“Obama’s Blunder: The Sorry Truth About Alternative Energy”

The Motley Fool's tease about "The One Energy Play for the Rest of Your Life" -- what is it?

By Travis Johnson, Stock Gumshoe, December 5, 2011

The Foolies are back in our inboxes — or in mine, at least, and I can’t imagine they’re not plying their promises to the rest of you as well. This time, they’re trying to sell subscriptions to their flagship Stock Advisor newsletter, along with their annual special report on stocks for next year.

We’ve looked at quite a few picks by Dave Gardner in recent months — he’s the more “growthy” brother who tends to have some huge booms and some big busts as he looks for “spiffy pop” or “multibagger” investments, but I tend to be more comfortable with Tom Gardner’s “stodgier” picks as he plies the “value” end of the investing spectrum. And it’s a Tom Gardner pick that’s being teased today, so I thought I’d sniff it out for you.

The basic premise is that alternative energy is filled with fad investments — not only the relatively big blowups like Solyndra or Beacon Power, but lots of companies, large and small, seeking out the holy grail in a business that is almost wholly dependent on subsidies.

Gardner tells us, though, that he has found “The Only Sure Thing in Alternative Energy.” So what is it?

Here’s a bit of sum-up from the teaser:

“It’s true that billionaire investors have piled into alternative energy. But most stand to lose big time. Get Tom Gardner’s ‘The One Energy Play for the Rest of Your Life’ to see the small but wildly profitable energy-efficiency company he’s recommending that you buy today!”

OK, so that’s interesting — instead of feeding the beast by finding clean power sources, how about just shrinking the beast by using less power? That’s certainly a sensible approach, and one that ought to be far easier to implement (though an ancient power grid and a population that’s angry about switching to fluorescent bulbs and not used to not worrying about unplugging transformers are impediments, to be sure).

Which, then is the “energy-efficiency company” being teased by Tom Gardner? Let’s scour this ad for some clues:

“Energy efficiency — the energy we don’t use — is the only viable long-term solution in existence. It’s an inevitability!

“So you can see why I called my analysts’ 21%-per-year growth estimates for this company conservative. It’s the company best positioned to meet $520 BILLION worth of demand!

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“Perhaps the most amazing thing is… you can still buy the stock CHEAP because everybody else is still chasing silly “clean, alternative” energy fads.

“That’s right. The little energy company I’ve just been telling you about is trading for just over 14 times earnings… less than $10 a share!”

“In 2009, this company won an $800 million contract with the Department of Energy, the largest of its kind in U.S. history, for instance….

“Not only is this company ‘well run and sustainable’ according to Forbes…

“It’s already providing its comprehensive energy solution to a stunning number of government clients, as well as some of the globe’s most prestigious brand names…

“Heck, it’s even helping to safeguard the Constitution.”

And some more details:

“What’s more, this little energy company is uniquely positioned to benefit no matter whether we experience a ‘double dip’ recession or don’t…

“Do you remember how I described it as both a ‘top dog’ and ‘first mover;? It’s true. Though it has not developed any new technology, this company IS a pioneer.

“Its CEO — truly the godfather of the industry — was the first to develop a special, new kind of contract that guarantees his customers actually spend less on energy. It’s called ‘performance contracting.'”

And a few numbers to help the Thinkolator along:

“Just since 2001, this company’s revenue has increased 28 times. (And that’s organic revenue growth, not just the result of a bunch of acquisitions.)

“And it boasts a five-year compound annual sales growth rate of 19%… return on equity of 21%… and even an awe-inspiring $1.2 billion backlog of orders…”

The “performance contracting” stuff, in case you haven’t heard of that, is basically financing an energy efficiency retrofit by paying the contractor a portion of your energy savings — it’s apparently big for government agencies, in particular, because it doesn’t require an upfront investment, and we all know that all levels of government would be delighted to become more energy efficient, but that they’re also mostly quite “capital constrained” these days (to put it mildly). So I can see how that’s an appealing business plan that should be relatively recession-resistant.

But I’m putting the cart before the horse — what’s the company Tom Gardner’s picking and teasing?

Well, we toss all those cute lil’ clues into the Mighty, Mighty Thinkolator (which could use a retrofit itself, I’m afraid — it burns four or five baby seals per hour when we’re dealing with the tougher teasers), and our answer eventually comes popping out the other end:

Ameresco (AMRC)

Which has been around since 2000, but just went public in 2010. The shares have jumped up in recent weeks, probably thanks in no small part to Tom Gardner’s “special report” (though having the markets jump 5% in a day on macro news tends to obscure the impact of newsletter publishers), so the trailing PE ratio is no longer at 14, and the stock is no longer at $10.

