Echelon Corp (Nasdaq:ELON) is Oversold In Our Opinion

Jun 25, 2008
Author: SCP Editor

June 25, 2008 – Echelon (Nasdaq:ELON) has pulled back recently to close at $11.68 as of yesterday’s close. In light of the fact that energy prices continue to inflate, and there is more pressure than ever for corporations and municipalities to reduce costs and maximize efficiency – both objectives that ELON’s technology enable – we have to scratch our heads at the fact that the Street is overlooking the stock. To be fair, there is probably some concern out there about how the business is going to bounce back from the tragedy of COO Bea Yormark this May, and the stock was also discounted based on the wider loss in Q1 on “declining revenue”. But we think that there is a misperception here.

Just taking a cursory gloss at the recent quarter’s numbers the declining revenue looks like reason for concern. But when you consider that fact, and this is critical, that the Q1, 2007 number was inflated by $14.4 million based on the fact that ELON recognized deferred revenue for sales in 2006, you quickly see that this past quarter, sales actually improved nicely at an adjusted 42% growth rate on a Y/Y basis. To be sure, whoever drafted ELON’s press release for the financial results should be sacked because it is completely misleading and doesn’t do justice to the actual fundamentals. The bottom line, in our opinion, is that the fundamental outlook for the company has never been better.

Here are some data points to consider:

·         Strong IP portfolio – more than 100 patents issued/pending

·         No debt, with about $100 million in cash and securities

·         Strong Y/Y Revenue growth: $57.3 million in 2006, $138 million in 2007 and forecasted $178 million this year

·         Amongst the deals that are driving the growth are utility deals in Russia and Denmark, the prospects for becoming McDonald’s “Kitchen of the Future” (a deal which drove the stock into the $20 range last year), China’s first mass market home control system, its NES smart meter business, which shipped its 1 millionth meter in January, and the fact that it is very much a part of Duke Energy’s “Utility of the Future” game plan.  

Just to expand on the Duke Energy opportunity, led by CEO Jim Rogers, who is one of the most forward-thinking energy executives in the business, Duke is focusing on conservation through its Sav-a-Watt plan. Through the plan, Duke intends to help its customers dramatically cut their energy use by distributing “smart” meters that automatically turn off customers’ appliances during periods of peak power use. In the Carolinas, Duke intends to cut the consumption of its customers by 1,800 MW, equal to the output of two new coal-fired plants. Duke’s motivation from a pocketbook perspective in doing so is that it would charge higher rates for the electricity its customers do use, to pay for all the efficiency technology. ELON is front and center to Duke’s strategy here, and this is just one example of how ELON is positioned to help customers curb energy consumption.

How big is the market? There are about 1.5 billion electricity meters worldwide, and about 80% of those are electro-mechanical (ABS Energy Research).

In our previous commentaries, we have said that our target trading range for the stock, based on the extending trailing twelve month multiples out to our forecasted 2008 numbers, and then discounting by 30%, is $10.78 to $15.53. At current levels, ELON looks extremely attractive and we are buyers here.

Disclosure Note: SCPEditor is LONG ELON.