Sector Watch: Sizzling opportunities
Here’s a shocking fact: electricity demand in North America will increase 19% over the next 10 years, but generation capacity will increase only 6%, according to the North American Electric Reliablity Council.
Electricity cannot be easily stored but rather must be generated and delivered as needed. As a result, maintaining a reliable power system requires real-time balancing between supply and demand. Inadequate existing grid systems, however, coupled with lack of infrastructure investment and rising peak demand, have increased the frequency of electricity brownouts and blackouts, which collectively costs the United States $80 billion in productivity losses annually.
Enter Comverge, Inc. (Nasdaq: COMV), and EnerNOC, Inc. (Nasdaq: ENOC), two small caps that provide services enabling electric utilities to increase grid reliability and available electricity capacity during periods of peak demand.
EnerNOC is in the business of helping power suppliers and their customers balance electricity supply and demand. Its Network Operations Center remotely manages electricity consumption across a network of commercial, institutional and industrial customer sites. During periods of peak demand, EnerNOC makes capacity available to its electric power grid operator and utility customers by reducing consumption from its participating end-user customers. Power suppliers pay EnerNOC for these services and the company shares a portion of revenues with end-user customers.
By enabling utilities to meet peak demand, the company provides a cost-effective alternative to new power plants and transmission lines. About 10% of infrastructure is built to supply electricity during periods of peak demand that occur less than 1% of the time. EnerNOC can help utilities reduce required infrastructure spending by more than $5.9 billion per year.
So far, EnerNOC’s performance has been impressive.
In the last three years, the company’s customer base has grown from 19 customers and 70 sites to 595 customers and 1,852 sites. Power capacity managed by the company has grown from 10 megawatts in 2004 to 756 megawatts today, and EnerNOC has pending contracts that will add 100 megawatts to capacity.
During the first six months of 2007, EnerNOC’s revenues increased 130% year-over-year to $22 million from $9.2 million; however, net losses were higher at $12.2 million, or $1.89 per share, in the first six months of 2007 versus $3.5 million, or $1.02 per share, in the same period one year ago due to higher capital expenditures. The company has nearly $100 million in cash and equivalents to fund its future growth initiatives. On Tuesday, shares closed at $40.47. Over the last 52 weeks, shares have ranged from $29.09 to $43.49. Analysts expect EnerNOC to produce 40%-plus growth next year. My $50 price target for EnerNOC is 20% above the recent share price.
Like EnerNOC, Comverge also provides services that improve grid reliability and allow utilities to meet peak demand.
Its Smart Grid Solutions Group provides advanced meter reading and monitoring and control tools that utilities can use to manage, shift and reduce energy consumption in real-time. Through its Alternative Energy Resources Group, Comverge offers Virtual Peaking Capacity (VPC) programs that reduce power consumption during peak periods by remotely operating energy-consuming devices such as air conditioners, water heaters and pool pumps. VPC services are provided under long-term, pay-for-performance contracts.
During the first six months of 2007, Comverge signed three new VPC contracts and amended an existing contract, increasing total power capacity under contract to 495 megawatts. The company’s revenues grew 9% year-over-year in the first six months of 2007 from $9.5 million to $10.4 million, but net losses also climbed, from $7.9 million to $8.9 million, due to infrastructure investment.
In July, Comverge acquired Enerwise Global Technologies and subsequently became North America’s largest provider of power management services, with over 1,400 megawatts of managed capacity. Shares closed on Tuesday at $33.45. Over the last 52 weeks, shares have ranged from $19.79 to $39.09. Analysts target six-fold growth for this company next year. My $40 price target for Comverge is 25% above the current price.