This is now a $12 stock with a trailing PE of 16 and a forward estimated PE of 13 (using numbers that are more conservative than Gardner’s analysts, the average Wall Street analyst thinks they’ll grow earnings by 18% next year and continue at a similar rate for the next five years — though five-year growth is obviously an almost impossible forecast to have confidence in for any company). It’s also a pretty small company at about $500 million market cap, though large for a stand-alone energy contractor (most companies like this are owned by or affiliated with utilities, which makes sense — and that’s the background of Ameresco’s founder).

And they’ve been riding a nice wave of government spending on energy efficiency and retrofitting and energy management projects, with a focus on this “performance contracting” for a lot of their work — though it’s worth noting that while their founder was reportedly one of the pioneers of this business model, it’s used by essentially all the businesses in this sector now and doesn’t necessarily make Ameresco unique. I presume that they’re selling not just this “no capital” model (which isn’t always “no capital”), but their expertise and independence from the utilities, and there’s probably something to be said for the fact that they have tight relationships with lots of government agencies thanks to their focus on that sector, which probably helps them keep procurement officers happy and generate more business. They did indeed win an $800 million contract (OK, it was $795 million) from the Department of Energy, which was the largest Energy Saving Performance Contract in history, to retrofit the Savannah cogeneration facility (closing a coal plant and opening a biomass facility). though it’s worth noting that it’s a long-term contract, I think I read 20 years but would have to check. I don’t know how these contracts are constructed, but I presume that Ameresco had to pony up the $100+ million to build the plant and do the work and will earn that back through the “performance sharing” contract over the long run. Not sure what the performance risks might be.

So that, anyway, is the idea — Gardner seems almost certainly to be teasing Ameresco, and the stock has recovered nicely along with the market in recent weeks. Will it do better than 20% earnings growth in the years to come and reward investors handsomely as the “top dog” in an increasingly important sector? Well, I dunno — all I can tell you is that he seems awfully excited about it (if you’d like another “bull case” on Ameresco, a Forbes contributor shared one here a few months ago). This is the first I’ve heard of the company, so I’ll have to look into it more before I consider it for my money — if you’ve a yen for Ameresco, or reasons why we should worry, let us know with a comment below.


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Jason
Jason
8 years ago

The upside seems pretty obvious with this one, I mean, green energy that’s producing a profit today with today’s technology? With a zero up front, pay out of savings business model? No brainer.

I signed up over this pitch (will probably cancel before the month, just didn’t want to wait for the gumshoe to figure it out for me). The major risk appears to be the credit markets… if potential clients don’t have readily available financing, the sales pipeline will take a hit. They almost had me up until that. Seems a pretty unstable foundation upon which to base a business model in this day and age. That said, with the efficiency and green push coming from the Fed these days, it’s not impossible that there would be some sort of loan system to encourage qualifying loans for green efforts.

I don’t know how to figure the liability of the performance contracts. Should the fact that they’ve mostly lived up to their guarantees give them some breathing room here, or is there some lurking danger hidden in their ability to continue to provide what they say they will provide?

It’s compelling enough that I may put a small amount in, but there’s too much I don’t understand about the business for me to consider it anything other than risky for the time being. It definitely warrants some more research, though.

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Anders
Anders
8 years ago

What if their clients liqiudity dry up or they even go bust because they cannot finance?

JJ
JJ
8 years ago

“I signed up over this pitch (will probably cancel before the month, just didn’t want to wait for the gumshoe to figure it out for me). ”

C’mon man, it took me all of 10 seconds to find this company after watching the Fool video. Googled: “performance contracting energy efficiency bloomberg” based on the video’s hints and Ameresco was the fourth link down. Cross that with the stock price hints and earnings and bingo! I did the same thing with one of their other “secrets” a while back. Its fun!

No disrespect to this site… I also found this while searching for Ameresco and have now put it in my favorites. Nice work done here! I am very interested in Ameresco but will of course watch this company for a while to learn more about it. There is no doubt, in my own experience, about their business model: upgrading clients to higher levels of energy efficiency and using the savings in the utility bills to get paid. In my state, the gas company will provide you with a $10K, five year, interest free loan if you can upgrade your equipment to increase efficiency enough to cover the monthly loan payments, based on what you are paying right now, roughly 25-50% improvement does it for most customers.

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Pete
8 years ago

” … while their founder was reportedly one of the pioneers of this [“performance contracting”] business model, it’s used by essentially all the businesses in this sector now and doesn’t necessarily make Ameresco unique.”
Well I guess . In fact, James Watt and his partner used this technique to sell steam engines to Cornwall mines back in 1776. To quote Wikipedia “The company made its profit by comparing the amount of coal used by the [Watt] machine with that used by an earlier, less efficient Newcomen engine, and required payments of one-third of the savings annually for the next 25 years.”

