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Speculating on Smarter Energy
Related Stocks:
ITRI, COMV, ENOC, ELON07/26/2007:
As global power grids come to a capacity crunch, a new bull market is emerging in smart energy. This nascent industry called demand response is spawning new products that help utilities better manage high electricity demand on the power grid. Two methods of implementation include smart metering and energy reduction.
Smart meter systems are similar to the electricity gauges found in most home basements, but more sophisticated. They have the ability to communicate with the utility, providing reports and automation that the customers can use to manage energy during peak hours, when electricity is most expensive. Eventually, smart meters will allow tiered pricing plans where utilities can adjust energy prices according to real-time grid demand and the meters will respond to such changes in costs.
Energy reduction programs take preventive steps to prevent rolling blackouts. During peak energy usage times, building administrators have agreements with the utility company to reduce energy usage in return for payments or discounts on electricity. Smart meters are often used to facilitate such programs.
Stocks Benefiting from Demand Response Growth
Driven by volatile energy prices, demand response programs have taken off in Europe and Asia. The United States is also launching pilot programs, which according to IDC Energy Insights could result in the installation of as many as 51 million electric and gas meters. IDC asserts that this industry can grow from $2.3 billion to $5.5 billion by 2011, with 22% growth in hardware sales. Here are a few stocks that stand to benefit from this industry’s growth:
Itron (ITRI) is the clear cut pure-play leader in smart metering. They provide meters and power grid forecasting/management software. For 2006 they had $644 million in revenues. Along with manageable debt and improving profitability, this company is in a stronger financial position compared to other pure plays.
Recently the company purchased Actaris, a competitor in Europe. The acquisition well complements both companies because Itron is dominant in North America (55% market share), but is much weaker globally. Actaris’s strength on a worldwide basis will give Itron a chance to expand the reach of its product lines. According to a recent conference call, the new company will be “the number one electric meter supplier, number two gas meter supplier, and number four water meter supplier in the world.”
An added bonus is that this company also builds water meters and water efficiency systems. Itron is well aligned to benefit from an impending global upgrade cycle as water utilities implement more automated meter systems to help curtail waste.
Comverge (COMV) and EnerNOC (ENOC) are two recently IPO’ed companies that provide energy reduction solutions for utilities. Both of these companies manage programs and networks that help add power grid capacity to utilities during times near overload. They work by providing hardware and economic incentives encouraging customers to cut back on power draining devices such as pool pumps and HVACs during peak times.
Because EnerNOC has only been public several months, not very much financial data is available yet. Comverge has robust revenue growth with $33 million last year. These companies have yet to make a positive EPS, and are thus hard to value based on PE multiples. While I consider these speculative stocks, I think over the long run this type of service will benefit from the rise solar power as more customers will have the capability of adding electricity back to the power grid.
Echelon (ELON) I consider the most speculative demand response stock, but I think has the greatest short term potential. It also comprises 5% of the WilderHill Clean Energy ETF (PBW). This company specializes in automation technologies that help business reduce energy consumption by more effectively throttling lighting, HVACs, and other energy-intensive appliances.
During an interview with TheStreet.com, the president and COO Bea Yormark commented that their product is differentiated through horizontal integration and interoperability. This makes the applicability of their technology more universal. As stated, “…because we have this whole 2-way idea of communicating devices, we are able to do things that makers of vertical systems can’t do. For example, in a building we can link the lights and HVAC system on the same network.”
This networking angle seems to be catching on. Recently, McDonald’s announced that it will be experimenting with Echelon’s LonWorks technology in its restaurants. The goal is to cut costs by more efficiently managing each restaurant’s energy consumption. (http://www.echelon.com/company/press/mcdonalds.htm)
The biggest engine of growth I anticipate to be international infrastructure applications of Echelon’s technology. Their smart meters are catching on in Europe, with Austria recently announcing a pilot program. The LonWorks technology is catching on with businesses in Asian countries such as Korea and Singapore, and even the Chinese government will begin applying the platform to street lighting systems. For anyone who has visited China, the application of public lighting control systems is apparent when Shanghai’s skyline goes dark at 11:00pm and other city streetlights turn off into the night.
(http://www.echelon.com/company/press/chinastreetlight.htm)
On the financial statements, this company’s income statement is less than stellar. Revenues have been shrinking as a large project in Italy finishes and the company has failed to turn a profit in recent quarters. Furthermore, deferred revenues distort a clear snapshot of the company’s current health. The recent rally to 21 seems to be triggered by a short squeeze. Prospective investors should carefully consider whether the value of new and future contracts justify the recent increase in the stock.
A Safer Approach
Because these smaller companies have riskier financial certainty, a much safer way to play demand response is to invest in infrastructure conglomerates. Both General Electric (GE) and Siemens (SI) participate in the smart meter market. The disadvantage of this approach is that the full benefit of this industry’s growth will be moderated by these companies’ other core businesses.
Closing
This new field of smart energy systems is still a maturing market and the definite leaders have yet to be determined. A few of these pure play companies may prosper, but it is also likely that some will sink to zero. If you want to play these stocks from a speculative standpoint, I suggest taking small positions in each as a basket of stocks
Full Disclosure: At the time of this writing, Winston does not hold positions in any of the discussed stocks.
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