Acorn Energy Could Reward Investors Handsomely

| About: Acorn Energy, (ACFN)

Acorn Energy (NASDAQ:ACFN) is an interesting company which could reward shareholders generously over the next year or so. I have written about it in the past here on July 6, 2011, when it was trading at $4.14 a share and here on August 15, 2011, when it was trading at $5.11 a share. Since then it has traded as high as $13.20 and closed Monday at $7.60; it now pays a quarterly dividend of 3.5 cents a share.

ACFN invests in and develops small companies with promising energy technologies. It helps them with marketing and product development and, in certain situations, sells successful operations at a substantial profit. In 2011, ACFN sold CoaLogix for some $101 million. ACFN's share translated into roughly $61 million which, for a company with a share count of roughly 18 million, was a very big pay day. CoaLogix produces and sells a product which helps utilities operate their scrubbers more efficiently and was expanding rapidly at the time of the sale. Still, the sale of a business tied to the coal industry just prior to a steep decline in coal production and consumption in the electric utility sector reflects the sound strategic judgment of ACFN's CEO, John Moore.

ACFN presently has 4 subsidiaries, each of which is expanding into a different area of energy or energy related technology. The common theme is real time monitoring and information generation. Digital technology has been harnessed to enable users to obtain detailed, real time information about equipment performance and integrity, security and even underground formations. Each of these companies allows users to function with greater awareness of relevant information and therefore much more efficiently.

DSIT provides underwater sonar and acoustic security systems. It has recently obtained major security contracts and, thus, may be in the process of becoming more of a defense contractor than an energy service provider. As illustrated below,

  Backlog Revenue - 6 Months
DSIT - Now $9.2 million $7.0 million
Coalogix - July 2011 $10.0 million $10.4 million

DSIT's recent numbers are not all that dissimilar to those of CoaLogix shortly before it was sold for $101 million. DSIT is nearly even to where CoaLogix was on backlog but DSIT has a way to go on revenue. DSIT has received two sizeable orders after the end of the most recent quarter (September 30, 2012) and is likely well on the way. I am not suggesting that DSIT is about to be sold for nine figures but it would make an attractive strategic acquisition for a defense contractor and its solid growth and performance suggest that it will make a significant contribution to the bottom line one way or another.

GridSense provides remote monitoring and control systems which allow electric utilities to operate transmission and distribution systems more efficiently. It fits into the "Smart Grid" set of developments and has had recent success selling transformer monitoring equipment to electric utilities. The transformer monitoring technology, given the number and vintage of transformers in our electrical system, addresses an enormous market. It just received an order from a large California utility for 500 transformer monitoring devices; the potential sales to this customer alone could reach 100,000 units.

OmniMetrix is a recent acquisition and provides wireless remote systems that monitor stand by power generation equipment. As Sandy has demonstrated, back up generators are increasingly important but are not helpful if they don't operate when needed. OmniMetrix solves that problem by providing equipment which allows an user to identify problems with back up generating equipment. Given the large and growing number of these back up systems on cell towers and elsewhere, this is another potentially very big winner. It has recently had an uptick in revenue to $570 thousand in the last quarter and has announced some large orders.

US Seismic Systems (USSI) provides fiber optic monitoring systems which allow oil and gas drillers to operate with much greater efficiency and accuracy. ACFN now owns 94.4% of USSI, and USSI may have the greatest potential of any of the subs. It addresses a potentially enormous and rapidly growing market. Because its technology permits the detection of leaks and other problems, it may be of critical importance in permitting the fracking operators to comply with environmental regulations. USSI could become a necessary supplier to a huge number of drillers and could help them achieve more consistent and profitable output. It has been in the process of testing by some of the big players in the industry.

The four subsidiaries are, in a sense, modular in that the sale of one would not materially adversely affect the others. I am not sure what ACFN's ultimate strategy will be with these four (or others it may acquire) but John Moore's track record to date of buying, developing and selling energy technology companies has been excellent and, once again, I think he has found some real winners that could pay off very, very well.

The common theme seems to be the generation of real time information to enable operators to achieve greater efficiency. This theme recurs throughout our society and certain patterns have begun to emerge. The first stage is information generation. It is usually followed rather quickly by data base assembly and management and then by data base analysis. This is the path from baseball scorecards to batting, on base, and slugging averages and then to Moneyball and Sabremetrics. It is the path from DNA and fingerprint gathering to an FBI data base. It is transforming the advertising and retail businesses even as we speak. The energy industry is really just starting to tap these enormous advances in information technology. Because of the gargantuan size of the industry(the national electric bill is roughly $400 billion a year), the potential for greater efficiencies is truly massive. ACFN appears to be on the edge of a very, very big wave of change.

Disclosure: I am long ACFN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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