I always like reading Chris Mayer’s stuff — he often presents at the Value Investing Congress, he seems to be an interesting and low-key guy in person, and the ideas that are pitched by his various newsletters at Agora often catch my eye.
They don’t always work out, of course, but every once in a while I find one of his teased picks that I really like… and the stocks he has presented at the Congress have generally done quite well (perhaps because he knows his audience — unlike Dan Ferris, Mayer rarely pitches a natural resources/commodity stock at the Value Investing Congress, he’s much more likely to talk about finance, property and insurance stuff… though he has certainly pitched plenty of commodity-related ideas in his newsletter ads over the years, Agora’s mailing lists light up at the mention of gold miners in a way that traditional “value” investors usually don’t).
So what’s he touting this time? Well, in a free email from Agora Financial yesterday (the Tomorrow in Review e-letter), he talked about a stock whose management he met with at the TD Micro conference. That’s a conference arranged for microcap companies to meet with investors so they can make their case in person, with presentations and private meetings.
Here’s the intro from the letter:
“Chris Mayer recently returned from an investment conference in Los Angeles, where he stumbled on a massively profitable trend called “the LED curve.” For years, this technology wasn’t developed enough to go mainstream. Today, it is. Chris showed his Special Situations readers how to pick up shares of an innovative LED company very close to where insiders are purchasing them.”
So this is apparently an idea that Mayer has already recommended to his Mayer’s Special Situations subscribers — that’s his more expensive “premium” letter that often delves into smaller stocks and “special situations” (spinoffs, etc. — if you’ve seen Mayer’s pitch for what he calls “Wall Street’s Secret Almanac”, WSSA, that’s mostly a tease about spinoffs and carve-outs, which generally do, on average, outperform the market).
What’s the stock? Let’s check the clues:
“The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential — like parking lots — have barely begun to change.
“While in Los Angeles, a CEO referred to this massive trend as ‘the LED curve.’ It propelled his company’s sales up 266% in the first half of 2014. Yet the market hardly noticed, for a simple reason you’ll soon see.”
And he shows a graph of that “LED curve” — which is basically showing the rapid advance of LED technology that has allowed it to now produce much more light for the energy put in, a transformation that, the chart implies, is more dramatic than the advent of fluorescent light or sodium lights or even the huge leap that was taken when the light of fire replaced reliance on the sun (right, it’s not subtle).
That’s all true as far as I can tell, LEDs have been talked up as an investment proposition for many years now — often based on the fearmongering about the government shutting down the incandescent light bulb, because LEDs would be a fairly substantial step forward for energy conservation. They emit much more light per watt, largely because they don’t waste energy by producing a lot of heat like incancescents and even (to a much lesser degree) fluorescent bulbs do.
Here’s a bit more from the email:
“Using LEDs Saves a Ton of Money
“For our purposes, though, what make LEDs especially interesting are the economic benefits of using them….
“… think about using LEDs to light parking lots… warehouses… office buildings. We’re talking billions of square feet of space. Many big companies have already made the switch. See the nearby graphic, which shows you that companies like Coca-Cola and Dollar General have already made the switch….
“The typical break-even for these corporate buyers is one-three years. After that, they enjoy a significant return on their investment in the form of lower lighting costs, saving them millions of dollars.
“But it’s still early. The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential — like parking lots — have barely begun to change. Take parking, high bay and troffer — all lighting fixtures. Together, they represent about 10% of the LED market so far… but they represent 52% of the addressable market.”
I didn’t copy the graphic listing the company names from Mayer’s email, but I can show you where it came from in a moment.
So what is the company that Mayer says will benefit from this? It is, apparently, a turnaround stock (Turnarounds are another of the “special situations” some investors look for — companies that are changing substantially but it’s not yet obvious on the surface or in the stock price). He describes it this way:
“A Turnaround That Could Triple Your Money
“I met with the CEO and CFO of a very special LED company in Los Angeles at the LD Micro Conference. The company is at the tail end of a turnaround.
