Orion Energy Systems: Right Industry, Right Time

by Debra Fiakas CFA

March 31st marked the end of fiscal year 2014 for Orion Energy Systems (OESX: Nasdaq), a provider of energy-saving lighting systems.  The half dozen or so analysts who follow the company on a regular basis think the company will be able to report about the same level of sales as the same quarter last year, but will actually suffer a penny loss instead of making a profit as they did last year.  If they are right it will be a setback for Orion, which higher sales this year than last and has so far had a small profit. 

Orion Energy Systems – Exterior Lighting

That Orion’s prospects are improving should be no surprise.  The benefits of efficiency measures to reduce energy costs are just recently beginning to gain respectability.  The Consortium for Energy Efficiency (CEE) reports that in 2012 alone efficiency programs sponsored by electric utilities in the U.S. saved enough power to serve over 12 million homes for one year  –  126 TWh.  The data was enough to help CEE analysts to conclude that energy efficiency is the most important source of clean, cheap energy because utilities do not need to generate as much power if their customers require less electricity.  A reported from the Natural Resources Defense Council says energy efficiency has outperformed all other energy resources combined, including the various fossil fuels and nuclear power.

The elevation of energy efficiency on par with energy sources should support higher valuation multiples for energy efficiency solution providers, especially those that have honed a profitable operating structure.  Orion has managed to maintain its gross profit margin over 30% although its profits have slipped from a peak of 33.7% in 2011.  Orion has also struggled to keep revenue on a consistent upward march.  Sales in the twelve months ending December 2013, were $98.2 million, back up to the company’s record revenue level of $100.6 million recorded in 2012.

However, analysts expect only $98.3 million in the fiscal year .  It is not until next year that the consensus reflects a decisive acceleration in sales activity  –  the kind that generates profits.  The consensus estimate for fiscal year 2015 that begins today is $0.12 in earning per share on $108.8 million in total sales.

Comparisons of Orion’s earnings in the coming quarters should be favorable.  That could keep the stock on an upward trajectory similar to the ramp that can be seen in the OESX historic stock price chart.  A review of trading patterns during the last two months suggests that the stock is may be poised to take a bit of a breather in the near term.  That would provide an interesting opportunity to take a long position in a company that has established a foothold in the right industry at the right time.   

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.