Acorn Energy (NASDAQ:ACFN) is a company with a promotional management team which has oversold the value proposition of its primary future product and has a dividend, which isn't really a dividend, which will need to be cut or ended within the next 12-15 months.
Acorn is a proponent of paid research and pays for research from at least 2 "research" firms which maintain buy ratings. Vista Partners analyst Ross Silver provides coverage on Acorn. Vista Partners' key takeaway for the value of Acorn is the benefit to shareholders if a short-squeeze occurs. In addition to issuing paid buy ratings, we believe Vista Partners is engaged in far less reputable promotional activities. We believe there are at least 4 Yahoo Message Board IDs (1, 2, 3, 4) being used by Vista Partners to facilitate the promotion of ACFN and other Vista Partners' clients. This belief is based on these user IDs being used for the sole purpose of pushing out "positive" information about nothing but Vista Partner's clients.
Acorn also has coverage from SeeThruEquity. SeeThruEquity's business plan is to initiate coverage on small/mid-cap companies, then try to peddle them entrance into its conference or pay-for-access trips to institutional managers. SeeThruEquity lists Acorn on its website as a paying client. It is highly unlikely any companies would attend their conference if the rating was anything other than Buy, thereby incentivizing the company to maintain a buy rating irrespective of results or value.
Management is promotional and will put out press releases on any development. Indeed the company has a history of putting out press releases announcing things such as an "invitation" to a conference. Channel checks revealed this "invitation" was in return for paying the organizers of the conference a fee to be a presenter.
U.S. Seismic (USSI)
USSI is touted by Acorn longs as the gem of the investment portfolio. One of the deals for Acorn's USSI subsidiary that has been touted by management both in press releases and conference calls is the sale to SR2020 for an order over $1MM in August 2012. Who is SR2020? SR2020 is a subsidiary of a company, International Oil and Gas Technology (OGT), somewhat similar to Acorn listed on the LSE. As of 9/30/12, OGT had $6.3MM of cash. According to recent results from OGT, SR2020 is still reliant on capital injections from the parent, making highly doubtful that ACFN will collect on its sale to SR2020 in the amount of the full ASP or if they do, such funds must be contingent on a capital raise of their own for SR2020.
Acorn's dividend is a return of capital not a return on capital. Sustainable dividends represent return on capital and come from net income. Paying a dividend has benefited Acorn because it has brought dividend seeking investors to the investor base. The cash to pay the "dividend" is from a divestiture in 2011, not operations. ACFN is paying this cash back to shareholders and putting an artificial floor on the shares. If the dividend is cut in the face of growing liquidity concerns, these dividend seeking investors will exit the stock, putting further selling pressure on the price.
Why own this?
Shareholders are facing dilution likely over the next 12 months. By management's own admission on the 3Q12 conference call, the company has 18 months of cash remaining.
With 880,912 shares owned by the CEO, the dividend is material to the CEO, paying him $123,328 per year in cash, very meaningful to his base salary of $375,000 which will increase to $425,000 on 1/1/13. If ACFN does not raise or generate additional cash, he stands to watch more than 20% of his annual cash payments from the company (before bonus) vanish.
The only group that is for sure getting paid is insiders. From fiscal 2008 through fiscal 2011, the period for which the last proxy was filed, insiders (named executive officers & directors) received compensation totaling $13.5MM. Over the same period, Acorn had net losses of $3.3MM. For each dollar in losses, insiders were compensated $4. Raises in executive compensations such as the $50,000 raise for the CEO will exacerbate Acorn's cash issues and call into question corporate governance with a substantial raise going to a CEO who has seen his stock price fall substantially from highs earlier this year.
Valuation - Sum of the Parts
To Value ACFN, we have chosen an approach popular with the company as well as its "research" coverage, sum-of-the-parts (SotP). We have broken down the company into 3 parts based on company segment disclosures. The company calls its segments: Energy & Security Sonar Solutions, Gridsense, Power Generation Monitoring, and USSI. We have grouped Gridsense and Power Generation Monitoring into the broader category of 'Smart Grid' in the analysis below. USSI falls under 'Seismic Equipment'; Energy & Security Sonar Solutions falls under 'Defense'. The analysis considers EV/EBITDA, EV/Revenue and P/E and uses the highest implied valuation for each segment to arrive at a price which represents best case scenario. Comparable companies with negative ratios or ratios equal to zero were ignored in the valuation furthering the goal of keeping this a best case scenario valuation. Cash of $25MM is based on holding company level cash plus short-term certificates of deposits.
Based on the company's decision to continue paying a dividend in spite of declining cash balances and negative cash flow as well management's prior yet never-talked about failures, we have assigned a 10% discount to the best case of $4.40, arriving at a target price of approximately $4.
Disclaimer: Use of the opinion produced by the author is at your own risk. This is a short-biased report and you should assume the author of this report holds a short position and/or derivatives tied to the security of Acorn Energy that will benefit from a decline in the price of the common stock. Following publication of the report, the author (including members, partners, affiliates, employees, and/or consultants) may transact in the securities of the companies covered herein. The author of this report has obtained all information used to form opinions and draw conclusions contained herein from sources believed to be accurate and reliable and has included references where available and practical. However, such information is presented "as is," without warranty of any kind- whether express or implied. The author of this report makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Forward looking statement and projections are inherently susceptible to uncertainty and involve many risks (known and unknown) that could cause actual results to differ materially from expected results. All expressions of opinion are subject to change without notice, and the author does not undertake to update or supplement this report or any of the information contained herein. The author is not a broker/dealer or financial advisor and nothing contained herein should be construed as an offer or solicitation to buy or sell any investment or security mentioned in this report. You should do your own research and due diligence before making any investment decision with respect to securities covered herein.