“‘Two years ago, we had a management change,’ the CEO said. He stepped in as CEO in September 2012. He inherited a messy and expense-laden firm. ‘We got rid of the corporate jet,’ he said, giving you a flavor of where the company was.Are you getting our free Daily Update
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“The CEO and his team refocused the business. They dedicated it solely to LED lighting. In the last two years, they’ve cut all kinds of noncore businesses — solar, wind, ice chilling, all kinds of things. Plant efficiency improved 67%. He sold businesses and bought new ones focused on LEDs.”
OK, so that sounds interesting. Why, then, is it cheap?
“If anything, the surface numbers for the first half of fiscal 2015 are ugly compared with 2014. But those numbers miss the big picture of the LED curve.”
Mayer goes on to say that the stock is “$4.48 per share as I write” … and that his estimate of earnings and growth (he thinks it should have a rapid earnings growth thanks the LED Curve of rapid adoption, and that it should trade at 15X earnings once that becomes clear) indicate that the stock could get to between $6.60-$16.65 per share. In “a few years.”
And yes, he’s pretty low on the hype in this email — it’s not really a full-on ad, despite the fact that he keeps the company name secret and tells you to subscribe to learn the identity, so he does mention some downside possibility:
“If the CEO is wrong (or lying) he’d have to come to the market to raise money, probably by selling stock. That would drive the shares lower. Maybe 30% lower….”
Final hint? He says they have $11 million in cash and more expense cuts coming, so he thinks they might not need to raise money… and they have “some 50 patents” and another 41 patents that are pending. And insiders — company directors — bought 35,000 shares back in may between $4-4.50 a share, which Mayer says is a good sign.
So really, it’s an embarrassment of clues. But as I said yesterday, we’re willing to take on an easier one when we’re forced to. Thinkolator sez this is definitely… Orion Energy Systems (OESX)
And I hate to tell you, but it looks like Mayer’s Special Situations subscribers already drove it up pretty dramatically — his publisher says he sends an update email each Monday, and in the last hour of trading on Monday this week the stock surged by more than 15% on a huge spike in volume. The stock is still lower than it was on Halloween, and still quite a bit below the highs of earlier in the year when it briefly touched $7, but it’s a tiny little $100 million stock — when people tell a few thousand of their closest friends about it (as we’re doing here again, you might notice) it tends to have an impact on the shares.
And they are at the tail end of a restructuring, though I don’t know if it’s early enough to say that it’s been a successful turnaround now — they used to be more of a general “energy management” company, with a lot of their growth coming from selling other people’s solar photovoltaic systems, and that worked well to spike their growth in 2011 and early 2012… so much so that they were called out as a “made in America” success story by President Obama back in 2011. But they did indeed bring in new management in September, 2012 and streamline the business, with an intention of transitioning to being a leader in the LED retrofit space. Their big target markets are as Mayer noted, and they cover them in their presentations (the illustrations Mayer used were from Orion’s presentation to the LD Micro conference two weeks ago if you want to see their current pitch), so OESX is indeed focused on the troffer market and on stuff like parking lots, where lighting demand is high, large-scale retrofits should be easier to come by, and cost savings ought to be quite clear (If you don’t know what “troffer” means — I didn’t — troffers are those fluorescent light boxes inside dropped ceilings… so, pretty much all the lights in every office building everywhere).
And it’s true, the company’s results in their filings are pretty weak so far — revenue last quarter was half of what it was a year ago, and they’ve been losing money every quarter in 2014. The LED business is growing very nicely — their LED sales have roughly doubled each quarter for the past three quarters, and the LEDs are becoming a much larger portion of their revenue mix… but that’s partly because the other revenue is disappearing (sales were $27 million in the quarter a year ago, with LEDs only $1 million of that — versus $13 million total revenue in the last quarter, with LEDs more than $5 million of that). LEDs were almost 40% of their revenue in the last quarter, versus 20% just a quarter ago and 5% a year ago.
