Ameresco (NYSE:AMRC) helps reduce energy bills, promotes renewable energy sources, and has a leadership position serving large government organizations. It grew revenue and profits right through Great Recession. Does it get any better than that?
Ameresco is an independent energy service provider. Its principal service is the development, design, engineering and installation of projects that reduce the energy and operations and maintenance costs of customers' facilities. These projects typically include a variety of measures such as heating, ventilation, air conditioning and lighting systems. Ameresco claims that the forecasted lifetime energy and operating cost savings of the energy efficiency measures we install will defray all or almost all of the cost of such measures.
It also serves certain customers by developing and building small-scale renewable energy plants located at or close to a customer's site. Depending upon the customer's preference, it will either retain ownership of the completed plant or build it for the customer.
The company believes that it secured more than 30%, by value, of the projects awarded from October 1, 2008, through December 2010, under U.S. Department of Energy programs related to energy savings performance contracts.
Ameresco will also assist customers in obtaining third-party financing for the cost of constructing the facility improvements, resulting in little or no upfront capital expenditure by the customer. After a project is complete, it may operate, maintain and repair the customer's energy systems under a multi-year contract.
Since Amersco’s inception in 2000, it has served more than 2,000 customers. Revenue has increased from $20.9 million in 2001, the first full year of operations, to $618.2 million in 2010. (Much of this growth comes from acquisition). It achieved profitability in 2002 and has been profitable every year since then.
Energy efficiency companies, sometimes referred to as energy services companies, or ESCOs, develop, install and arrange financing for projects designed to improve the energy efficiency of buildings and other facilities. Typical products and services offered by energy efficiency companies include boiler and chiller replacement, HVAC upgrades, lighting retrofits, equipment installations, on-site cogeneration, renewable energy plants, load management, energy procurement, rate analysis, risk management and billing administration. Energy efficiency companies often offer their products and services through energy savings performance contracts, or ESPCs. Under these contracts, energy efficiency companies assume certain responsibilities for the performance of the installed measures, under assumed conditions, for a portion of the project's economic lifetime.
The market for energy efficiency services has grown significantly, driven largely by rising and volatile energy prices, advances in energy efficiency and renewable energy technologies, governmental support for energy efficiency and renewable energy programs and growing customer awareness of energy and environmental issues. End users, utilities and governmental agencies are increasingly viewing energy efficiency measures as a cost-effective solution for saving energy, renewing aging facility infrastructure and reducing harmful emissions.
According to a 2008 Frost & Sullivan report, activity by ESCOs in the North American market for energy management services, including energy efficiency, demand response and other services, grew at a compound annual growth rate, or CAGR, of 22% from 2004 through 2008, with the estimated size of the market reaching more than $5 billion in 2008.
In a 2009 report, McKinsey & Company estimated that energy savings worth $1.2 trillion are available if the full amount of economically viable and commercially available energy efficiency potential is implemented in the United States through 2020, which would require upfront investment of $520 billion.
The U.S. federal government has significantly increased its interest in and spending on energy efficiency measures over the past decade. As of March 2010, ESPCs have been awarded by 25 different federal agencies and departments in 49 states, resulting in more than 550 federal energy efficiency projects cumulatively worth $3.6 billion.
Many ESPCs are affiliated with an equipment manufacturer, utility or fuel company. Ameresco is one of the three independent companies awarded contracts by the DOE.
Utilities and large purchasers of energy are increasingly seeking to use renewable sources of energy, such as LFG (created by the action of micro-organisms within a landfill that generate methane gas as a byproduct of solid waste decay), wind, biomass, geothermal and solar, to reduce or stabilize their energy costs, meet regulatory mandates for use of renewable energy, diversify their fuel sources and realize environmental benefits, such as the reduction of greenhouse gas emissions.
According to the International Energy Agency, utilities worldwide are expected to increase their overall renewable generation capacity (excluding hydro) as a percentage of their overall capacity from less than four percent in 2007 to 13% in 2030.
Trends Driving Growth
A multitude of forces are likely to drive governments and end users to look for more efficient energy operations:
- Rapidly rising energy prices
- Pressure on Governments and private companies to reduce spending
- Effectiveness of energy efficiency measures
- Replacement of aging infrastructure
- Availability of third-party financing
- Increasing legislative support (for efficiency, reduced CO2 emissions, encouraging renewable energy), at the Federal and State level
There are three principal types of energy efficiency companies:
Independent Energy Services Companies — Energy efficiency companies not associated with an equipment manufacturer, utility or fuel company. Most of these companies are small and focus either on a specific geography or specific customer base.
Utility Affiliated Energy Services Companies — Companies owned by regulated North American utilities, many of which were traditionally focused on the service territories of their affiliated utilities. Many of these companies have since expanded their geographical markets. Examples include Constellation Energy Projects and Services and ConEdison Solutions.
Equipment Manufacturers — Companies owned by building equipment or controls manufacturers. Many of these companies have a national presence through an extensive network of branch offices. Examples include Honeywell (NYSE:HON), Johnson Controls (NYSE:JCI) and Siemens (SI).
As an independent provider, Ameresco provides some competitive advantages:
Customer Base and Experience – Ameresco has bragging rights, ongoing revenue opportunity, and reference selling potential from selling to over 2,000 customers, including over 1000 in 2010
One-stop shopping - Ameresco covers multiple aspects of purchasing and using energy effectively within a facility. From lighting systems to new heating and cooling, solar panels, to small scale renewable energy plants.
