If there’s one company that I would have liked to recognize as a world changer 20 years ago, it’s Cisco Systems — the routing pioneer is one of the great stories of the internet age, a tiny company that was trading at a split-adjusted 8 cents a share back in 1990, now the dominant networking stock in the world with the stock at $26 a share and a market cap of $150 billion. The market share gains have beaten the stock price gains by a bit, unfortunately, since Cisco has long siphoned off a lot of their profits in stock options, but it’s hard to complain about that with such a massive gain.
So when someone says they’ve found the “next Cisco” — and they say it will be the “Cisco of the smart grid,” which everyone seems to believe will be an inevitable focus of infrastructure spending in the decade to come, I sit up and take notice. Who, pray tell, are they teasing us about?
Well, the tease is in the service of the Money Map Report, which is the “entry level” newsletter from Money Map Press — and they tell us not only that if we sign up we’ll receive a copy of Peter Schiff’s revised version of Crash Proof, but also the name of the company that they tease as this “Cisco.” This is a standard marketing pitch from Money Map, they have long tied their name to Peter Schiff by giving away his book to folks who sign up for subscriptions and teasing his ideas (I wrote about this last May, when they pitched the older version of his book, and in June when they focused on the new currency of “Gold Dollars” that Schiff likes, and very little of that has changed much in the new Crash Proof 2.0, as far as I can tell).
In fact, I just checked on their website at Money Map and they’re also trying this with a book that they must be able to get dirt cheap right now, A Bull in China by Jim Rogers — so they piggyback on his commodities expertise and China boosterism to tease the ideas he writes about in the book, including specific stocks, and offer a copy of it to you if you’ll just subscribe. I’m wondering if it’s an error that has this offer on their site right now, since the book is extremely old to be used as a source of specific stock tips (it was published in 2007). I’ve read it, it’s an interesting book, and some of the stocks he mentioned certainly did well … but I don’t find the tease of 2007 stock ideas all that compelling.
But anyway, I’m again off track: The target today is this “Cisco of the smart grid” … here’s how they tease it:
“As you probably know, many people got rich from the emergence of the Internet.
“The best example might be Cisco Systems. The Internet-hardware company handed investors 16,637% gains from 1990 to 2000.
“But some investors will get even richer off the emergence of a new Internet.
“This one will be 1,000 times bigger than the first, according to a current Cisco VP.
“The new internet won’t handle emails and web pages. It will route energy between power plants and customers in the most efficient way possible.
“Many call this new network the Smart Grid.
“As CNET reports, the new network will add billions to the bottom lines of both utility companies and customers each year.
‘Building the smart grid means adding computer and communications technology to the existing electricity grid. With an overlay of digital technology, the grid promises to operate more efficiently and reliably… Much like computers and routers manage the flow of bits on the Internet, smart-grid technologies use information to optimize the flow of electricity.’
“… no wonder experts see the Smart Grid as a $100 billion marketplace for new technologies, ideas and equipment.
“For investors in one little company, all of this could mean enormous gains.
“We call this fast-emerging company the ‘Cisco of the Smart Grid.’ While Cisco provided the routers and switches for the first Internet, this company provides the data ‘hubs’ for the Smart Grid.
“These hubs route information, and energy, between power plants and customers – in real time. And they’re already controlling the flow of power in places like Tennessee, Florida, Ontario and California.
“A Southern California Edison Vice President calls the hubs ‘an essential part of providing clean, cost-effective technology solutions to further enhance the reliability of the electric power grid.’
“But the company is just getting started. It’s looking at potential deals with dozens of other major metropolitan power companies. And as each new customer signs on, the company’s earnings will spark higher.”
So who are they talking about? Throw it all into the mighty, mighty Thinkolator and one answer emerges:
EnerNOC (ENOC — click here for a free instant trend analysis of ENOC from MarketClub, one of my advertising partners — as I type this, the trend isn’t particularly definitive one way or the other)
This is a company that provides these so-called “hubs” to Southern California Edison, and one of their customer testimonials/case studies [pdf file]is the source of the quote in the tease, which happens to be about one of their demand response programs, where EnerNOC essentially subcontracts to manage part of the system in which big energy consumers (they provide a couple examples — an aquarium, a produce processor) agree to give up full power during demand spikes to help the utility manage the load.