And they do have a pretty impressive-sounding order backlog of about $12 million now (though that’s still smaller than their backlog often was in the “pre-reorganization” days of a year and two years ago), and some product “wins” with agreements to start retrofitting some large supermarket chains, federal office buildings, and the like. So they are moving in a positive direction, it appears — I just don’t know when that turns into earnings growth.
The hope, certainly, is that LED sales and the focus on retrofitting will let them continue to streamline and cut costs on the other parts of their business — which would mean that the revenue from that fast-growing segment could more quickly come down to the bottom line. But it seems a pretty open question just when that might happen, assuming they are successful — there’s a lot of competition in LED retrofitting, and I have no idea whether their technology and designs are meaningfully better or more cost-effective than the competition. They seem to believe they’re the market leader on the technology, but, well, of course they would say that — they are quite investor-savvy, and they’ve been making the rounds of every investor conference they can in recent months.
That’s not to say Orion is a bad company — they are a “special situation”, to be sure, with rapid growth in their newly adopted “core” business of LEDs still obscured by dramatically falling revenue in the rest of the company, writedowns on their old inventory for other segments of the business (most recently wireless controls). Here’s what the CEO, John Scribante, said in the last quarterly press release, which I assume is similar to what he told Chris Mayer when they met at the conference a couple weeks ago:
“Over the past 12 months, we have successfully transitioned the Company to take advantage of the large market opportunity in LED lighting. We closed the quarter with the largest lighting backlog in our history, largely driven by our escalating LED product adoption rates and continued efforts in expanding our sales infrastructure. In the second quarter, our top line and gross margins were impacted by a number of large account wins that were delayed into the second half of fiscal 2015. However, we are now beginning to see our pipeline of LED product sales build, and we have the capacity and personnel to handle it. Sales are being generated through a number of channels. We secured LED lighting solutions orders from several large enterprise accounts and also have seen our reseller sales increase dramatically from January 2014. We believe this is largely due to the success of our LED Troffer Door Retrofit product. We will continue to expand our LED product suites to address increasing customer demand for our LED lighting solutions.”
They also substantially reduced their revenue guidance for the remainder of their fiscal 2015 (we’re two quarters into their fiscal year right now), reporting now that they expect revenue to be between $80-88 million (it had been $80-105 million). The revenue for the past two quarters is just under $27 million, so that means they’re predicting pretty dramatic sequential revenue growth for the next two quarters — they need to report $26+ million per quarter in revenue for the next two quarters to hit that forecast. That’s what the sales were in their last profitable quarter, the December 2013 quarter when they had $27 million in revenue and earnings of five cents a share — but gross margins were also much better back then (cost of goods sold was about 70% of sales, about where it had been for years, it’s over 100% now but I have no idea what a “normalized” number would be for the LED business). As with a lot of turnaround stories, the quarters are really hard to compare to each other because of lots of writedowns and one-time charges combined with a big sales push (which also costs money) for their new products. There’s only really one analyst providing earnings estimates, so they’re probably very wrong, but he (or she) is predicting continuing losses through 2015.
But yes, the growth in the LED business is good — and if you agree with the company that we’re still early in a mass adoption/retrofit curve that will create a lot of business, and that they have a good opportunity to be a national leader in those retrofits, then there is certainly an opportunity… but Mayer carefully put in that comment about “a few years” and there’s no guarantee that they’re going to get a lot more love from the stock market next month or year if they’re still losing money and haven’t yet proven that they can create sustainable revenue growth.
So there you have it — I like the idea of OESX, and the “hidden” growth in their LED revenue, but without knowing much at all about the business or who the other big players are, or what kind of margin pressure this little $100 million company might have as it tries to ramp up into bigger and bigger installations, well, I’m undecided. That’s just for me, though — what about you? Interested? Let us know with a comment below.
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