Zacks increases price target of Acorn Energy to $10.00 - Analyst Blog

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Zacks increases price target of Acorn Energy to $10.00

Steven Ralston, CFA

Acorn Energy ( ACFN ) announced that a definitive agreement has been signed to acquire OmniMetrix, LLC for $8.5 million. OmniMetrix designs, manufactures and markets wireless monitoring systems for backup power generators and cellular towers. Also, OmniMetrix provides remote-site monitoring systems for pipeline integrity and landfill gas. Headquartered in Buford, Georgia, OmniMetrix generated revenues of $3.0 million and pre-tax income of $800,000 in 2011. Utilizing a subscription business model, OmniMetrix generates a recurring revenue stream.

OmniMetrix' Smart Service monitoring system tracks the operating status of backup emergency power generators in real-time. The emergency generator market serves the backup power requirements for critical sites, such as hospitals, nursing homes and cell telephone towers. The Smart Service monitoring system gathers static data, such as fuel level, coolant level and battery charge level, on a constant basis. During the periodic testing of the emergency generators, performance metrics are monitored to confirm normal operational characteristics. Some measured factors include oil pressure, oil temperature, coolant temperature, battery voltage, generator phase voltage, generator phase current, exhaust temperature and RPM. Technicians are informed of any measurements outside acceptable levels by e-mail and/or text message. Minor issues can be repaired remotely, including resetting the equipment.

OmniMetrix also provides the Pipe-to-soil Monitoring System (PSM) to remotely detect leaks associated with pipeline corrosion. Powered by a 10-year lithium battery, the monitoring system periodically measures the reference cell voltage and wirelessly transmits alarms when values are detected outside acceptable limits. The PSM sensor units are buried near pipe risers for the deployment of the in-soil reference cell and the installation of the pipeline connection.

Our expected price-to-sales ratio valuation range is being increased from 1.1-3.2 to 1.8-3.9 based on two developments. First, it appears that in 2012, Acorn's subsidiaries should benefit from the marketing efforts in their long sales-cycle businesses, and we expect accelerating growth of the sales base. DSIT has already received a very significant $12.3 million contract from an undisclosed Asian customer. US Seismic Systems should benefit from the five pilot programs from oilfield service and equipment companies received in 2011. The $1.6 million proof-of concept contracts could generate $36 million in annual revenues if they transition from development to production contracts during 2012. Also GridSense's TransformerIQ monitoring project for a leading southeastern electric utility should empirically demonstrate the cost effectiveness of employing smart monitoring systems for electricity transmission and distribution networks.

Second, Acorn's stock is benefiting from increased institutional sponsorship. Columbia Wanger Asset Management now holds 2,455,000 shares (14.02% of the shares outstanding), having recently purchased 130,699 shares according to the latest reported 13-F. In addition, Verition Fund Management LLC filed a 13G in January declaring its ownership of 888,541 shares (5.07%) of Acorn Energy. As a result, institutional ownership of Acorn energy's stock is now approximately 31.5%.

Our price target is being raised based on a P/S valuation on annualized current quarter sales of the Acorn's four operating companies plus a multiple on the cash on the company's balance sheet that may be utilized for acquisitions similar in valuation to OmniMetrix, namely 2.8 times sales. Based on an expected 3.9 price-to-sales ratio valuation on annualized quarterly sales, our price target for the first quarter of 2012 (based on our expected results for the fourth quarter) is now $10.00.

We reiterate our Outperform rating on Acorn Energy.

To view a free copy of our most recent research report on ACFN or subscribe to our daily morning email alert, visit Steven Ralston's coverage page at http://scr.zacks.com/ .
 


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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