ENOC is a small stock, market cap around $700 million, and, in part because they’re in the story-driven “smart grid” space the stock has been very volatile, getting down to around $5 a share during the crash and bouncing back up to as high as $37 or so in recent months, though the stock now trades right around $30. And if you got in on the IPO of ENOC back in 2007 you’re probably not dancing yet — they IPOd at about $43 and the stock promptly shot up to the $50 range before completely collapsing in early 2008.
The shares trade at an estimated forward PE of about 30, but ENOC has been recording most of its revenue and all of its profits in the Summer, so the numbers are extremely lumpy and very hard for analysts to estimate very well — they beat analyst estimates every quarter over the past year, but only the September quarter showed a profit (they earned $1.12 per share in that quarter, and lost enough in the other three quarters to get an annual loss of something like 40 cents per share). So be careful about extrapolating from current quarters, unless the lumpiness settles down as they grow, what will really matter for profitability is how great their third quarter is, and how they manage to control costs in the other quarters.
Still, there is a lot of potential business out there — there are many smart grid stimulus checks burning holes in the pockets of utility executives, and there are also several new pushes by state governments to develop more responsive grids and manage power more effectively — Act 129 in Pennsylvania, for example, is getting a lot of press from smart grid and smart meter companies as providing some potential fuel to drive their revenues higher as it requires new efficiencies and load management initiatives over the next few years, but after just a quick scan on my part it looks like there’s still a fair amount of uncertainty about which companies will get the various contracts that are available, and when the money will be spent.
If you want to get a handle on EnerNOC’s services, they explain them in a nice, brief format here. Demand response, (the kinds of contracts they have with Southern Cal Edison, for example,) is by far their biggest business, which is why Summer is so huge — the immediate necessity for demand response and load management in most areas, and especially in California, is air conditioning demand spikes during heat waves. They have some other higher-margin businesses in energy management and other stuff that many of us would classify under “consulting,” but load management “demand response” seems like it will continue to be a big driver of the business.
There are other companies that do this, of course — one fairly prominent one is Comverge (COMV), a company about half the size of EnerNOC. I’m not in any position to tell you whether the quality of their products and services differs, but I can tell you that when the last quarter came out Comverge was pretty cautious and conservative about the year ahead, and EnerNOC was fairly optimistic by comparison (though not super-optimistic, the analyst estimates for 2011 came down a bit after the earnings release). Personally, I’m intrigued by EnerNOC and Comverge and their demand response services, though ENOC looks a bit more appealing because they’re bigger — both are expected to start being profitable this year (though ENOC more so), and both have lots of cash on hand (15-20% of market cap) and no real debt. ENOC’s last conference call, when they give some more “color” on their year, the lumpiness of their earnings, and their expectations, is available in transcript form here.
Both stocks have fairly substantial short bets in place, which is not much of a surprise for a highly valued and currently unprofitable “story” investment with lumpy earnings — ENOC has about 12% of the float sold short and COMV 7%, though with ENOC’s much higher trading volume the days to cover is much bigger for COMV (14 days vs. less than 4 for ENOC — this is also called the short interest ratio, it’s the number of days of average trading that it would take for the short holders to cover their positions). The shorts could know something we don’t know about these companies, or they could just be betting that the press coverage of “smart grid” stuff will die down and the expected world-changing bounty will fail to appear or otherwise disappoint. (Those numbers are from shortsqueeze.com, by the way, lots of folks publish short numbers but they’re often different or from different dates).
So there you have it — one nomination for the “next Cisco” … do you buy it? Will load management of the electric grid be to this company what speed increases on the internet were to Cisco? As with Cisco 20 years ago, there are other companies doing this, too, and Cisco wasn’t picked by everyone to be the eventual dominant force — naming the winners is always easier for historians than for futurists, but I will say that many of the smart grid companies tempt me … though they’re also all looking pretty expensive right now. If you’ve got a favorite, or an opinion about ENOC or one of their competitors, please share with a comment below.
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