Independence - from any particular equipment manufacturer, utility or fuel company.
Federal and State Qualifications – energy service providers are required by federal and state programs to have a track record in the industry and meet specified qualifications.
Competitors are generally business units of large conglomerates include Chevron Energy Solutions (NYSE:CVX), Constellation Energy (NYSE:CEG), Honeywell, Johnson Controls, Siemens Building Technologies and TAC Energy Solutions.
For renewable energy plants, they compete primarily with many large independent power producers and utilities, as well as a large number of developers of renewable energy projects. In the LFG market, competitors include national project developers and owners of landfills, which self-develop projects using LFG from their landfills. For the sale of solar energy products and systems, there are numerous competitors ranging from small web-based companies that sell components to PV module manufacturers and other multi-national corporations that sell both products and systems.
Ameresco has growth partly through ten acquisitions which have expanded operations geographically and in types of services (like solar).
Renewable energy facilities are a key growth area. As of Dec 31, 2010, it had constructed more than 28 renewable energy projects and had contracts for the construction of 13 additional projects. The company owns and operates 22 small scale renewable energy plants, 19 are renewable LFG plants. It has constructed and is currently designing and constructing a wide range of renewable energy plants using LFG, wastewater treatment biogas, solar, wind, biomass, food waste, animal waste and hydro sources of energy. Most of the renewable energy projects to date have involved the generation of electricity from LFG or the sale of processed LFG.
Other projects based on wind power and solar power are also under way.
In 2010 approximately 87% of revenue was derived from government entities including public housing and universities, mostly in the USA and Canada.
Ameresco’s revenue line has grown consistently since 2006, with a particularly strong growth trend toward renewable energy. From 2006 to 2019 renewable energy grew from $13 mln to $163 mln to become 26% of the business. Overall revenue grew from $277 mln in 2006 to $618 mln in 2010. Unfortunately we cannot define exactly how much of this growth came from organic growth versus growth by acquisition. Revenue from customers outside the United States, principally Canada, was $27.1 million in the second quarter of 2011, compared with $22.5 million in the second quarter of 2010.
Profits for Ameresco have run as a very thin slice of revenue. Cost control is critical. The company has done an adequate job of controlling direct expenses. From 2006 to 2010 direct expenses remained in the range 80-82% of revenue. Operating expense improved in 2010 to 11 percent in revenue. Overall net profits have consistently been about 4.5% of revenue.
The company had 59.8 mln and 9.8 mln in cash and equivalents, and has been generating cash from operations. Given a history of acquisitions and investments in project assets, the company likely will need access to investment cash. Given the consistent profitability of the company, we don’t see any problem with the company raising any cash required to continue similar operations and investments.
Growth and Profit Assumptions
Conditions appear good for Ameresco to continue with solid revenue growth. Even with anticipating tighter conditions for North American governments, we feel government entities will likely be motivated to find energy reduction solutions and alternative energy solutions and Ameresco is making it easy for them.
Given tighter conditions over the next few years, we expect that the company will continue to grow revenue at a similar rate as in the past year. That being a CAGR for revenue of 15 per year. Should US economic conditions improve, we see upside to that.
With several competitors chasing the same business, pricing may be tight, making it difficult to increase gross and net profits, but on the other hand, the company should have even better tools to pursue alternative fuel solutions. We are assuming that net profits will continue in the 5.2% range.
The company has not provided good visibility of how much growth over the past 5 years has come from acquisitions versus organic growth. It discusses revenue and profitability from regional operations but little visibility on revenue and profit by type of business.
Risk Assessment: Medium-Low
On the positive side the company has consistently been growing revenue and profitable, even during the recession of 2008. It generates cash from operations, and has been successful at buying and assimilating companies to expand its abilities and geographic reach. The main competition comes from other large sophisticated companies that are not likely to dramatically undercut on pricing. Its core offering saves organizations money and helps some move to renewable energy sources, and can be self-financing for the client.
Other negatives, almost all revenue come from Governments in the US and Canada, and it is quite possible that governments will have tight fiscal budgets in coming years, or may pull back on incentives to convert to renewable energy reserves. The company will depend on the availability of credit to finance infrastructure upgrades. Many of the company’s competitors are large and are well funded and could get a lot more aggressive.
Are the shares priced high or low?
We assess stocks primarily based on their fundamental value. We estimate the revenue and earnings to be generated by a company over the next ten years. We look at the risk involved in the business, look at the assets and liabilities, and we discount the value of the future earnings according to risk level. For companies with medium to high risk levels, we discount the value of future earnings more aggressively. Finally, we compare the value of those future earnings with the stock price. Are the shares “on-sale” – or are they expensive?
Conclusion – Buy
Since the IPO at $10 the company’s stock has barely changed in value. Our target price for the stock is $18, and we rate the shares a buy.
We like Ameresco’s chances of continuing to grow revenue and generate profits. It seems likely that it can do quite well in a wide range of economic conditions. There are many government facilities that will need energy infrastructures maintained. Each maintenance project is an opportunity for Ameresco to capture a new project and Ameresco seems quite well organized to capture a growing share of that business.