With the distraction of the massive health care plan behind
them, senior members of the Obama administration are gearing up to
help modernize our aging and inefficient power grid. New sources of
energy, new power lines and enhanced conservation measures should
all help reduce our burden on imported oil while cutting greenhouse
gas emissions. But to maximize all of the efforts, the entire
system will need to make a leap to the 21st century.
That's where Boston-based
EnerNOC (Nasdaq: ENOC)
comes in. The company uses its Network Operating Center (
) to provide energy management and energy efficiency solutions to
assist grid operators and utilities. For example, many utilities
must invest in excess capacity to handle unusual demand spikes that
may only happen a few times a year. By sharing the load with other
utilities and working with large customers to agree to curtail
usage at peak times, the utility can save a great deal of money by
cutting the need for additional power plants.
The International Energy Agency (
) refers to this as "cost avoidance," and estimates that by
deploying enhanced grid intelligence, utilities can save nearly $60
billion during the next 20 years. Executives at EnerNoc believe
that an investment of $1 million in the company's technology can
save anywhere between $60 million and $100 million in
construction costs. If a utility sees a demand spike coming, it can
shed non-critical loads, deploy back-up power and optimize existing
current flow -- a far better solution that building more capacity
"just in case."
Nearly 3,000 commercial customers use EnerNOC's Demand Response (
) system to monitor and adjust real-time energy usage, including
General Electric (
, as well as many universities. Those customers, with greater
visibility into their power usage at peak times, can reduce power
consumption or deploy their own on-site power sources. EnerNOC
signs customers to long-term deals, typically three to 10 years in
duration, so revenue growth is unlikely to be bumpy.
EnerNoc doesn't directly benefit from stimulus funds earmarked for
grid enhancement. Instead, utilities and large corporate power
users have tax incentives to deploy grid intelligence products, and
should increasingly turn to companies like EnerNOC. Similar efforts
are just beginning in the U.K., prompting EnerNOC to pursue that
market as well. The company has also recently acquired a pair of
small companies to better target the building efficiency market.
EnerNOC is a young company: it had less than $10 million in revenue
in 2006, but sales have increased at least +75% every year since.
Sales hit $191 million in 2009 and could reach $260 million in
For many investors, EnerNOC has been a "show-me" story, as the
company was hard-pressed to generate a full-year profits off its
fast-rising sales base. (The company generates strong profits every
third fiscal quarter from demand management during the peak summer
season). The company finally generated positive cash flow in 2009,
and is set to generate a modest profit this year (though close to
$1.00 a share on a non-GAAP basis). The company has an opportunity
to keep boosting sales at a fast pace and keep competitors at bay,
so management is likely to keep pouring any earned cash flow right
back into the business, which could make GAAP profits in 2011 look
uninspiring as well. Investors should focus on the company's
widening moat in this burgeoning space instead.
Young, high-growth companies like EnerNOC may look expensive based
on near-term metrics, but can often be real bargains in the context
of long-term growth. Thanks to favorable tax breaks for smart-grid
investments, the utility industry is expected to keep deploying
these grid-enhancing solutions for the foreseeable future. EnerNoc,
though, is not likely to reach maturity in terms of sales and
profits before 2013. Assuming that the company can
annually boost sales +30%, sales could hit $400 million by
2013. If operating expenses grow by a more moderate +10% in each of
those years, non-GAAP net profits could approach $75 million by
2013, or $3.00 per share. In that context, the shares look
attractively priced at $27 a share.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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