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Bill Robertson
8 years ago

Companies that front energy efficiency find the capital requirements are too large and encounter financing problems. Doing business with the government eliminates this issue. But the private sector is a different matter. Gainsharing is easy if energy prices go up, but difficult if they go down. Natural gas might kill this company. If Obama loses and the EPA regulations are tempered, it’s in real trouble. I’ll wait to see that outcome.

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Charlie
Charlie
8 years ago

I’ve been in this industry for three years. No, their business doesn’t go away if energy prices fall. You are still saving 30% (an average) of your energy costs regardless of the per kilowatt multiplier. But, yes, they will find it hard to continue to source money. The markets don’t like this model. The retrofitter upgrades the infrastructure of their customer, but there is nothing for the financing agency to repossess if the deal goes bad: installed light bulbs don’t have much resale value. It is all about financing. They would have almost unlimited growth with unlimited financing. About 85% of businesses remain to be retrofitted.

Steve
Steve
8 years ago

Why wouldn’t you just go with GE which is going to bet both sides of any argument and pays a solid dividend?

Jon Eikeland
8 years ago

”The future source of energy is the energy not used..”
Sound wrong to compare the old case of standardization in medical industry with the magic of energy efficiency.
Energy efficiency needs engineers with technical solutions to patent while a medical standardization only needs written text, some simple software, business acceptance and political contacts. Any real energy efficiency will anyway be taken or adopted by the big energy providers.
Unless Ameresco has extremely clever engineers to be ahead of “energy efficiency business” to patent smart energy saving methods, there are no chance they can beat the big once. So to have any chance for success the business idea must be some tool to optimize energy distribution between end users. Example: Every man in the street are trading electricity for their house. Another idea could be governments rule for how electricity is used and making the perfect monitor software & equipment for it, but still this would be a one off system related to government rules and not something you can patent.
However it is hard to know the real condition of energy infrastructure and logistic, so possible there are areas where to improve. But, this sounds more like a consulting business where experts are hired to analyze and engineer a special solution for a specific cases. There are nothing special about such a company compared to hundreds of other engineering consultant companies. The questions is how much re-use of secret engineering knowledge learned during special projects you can “harvest” and how smart the company is organized to have rapid response to the client. You also need the best engineers in the market and those people are the only real valuable asset to price into the stock value. To be partner in projects with potential good revenue is also risky and investment in the related equipment is even more dangerous.
I am afraid this company has to beat the biggest oil service companies in the world to have any chance. Oil service companies has the required organization to provide analysis and find solutions to any problem. If energy efficiency becomes a big business then oil service companies would just add this as another small bit in the end of long chain of energy service products.

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Valentino
8 years ago

Interesting title – at least their is no second guessing about what side of the Political isle the over inflated Motley Fool’s stand on – I suppose it is very easy to scapegoat the President – It is all all the idiots of the Right Wing Republican party has left. It would be to easy to let history speak here, as we know it does not suffer Motley Fools lightly lightly.. (Pun intended) I suppose any number of visionaries had and do endure lots of stupid people who derided their ideas – while I am glad to note that this these Fool’s are so keen on an undervalued performance contracting industry – It is a Fools errand to deride this President and the immense possibilities of renewable energy and technologies. I believe that if this blog would like to continue to attract new members, then the political affiliations must be left out of any argument – we don’t need Glen Beck or Carl Rove Commentaries or speeches – just the facts – I was completely exhausted and disgusted after 20 minutes of diatribe and ranting – i closed the page before I found out which company was doing so well in this industry – We know you guys the rich one percent and that’s great for you.. but leave the Right Wing BS out of your blog. Or loose potential business

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James Brown
James Brown
8 years ago
Reply to  Valentino

Your right about the Right Wing BS. They fit in with Fox News.

aoibhneas
8 years ago
Reply to  Valentino

Oh yes indeed, The Chosen One has done a quite sterling job having the government pick winners and losers in the area of Green energy. I’m sure the political ties with kickbacks, campaign contributions and loan guarantees have obviated the need for any bankruptcies. Of course if solar companies die , it just means the taxpayers have not thrown enough money at them? Ditto for the failing public school system..throw more money for higher pay for lousy teachers with tenure and administrators with very golden parachutes. Of course the limo libs send their own kids to private schools. Obviously the dude above listens and believes the media hype regarding his messiah and enjoys drinking the kool-aid. Let’s just print more money. Bail out the Big Bankers, Wall st. (take their $ for the election campaign while throwing them under the bus), bail out Euro banks, next is Japan and more to Europe, including big green supporting Spain. hahahaha

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blufox
8 years ago

The focus of this website is not political so let’s leave the politics out – left, right, or inbetween — and deal with the companies that Travis and others wish to discuss. Thanks.
/* Phil */

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