Echelon Corporation (ELON) provides smart energy control solutions on both the hardware and software side, and although current revenue remains flattish due to the company’s exposure to the U.S. and Europe, revenue is expected to grow thanks to exposure to emerging markets, says Pavel Molchanov, Analyst at Raymond James & Associates, Inc.
“The good news is that Echelon has opportunities in two of the biggest emerging markets, China and Brazil. In China, Echelon has a joint venture with a smart meter company called Holley, and in Brazil it has a joint venture with a smart meter company called ELO. Both of these opportunities are icing on the cake. In other words, I would look at it as pure optionality, because deployments in China and Brazil have not even begun yet on a commercial scale,” Molchanov said.
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Molchanov says Echelon stock currently does not seem to price the future growth opportunities for this energy-efficiency company, providing investors with an opportunity to buy shares at a reasonable price.
“Over the next 12 months, I would expect to see China and Brazil become much more meaningful revenue contributors to Echelon, and in the meantime, the stock is trading just above book value. Book value is $1.75 a share; the stock is at about $2.30. And it’s also a company where cash on hand, net of debt, is almost half of market cap. So the market is pricing in very little, if any, future revenue growth for Echelon, and that’s why I think currently, with the stock down year to date, the entry point looks very interesting,” Molchanov said.
EnerNOC (ENOC) is growing its SaaS-model, energy management services for the enterprise, currently comprising $50 million in revenue out of a total of $380 million, and the company is diversifying its customer base for its larger demand-response systems business, says Pavel Molchanov, Analyst Raymond James & Associates, Inc.
“In contrast to traditional SaaS companies, EnerNOC is trading at dramatically lower multiples. It trades at four times EBITDA, whereas traditional SaaS stocks trade at double-digit EBITDA multiples. And EnerNOC is also profitable, whereas many SaaS companies have negative earnings,” Molchanov said.
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Molchanov says ENOC is trading at a lower multiple than other SaaS companies for two main reasons, one being the seasonality of its business, and the other the high dependence on a small number of customers, particularly in the U.S.
“The good news is that EnerNOC is diversifying its revenue mix every year. First it’s diversifying by increasing its exposure to non-demand-response revenue, energy management for enterprises. And second, within demand response, it is becoming much more international. It’s already operating in several countries outside the United States, such as Australia, and I think there will be an entry into at least two more countries, quite possibly Japan and Korea, over the next 12 months,” Molchanov said.
Synthesis Energy Systems, Inc.’s (SYMX) joint marketing agreement with General Electric Company (GE), which combines SYMX‘s gasification technology used on low-quality, low-cost feedstocks with GE‘s aeroderivative gas turbine power generation technology, has opened up opportunities in emerging regions, says Robert W. Rigdon, President and CEO of Synthesis Energy Systems, Inc.
“We believe there is an opportunity existing today in many regions of the world to provide smaller- to medium-scale power plants; these would be power plants that would produce somewhere between perhaps 50 megawatts to 100 megawatts, and potentially even as high as 300 megawatts. These smaller-scale power plants are needed for power generation in many regions of the world with emerging and developing economies to move their economies forward. A lot of these places don’t have the power demand yet, or the infrastructure in place that can support massive centralized power plants like those that have been built in the developed world,” Rigdon said.
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SYMX has the capability to produce a clean syngas fuel from very low-cost, low-quality feedstocks, which when combined with GE‘s aeroderivative gas turbine power generation technology can provide the key to clean and affordable power, Rigdon says, opening up significant opportunities in developing areas.
“These units would consume low-quality, low-cost fuels, like lignite coals and renewable materials and waste materials, to produce electricity very cleanly and affordably. This can be a compelling value proposition, because without our technology to convert the low-quality feedstocks into clean fuel, these regions are left with the option of expensive LNG-based natural gas costing in the $14 to $15 per million BTU range, expensive fuel oil or older, much less clean and more expensive coal options,” Ridgon said. “Therefore we create an opportunity to actually make clean power from much lower-cost resources that are readily available in most of these countries…It’s a great example of deploying our technology as a clean energy platform to help provide much needed energy to improve and create better living conditions in many parts of the world.”
