The high-performance lighting industry -- which is made up of fluorescent, high-intensity discharge (HID), induction, and LED lighting -- has seen huge growth over the last five years and has the potential to grow even faster in the next five. Currently, LED lights alone occupy 18% of the $66 billion global lighting market. Lighting industry estimates show the LED lighting industry growing some 34% annually, reaching over $100 billion by 2020. A report on the lighting industry from McKinsey further went on to state that over 70% of lighting worldwide will be LED-based by 2020.
One company reaping the benefits of such blockbuster growth is Orion Energy Systems (NASDAQ:OESX), which is involved in the design and manufacturing of LED lighting fixtures and bulbs, as well as the implementation of energy management systems. The company has guided that it will grow rapidly with revenue of some $250 million by 2017, which may be conservative given the rapid growth of the LED lighting market size. Orion Energy Systems stands out for not only being significantly underpriced, but also for its various business lines and the lighting market niches that it serves.
Orion operates in across two market segments: Energy Management and Engineered Systems. Orion Energy Systems develops and provides technical services for the sale of commercial high-intensity fluorescent (NYSE:HIF) lighting and energy management systems. The company also offers Apollo Solar Light Pipe, a lens-based device that collects and focuses renewable daylight, bringing natural light indoors without consuming electricity. Also, its InteLite wireless dynamic control product line allows customers to remotely communicate with and give commands to individual light fixtures and other peripheral devices through Web-based software. In addition, Orion produces HIF fixtures to address the lighting and energy management needs of commercial and industrial properties and of rural and remote communities, including agribusinesses, parking lots, roadways, streetlamps, and other outdoor lighting applications.
Orion also offers solar photovoltaic systems and integrated solar power services, which also covers project development, engineering, energy audits and procurement, construction, operations and maintenance, and with project financing. Orion Energy Systems supplies energy management services, including comprehensive site assessment, site field verification, government energy subsidies management, engineering design, project management, installation, recycling as well as power data management and data cloud storage-related services. The company's sales channel sells to commercial and industrial customers both directly and indirectly through value-added resellers and electrical contractors.
Orion Energy Systems Market Summary
Orion counts 151 of the Fortune 500 companies as its customers. Its systems have been installed in over 9,000 facilities, including 386 facilities of Coca-Cola (NYSE:KO), 167 facilities of PepsiCo (NYSE:PEP), 97 facilities of Kraft (KRFT), 115 facilities of Sysco (NYSE:SYY), and 44 facilities of General Electric (NYSE:GE). This is a savings of over $2 billion in energy costs since 2001, and an average savings of $1.30 in energy costs per square foot in the total 1.31 billion square feet retrofitted with Orion fixtures and lighting. Orion has been recognized by Inc. Magazine as one of the fastest-growing companies in the United States, as well as receiving several awards including the Coca-Cola "Supplier of the Year" award.
Compared to the overly saturated LED signage market, the LED lighting market has only really started to come into its own. Other players similar to Orion Energy Systems include Revolution Lighting Technologies (NASDAQ:RVLT), Trans-Lux Corporation (OTCPK:TNLX), and LSI Industries (NASDAQ:LYTS). Combined, the publicly traded shares of all four companies have averaged a 79% return over the past six months and established the LED lighting sector as a "dark horse" sector that has not gained appropriate coverage. Mercury Marine stated that Orion lighting fixtures use 60% less energy while producing 30% more light and a 20% longer life span, echoing what Caterpillar (NYSE:CAT) claimed to "improv[e] the quality of lighting in [its] facility 200%," and that it was "a solid investment." Another large competitor that is poised to catch up to Orion (the Orion Miller-Coors case study can be seen here) is Hubbell (HUB.B). HUB has a "Buy" rating and a price target of $115 from Oppenheimer, released on July 23, while D.A. Davidson set a price target of $110 and downgraded it from "Buy" to "Neutral."
Orion Energy recently acquired privately held Harris Manufacturing and Harris LED, located in Green Cove Springs, Fla. It engineers, designs, and manufactures energy efficient lighting systems, including fluorescent and LED lighting solutions, and day-lighting products. This strategically important transaction further expands the breadth and scope of the company's offerings with a comprehensive product line. It will further expand its sales force and broaden its presence in already-served markets, as well as provide immediate positive earnings and revenue growth.
