the stop-loss for this trade has been revised.)
The global energy picture is changing so fast that it's getting
hard to keep up. In just the last five years, we've seen:
• Crude oil briefly spike above $140 a barrel in 2008
• A number of governments -- especially in Europe and China --
subsequently rush to deploy solar and wind power
• The United States find ways to tap into vast reservoirs of
• The Chinese, Indian and Brazilian economies grow so fast, that
their energy needs threaten to alter the current global balance
between energy supply and demand.
If there's one thing for sure, it's that more neck-snapping moves
in the global energymarket will take place anew in the next few
years. And investors will need to be prepared to act accordingly.
The rush to embrace wind and solar power now seems to have been a
bit hasty. Key countries such as Germany and Italy have radically
cut spending in this area, and for investors, solar- and wind-power
stocks have been duds anyway because supply overwhelmed demand and
Yet it's abundantly clear that in the future, the world will have
to do more with less. Demand for energy will only rise, and the
supply of energy may not keep pace.
We'll have no choice but to make more judicious use of the
power we have
. Electric utilities are just now starting to take steps to enhance
the efficiency of their networks, looking at ways to serve more
customers without building more power plants.
This, in a nutshell, is the premise behind a "smart grid."
By adding a degree of intelligence to their systems, utilities can
more effectively monitor and control power consumption patterns.
And though a number of companies seek ways toprofit from this
niche, only one has a longstanding track record and the products
that can help utilities "get smart."
I'm talking about
, which has been around for more than 20 years and has already seen
several spurts of growth on the heels of major utility contracts.
Right now, its stock is near 10-year lows, as growth has slowed in
a constrained globaleconomy . But the steps are in place for a
solid rebound in sales -- and the lagging share price.
The long hard slog to current lows
Shares of Echelon, which currently trade below $5, changed hands
for $80 back in 2000. At the time, the company was in the midst of
completing a huge contract with Italy's electric utility
Millions of Italian homes were re-wired to use Echelon's electric
meters, which contained controls that enabled the meter to
wirelessly transmit information back to the utility. The system was
known as advanced meter reading (AMR), which as I'll note in a
moment, has been radically upgraded. The company hoped to quickly
secure additional major contracts, and as they failed to
materialize,shares started to grind lower.
had fallen to just $10 by 2007, but quickly spiked to $30 that year
as sales were rising at a few key clients, and a range of pilot
programs with other utilities looked quite promising as well.
Management expected those programs to become full-fledged rollouts
within a few years, but the economic downturn led utilities to
slash many discretionary investments. Shares have been on a
downward drift ever since.
Though sales shot up 40% in 2011 to $156 million, management now
concedes that ongoing delays will keep sales from rising sharply
again in 2012. Analysts expect sales to grow just 8% this year to
around $170 million, and even that forecast may prove to be
Many investors in this stock have simply had enough.
Yet behind the scenes, the seeds of a rebound have been planted,
and over the next 12-18 months, Echelon appears poised to land
another big fish or two. This time, it won't be from a major
utility in the United States. or Europe. These two regions appear
paralyzed at the moment, making few major bold moves to address the
changing global energy picture. Only
Duke Energy (NYSE:
and Finland's Fortum are actively working on rollouts with Echelon
Instead, China and Brazil appear to hold the keys to an upturn.
These countries aren't simply looking to deploy the AMR's noted
above that Italy's Eni used. They aim to do much more, with a
system developed by Echelon that entails advanced meter
So what's an AMI? It's a communications and control system that can
help utilities save energy, reduce power when needed and improve
reliability. Let me provide an example...
There is an increasing number of electric cars hitting the road,
and each one needs to be plugged in at night to recharge the
batteries. Utilities have grown concerned that too many cars being
charged at once will overwhelm the system. So they want to be able
to know what is being charged, and they want to have the ability to
cut the juice to specific devices when demand peaks. The car
charging could be delayed if needed until consumers are done with
washing machines, dishwashers and other appliances. We are starting
to see this happen in places such as California, where utilities
have signed up many homes to have their power cut voluntarily when
the risk of summer blackouts can occur.
The interest from Brazil and China is different. These countries
also aim to better identify when electricity is being pilfered, and
need an AMI to truly control all the juice that flows.
In November 2009, Echelon announced plans to partner Brazil's ELO
Sistemas Electronicos. The company supplies meters and other
equipment to the top 40 utilities throughout the country
(representing 55 million homes). Not only does the Brazilian
government seek to push utilities to become more efficient, but the
utilities themselves lose an estimated $350 million to electricity
theft every year. Echelon's technology is being tested throughout
Brazil this year, with an eye toward possible major rollouts in
2013. ELO also has relationships with other utilities outside of
Echelon is partnering with China's Holley Metering to tackle the
country's mandate to connect 300 million homes and businesses to
smart-grid technology over the next five years. As is the case with
ELO in Brazil, Holley has relationships with most of China's major
utilities. Both of these deals are unlikely to impact results in
2012, but could represent a significant growth driver in 2013 and
beyond. The Brazilian opportunity is a little further along and
could be the first driver to help boost the stock.
The fact that 2012 will likely represent minimal growth for Echelon
is why this stock is now scraping fresh lows. Investors had been
anticipating that 2012 would finally be the year when Echelon sees
a sustained build-up in sales.
As a final note, Echelon also has a base of industrial customers
that use the company's "Lonworks" technology in process-control
environments. Lonworks is a suite of hardware and software that
allows for the remote management of factory machinery. This is a
solid segment of the business, but not key to upside for the stock.
I'll be touching on Lonworks in the future if the segment becomes
more relevant to the stock's potential upside.
Downside Support -->
This stock appears fully washed out, and it's hard to see how it
can move much lower. I see a floor at $4, which would value this
company at $170 million. Consider that Echelon has spent $260
million on research and development during the past eight years.
Current investors can buy that knowledge base at a 25% discount to
that value. (The currentmarket value is $200 million and
theenterprise value is just $160 million.) Said another way,
Echelon's technology base and customer relationships -- though they
may be nascent in their development potential -- makes Echelon
quite valuable to any larger technology firms that want to enter
into the smart-grid space. That $4 mark may also be the point where
chatter would likely build around the company being acquired.
Besides, Echelon has $59 million in cash and no debt so there is
minimal financial risk.
Upside Triggers -->
This is no longer a timely investment, so many investors have given
up on Echelon for now. But they will pour back into this stock once
the makings of an upturn begin to take shape. Management's upcoming
comments could help to refocus investors on what is still a
tremendous long-term opportunity.
Echelon has also held discussions with dozens of other utilities
around the globe, and you can look for new customer wins later his
year as well. As a finalcatalyst , the United States and Europe
have been paralyzed by their economic woes, but as these two major
economies start to stabilize, the willingness to make upfront
investments with long-term payoffs may soon be back in vogue. On
its most recent conferencecall , management noted that Echelon's
pipeline of new business leads is three times larger than a year
ago. Converting these leads into contracts could be a solidcatalyst
Action to Take -->
I will buy 1,000 shares (roughly worth $4,700) two trading days
after you read this. I suggest investors put in a stop-loss at
$4.00, in the event that amarket rout sucks this stock down with
the pack. Shares can be bought under $7.
If you haven't already signed up to receive my
updates in your email inbox, you can do so by
. It's completely free for a limited time.]
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of E in one or more if its "real money" portfolios.
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