Solazyme Inc (SZYM) is utilizing its algae technology platform to enter into different applications and end markets, in particular the nutrition market, despite the dissolution of its joint venture with Roquette, says Pavel Molchanov, Analyst at Raymond James & Associates, Inc.
“Solazyme can make fuels, specialty chemicals, cosmetics and also nutrition products. In the long run I would expect fuels and chemicals to be the dominant revenue driver for the company, but cosmetics and nutrition is an important opportunity for generating revenue and margin relatively quickly, quite simply because the pricing and the margins in these markets are so much higher than in the commodity fuel market,” Molchanov said.
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Solazyme had a joint venture with Roquette Freres, a French producer of starches, and the two were looking to start production at their first plant this summer; however, the companies had different expectations for how quickly to move forward, Molchanov says. Since dissolving the JV, Molchanov sees Solazyme entering the nutrition market on its own, as the company has the rights to the technology.
“Roquette, as a large mature company with lots of things on its plate, wanted to move more slowly; Solazyme wanted to move more aggressively, and they decided to part ways,” Molchanov said. “It would have been ideal if they could move forward with that next expansion next year, but Solazyme is the company where the technology originated. Solazyme keeps the rights to the technology, and therefore it’s going to get into the nutrition market on its own, rather than through the JV with Roquette.”
Clean Energy Fuels Corp (CLNE) has large exposure to the commodity pricing of natural gas in North America, as the company owns stations that distribute CNG and LNG, leading Pavel Molchanov, Analyst at Raymond James & Associates, to avoid the stock based on the company’s performance and outlook.
“The company has negative EBITDA, burning cash, even without taking capital spending into account, and it’s trading at about four times revenue. For a commodity company with low barriers to entry that’s nowhere near profitability and trading at four times revenue, that’s a stock that I would definitely avoid,” Molchanov said.
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Molchanov says CLNE is the biggest distributor of natural gas fuels in North America, which would give it some first-mover advantages, but the pure-commodity nature of the business leads him to avoid the stock altogether.
“One stock, though, I would tell people to avoid is Clean Energy Fuels,” Molchanov said. “This is a company that quite simply produces and distributes the actual fuel. They own the gas stations that distribute compressed and liquefied natural gas. This is a pure commodity business with no technological advantage.”
KiOR (KIOR) has started commercial production of its biofuels from nonfood biomass out of its first facility. The renewable fuels company still shows risk, however, in the consistency of production through this new technology, and the company has exposure to regulatory risk, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“A company like a KiOR, it built its first facility — this was slightly over budget, and it’s taken longer for them to ramp it up and have it start producing. Now the good news is, they have actually produced some commercial products out of it. It’s taken a little bit longer, and we do need to see consistent production before we know that the technology is derisked,” Kallo said.
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Kallo says KIOR is different from other biofuel companies that are looking to develop without depending on subsidies, and KIOR is more exposed to RIN values. He adds that the technology is still in the early innings, and there is opportunity in the space.
“A lot of their revenue will come from RIN values as they sell product; that does expose them to some regulatory risk, although the renewable fuel standards does have a lot of support. So people will give that a different amount of risk, but there is — a substantial portion of their revenue does come from RINs or projected revenue,” Kallo said.
ESI Group SA (EPA:ESI) is providing automakers with virtual prototypes that allow auto companies to run thousands of tests without incremental costs, and though ESI is participating in a growing niche and making over $1 million per prototype, the stock is still well below the radar of most investors, says Joshua B. Stewart, Portfolio Manager at Wasatch Advisors.
