Acorn Energy: Recent Developments Confirm Bullish Thesis

| About: Acorn Energy, (ACFN)
This article is now exclusive for PRO subscribers.

I have written before about Acorn Energy (NASDAQ:ACFN) and have recommended it to investors. Recent developments have made the stock somewhat more expensive (an extraordinary development given the market action of the last few weeks) but also confirm the bullish case for ACFN. It closed Friday at $5.11 a share.

ACFN has reached an agreement to sell its largest portfolio company, CoaLogix, and will realize more than $55 million after tax on the sale. This will leave ACFN with substantially more than $3 a share in cash. The sale will be for roughly 5 times trailing revenue and represents a huge gain on the original cost of this position. Factoring in the cash generated by the sale, investors who buy ACFN here will get the other three divisions for somewhat less than $2 a share.

The really exiting news from ACFN involves the remaining three portfolio companies. GridSense makes sensors and communications equipment, which enable electric utilities to monitor their distribution networks. With a fleet of aging transformers facing new customer load patterns caused by, among other things, battery charging for electric and plug-in hybrid automobiles, the need for this equipment has strengthened substantially. GridSense just received a "break out" order from a large electric utility, which will increase its revenue as well as provide it with credibility in the industry. Although we are in the first inning of the adoption of this technology, GridSense is already posting impressive sequential increases in revenue and order backlog.

DSIT provides underwater security equipment and has an order backlog that should give it a strong second half of this year in both revenue and earnings.

The crown jewel appears to be US Sensor Systems, which makes fiber optic sensors that can be used in oil and gas drilling and on natural gas pipelines and distribution facilities. USSI has landed some large orders and is ramping up production in response. Successful execution of these orders should open the way to adoption of its technology by more and more companies in the industry. The USSI technology allows oil and gas drillers to acheive higher levels of output and also permits drillers engaged in fracking to monitor and control any threatened environmental problems. The markets it addresses involve potentially tens of billions of dollars annually. Its revenue and order backlog numbers have shown impressive growth this year and it is likely that major breakthoughs may be around the corner, after which ACFN may not be available at prices in the current range.

As always, there are risks, although they are somewhat mitigated by the large cash hoard that ACFN will have after the CoaLogix sale closes. This is a well managed company that is zeroing in strategic opportunities in the energy sector and has an enormous potential upside.

Disclosure: I am long ACFN.