012 United Nations Industrial Development Organization Energy Resource Market Study, "most energy efficiency projects pay for themselves through generating savings, financing is usually needed to cover energy audits, energy advisory services, new energy efficient equipment, installation, and monitoring." Further, the study found that there was 'generally very high level of internal rates of return at a project level - with payback periods ranging from 0.9 to 2.9 years.' The study also concluded that "three-year projects reported an estimated mean IRR of 25%. As expected, the estimated rate rose with longer life spans - 37% for the 4 year case, 43% for the 5 years, and 50% for 10 years. These returns show higher profitability for energy efficiency projects in comparison with average returns in capital markets over similar timeframes."
Just this year, there are has been some very big head turning developments for those in the energy efficiency field. For example:
- New York Governor Andrew Cuomo announced in April 2012 that the state intends to invest $800 million to enhance the energy efficiency of state and local government buildings with a goal of reducing consumption by 20 percent over the next four years.
- In August 2012, President Obama signed an Executive Order Promoting Industrial Energy Efficiency. The Executive Order also directs agencies to foster a national dialogue through ongoing regional workshops to encourage the adoption of best practice policies and investment models. The Order establishes a new national goal of 40 gigawatts of new combined heat and power capacity by 2020, a 50% increase from today. Meeting this goal would save energy users $10 billion per year, result in $40 to $80 billion in new capital investment in manufacturing and other facilities that would create American jobs, and would reduce emissions equivalent to 25 million cars.
- China's energy efficiency industry is emerging as a high growth sector with the country projected to spend as much as Rmb2.1 trillion (USD300 billion) over the next five years on products and services that cut energy use.
How can investors participate in this growth, what stocks to avoid and where to harness your horse for a potential stock run? We would suggest the pure-play energy efficiency providers can offer a focused investment. However, many of the larger providers in this space have already had a solid rally this year, while some have stumbled. Here are the Good, Not So Bad, and Ugly.
Good. Some may be surprised by the only GOOD pure play pick of Blue Earth Inc. given the stock trades on the OTCBB (BBLU) and is perhaps one of the more junior players with the smallest market capitalization of $28 million,. Admittedly, this vote of confidence may partly be attributable to other peer stocks already at nose bleed heights and others having recent stumbles, yet overall the potential upside for Blue Earth is immense. Also, much of the pure play markets are smaller type companies, which in a sense, offers the greatest growth too. We will go into more detail on Blue Earth later, but to highlight the compelling investment catalyst: December 31, 2012 projected annual revenues of approximately $11 million, shareholders' equity of approximately $5.9 million, assets of approximately $12.5 million and 2013 projected revenues of approximately $100 million and EBITDA of approximately greater than $10 million.
Not So Bad: World Energy Solutions (NASD:XWES) delivers best price energy to clients for a fee and has had five consecutive record revenue quarters, a history of positive net income, but the stock has also rocketed up by almost 80% to around $5.00 per share, or around $60 million market capitalization. Though the company is considered Good, the valuation places it in the Not So Bad category.
Not So Bad: Ameresco (NASD:AMRC), with a $500 million market capitalization, but last quarter's revenues turned flat at around $165 million last quarter and income dropped, making its 18.5 price-earnings look lofty even after the stock sold off.
Not So Bad: EnerNOC (NASD:ENOC) manages energy demand for clients to earn incentives (Demand Response) from utilities. However, revenue has faltered, with reported revenue of $33.3 million last quarter, which was 44% lower than the prior-year quarter's $58.9 million. Also, analyst consensus has revenue projections for next quarter as flat, but with 9.6% earnings growth.
Ugly: Another stock offering AMRC service to improves energy efficiency and renewable energy systems has been badly bruised by the markets this year is Lime Energy Co. (NASD:LIME). The company has had some dilutive financing, shareholder lawsuits targeting misstated financials, and delisting chatter by the SEC.
With the market growth funded by prepaid ratepayer surcharges of $6 billion to over $10 billion by 2015, the profit and sales opportunity for energy efficiency stocks couldn't be better. Add the regional state mandates to replace 33% of fossil fueled power with alternative energy and we have gangbusters potential for those established market players.
Although many of the companies discussed will also benefit from the money rolling into this space, Blue Earth Inc. (OTCBB: BBLU) has the right balance between low valuation and high market growth. The Company has been acquiring technology and energy saving entities in this marketplace, including Castrovilla, Inc. (energy efficiency in refrigeration, utility program) and Xnergy, Inc.(efficiency cost reduction for HVAC, lighting & alternative energy). BBLU has also marked some recent high level revenue deals: closed on 497 kilowatt project in Hawaii, acquired exclusive rights to 3.5 megawatts DC of Solar PV projects in Hawaii, executed on three life science projects, closed a joint development with Greenwood Biosar for 1MW of Solar PV projects in California valued at $4.2 Million, energy savings for 7-11 stores & Carl's Jr., among others.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Prime Equity Research has been paid to write and distribute this article. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Neither the writer or distributor of this article have any positions in any of the companies named.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions.
Prime Equity Research
Chris Engleman