The purchase price of the transaction was $10 million, subject to post-closing adjustments for net working capital. The purchase price was paid through a combination of $5 million in cash, $3 million in a three-year unsecured subordinated note, and $2 million of over 850,000 unregistered shares of Orion common stock. In addition, Orion may pay up to an additional $1 million in shares of unregistered common stock upon Harris' achievement of certain post-acquisition revenue milestones in calendar year 2013 and/or 2014. Harris Manufacturing and Harris LED had combined unaudited revenue of approximately $14.5 million and a combined unaudited net income of approximately $0.9 million during the year ended Dec. 31, 2012.
Why Orion Energy Shines Brightly -- By the Numbers
In the fourth quarter of Orion's fiscal 2013 ending in March, Orion delivered both year-over-year revenue growth and earnings growth for the second consecutive quarter. For the quarter, Orion reported revenues of $22.3 million, an increase of 4% compared to $21.5 million in the fourth quarter of fiscal 2012.
The acquisition of Harris Manufacturing and Harris LED by Orion Energy will drive further revenue growth once the acquisition has been digested by the company and by investors. Both Harris companies had combined unaudited revenue of approximately $14.5 million and combined unaudited net income of approximately $0.9 million during the year ended Dec. 31, 2012. With the merger finally completed earlier this July, Orion Energy will continue to expand through additional design and manufacturing capabilities along with adding more customers.
The company announced fourth-quarter earnings on Aug. 1, and for the last three months ended June 30, 2013, it reported revenue of $20.9 million, up 36% compared to revenue of $15.3 million in 2012. Orion's core lighting efficiency systems revenue increased 26% year over year, as LED systems accounted for 7% of efficiency sales, but will seek to grow even further as the LED lighting market expands. Orion Energy is looking for revenue guidance for the second quarter of fiscal 2014 in the range of $24.0 to $26.0 million and earnings of $0.01 to $0.03 per diluted share, indicating strong guidance and management.
Although Orion Energy Systems did report a loss from operations of $0.8 million for the first quarter of fiscal 2014, this number is a stark contrast from this time last year. This is significantly less than the loss from operations of $3.6 million for the first quarter of fiscal 2013, a turnaround of 77%. The fiscal 2013 first quarter also included a tax benefit of $1.6 million, or $0.07 per share, while the fiscal 2014 first quarter did not. In addition, the current-year quarter was impacted by non-recurring expenses totaling $0.4 million, or ($0.02) per share, related to the acquisition of Harris Manufacturing and Harris LED, as well as the liquidation of inventory. The company said it would not only benefit from any backward-compatible technology integration, but also from its role in financing.
During the conference call, management spoke about new opportunities and the company's role in new solar projects such as a solar plant in Brick, N.J., and the Bio-Energy Recovery System at the Anheiser-Busch brewery in neighboring Newark. These are prime examples that show Orion has as much to gain from manufacturing as it does from its energy management and LED manufacturing, as it's one of the pioneers of the market. According to CEO John Scribante, 2014 is part of a plan where the company begins to grow in a new, more consistent direction. "While some seasonality remains in our quarterly results, we are taking steps to reduce this over the long term, and, given our higher degree of certainty with regard to future results, have begun providing guidance concurrent with this release... We are finally at a place where we want our company to be."
Scribante has been the CEO since September 2012, and previously was president of Orion Engineered Systems. Scribante grew the division into a multimillion-dollar operation. Prior to joining Orion Energy Systems, Scribante co-founded XE Energy LLC and served as its CEO from 2003-04. XE Energy specialized in marketing energy reduction technologies. COO Michael Potts manages everyday operations at Orion Energy Systems. He joined Orion in 2001, and prior to being appointed as president and COO served as executive vice president. Prior to joining Orion, Potts started his own company, Energy Executives, Inc., where he assisted large energy-consuming clients on energy issues. Prior to that, he was the energy manager for Kohler Co. Orion's CFO Scott R. Jensen, C.P.A., has over 20 years of financial experience. Jensen joined Orion in 2004 through Orion's acquisition of a Koenig & Vats facility, where he served as vice president of finance.
A Bright Outlook
Orion Energy Systems, Inc. is a very attractive investment due to its entry into the fast-growing LED lighting industry and its existing energy management systems. The company has guided that it will have rapid growth with revenue of some $250 million by 2017. Orion Energy has helped some of the largest companies in the world implement energy-efficiency campaigns through its unique line of lighting solutions and renewable energy products and services. With its recent acquisition of Harris Manufacturing and Harris LED, the company will be able to broaden its product offering and will further expand its sales force to serve a wider market, as well as grow its earnings. With rapid growth forecast by company management, Orion Energy could be attractive either as a standalone opportunity with a price target of $6.50-$7.50 or as a potential M&A candidate in the future.
Note: My associate Anthony Orbanic contributed to this article.
Disclosure: I am long OESX. 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.