A Play on Energy Efficiency

04/21/2008 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith, founder of ChangeWave Research, says more efficient lighting is the easiest way for many companies to save energy, and he finds a stock that should benefit.

Electricity prices in the United States are rising and there is a frightening dearth of new power plants coming online to meet demand for the coming decade. What's more, environmental concerns and the prospect of regulations on carbon emissions are putting added cost pressures on power plant owners.

Demand for electricity in the United States has grown steadily in recent years and is expected to grow significantly for the foreseeable future. According to the Energy Information Administration (EIA), $298 billion was spent on electricity in 2005 in the United States, up from $203 billion in 1994, an increase of 47%.  Additionally, the EIA predicts consumption will increase to 5,478 billion kWh in 2030, or 43%.

Overall, the United States spends about $1 trillion per year on energy. It is estimated that advanced efficiency systems could reduce that energy bill by as much as 25% to 50%.

The perfect storm of rising energy prices and concern over global climate disruption is forcing corporations to rethink the most-basic ways they use energy.

Orion Energy Systems (Nasdaq: OESX) is a newly public company (it went public last December), and it's still flying well under Wall Street's radar.  The company is a pure play in energy management systems, which it designs and manufactures.

Most of Orion's revenue is generated from the sale of high-intensity fluorescent (HIF) lighting systems to commercial and industrial customers. So far, Orion has sold and installed about 1 million of its HIF lighting systems in more than 2,100 facilities. Larger players compete with Orion in the energy-efficiency lighting market, but none are equipped with the comparable breadth of innovative products and technologies.

Lighting tops all areas as the easiest way to reduce energy use. It's no wonder that 90 of the Fortune 500 companies are already Orion customers, since its systems generally reduce lighting-related electricity costs by about 50% while improving the lighting quality and increasing the quantity of light by approximately 50%.

Its customers typically realize a two- to three-year payback period on HIF lighting systems without considering utility incentives or government subsidies. [So], it's not surprising that OESX sales are growing at an impressive clip. For the nine months ended December 31st, revenues increased 73%, while net income surged 423%. The company ended the year with $83 million in cash and minimal debt.

Orion's shares were offered at $13 in its IPO, and the price quickly rose above $22 before dropping to [Friday’s close below $12]. There is an attempt at a lawyer-instigated class-action suit against OESX, but it doesn't appear to have any teeth.

Let's and enjoy the luxury of accumulating OESX as long as the stock wallows at its currently attractive price. We recommend building a solid position in OESX with a Buy Under price of $12.

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