“[ESI] creates software that all the automakers use to do things like crash tests. It is virtual prototyping and crash testing. It costs a lot of money, often more than $1 million, to make a prototype of a new car model. Volkswagen (FRA:VOW) is ESI’s biggest customer, and using a prototype made virtually with software, you can run thousands and thousands of tests without any incremental costs…It saves a lot of money for the automotive companies,” Stewart said.
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Stewart believes that ESI has a key asset that its customers cannot live without at this point, as automakers look to phase out physical prototypes and save money. ESI has been under-the-radar for most investors, yet has many characteristics that make it an attractive investment, Stewart says.
“Its customers are figuring out even more ways to use its tools as they try to reduce the physical prototypes as much as they possibly can, and that saves them money. In the financial crisis, ESI didn’t lose any of its big key customers,” Stewart said. “It is an asset that is really attractive, it’s not going anywhere, and someone could easily look to acquire. It is in a really nice growing niche that people are going to use more and more, and it’s trading at 1.25 times EV to sales. So it is much cheaper than its global peers.”
Thermo Fisher Scientific Inc. (TMO) has become a market leader in life sciences by playing into the M&A theme that is prevalent throughout all of health care with its Life Technologies Corp. (LIFE) acquisition, says Ross Muken, Senior Managing Director at ISI.
“We had Thermo Fisher and Life Technologies get together this year in our tools space; that is two very large players consolidating and really becoming a true market leader in life sciences,” Muken said. “It’s really out of strength, where you’re…taking two really complementary groups and putting it together for a unique business model like you have with Thermo Fisher.”
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TMO is at the top of Muken’s investment list at the moment, as the company is a proven leader across many different subsegments of the life science space and is exhibiting strong cash flow generation.
“It’s a real leader across the life science space enabling all source of R&D and productivity tools across pharma, biotech, academic research, food testing, environmental testing, lots of different subsegments. Great cash flow generation and really stellar management, and we think that one is quite attractive,” Muken said.
SunPower Corporation (SPWR) has diversified its customer base for its solar energy products and services across classes and geographies, and the company is expected to benefit from a beginning recovery in the space, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“I like SunPower because of its diversification across customer classes. So it serves as both residential, commercial and then also big large-scale utility projects. The utility projects give us good visibility for the next two to three years, good pipeline there. The residential rooftop market is being driven in the U.S. largely by a leasing program similar to what SolarCity (SCTY) offers and started; SunPower has that business inside of them as well, that’s growing very rapidly,” Kallo said.
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Kallo says SPWR has good exposure to Japan thanks to its relationship with local companies, and he says the country is the largest market this year. He adds that the company’s exposure to the EU is not as bad as previously expected, and he expects the space to play out with SPWR eventually at the head.
“We’ve already started seeing some of the Chinese players pull out of Europe; that was supposed to be kind of the black eye of the industry this year in Europe, and that’s actually gone better than expected, so that should help them out, too. So I think they are set up for a good year, and I’d say a good next couple of years it all emerges as the leader in the space,” Kallo said.
W.R. Grace & Co. (GRA) is expected to come out of bankruptcy in Q4 or Q1, allowing this specialty chemicals and materials company more flexibility with its capital and potentially returning it to shareholders, says Ben Kallo, Senior Analyst at Robert W. Baird & Co.
“They have a very good balance sheet. There are three basic business segments, the most profitable one is our catalyst division, which sells catalysts for the refining process. They just instituted a price increase earlier in the year, a double-digit price increase, so they have some pricing power there. We’ll see that flow through into next year,” Kallo said.
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Kallo says GRA has improved operations and is also expected to benefit from a change in the economic atmosphere thanks to a rebound in construction. Moreover, he says the company could become an acquisition target once it leaves its bankruptcy status.
“They have construction-chemical business, which has been weak over the past few years as construction was weak — that is recovering. They did a lot of streamlining of the business in the downturn, so when we started seeing a pickup in that business, we got a lot of leverage there,” Kallo said.
