Tuesday, October 07, 2008

Keeping the Lights On

Listening to financial news some investors might think U.S. commercial and investment banks are scrambling just to keep the lights on. In fact it appears the light bill IS on their minds. Lime Energy, Inc. (LIME: Nasdaq), a provider of energy efficiency products and services, has signed contracts valued at over $8 million with three major financial institutions to provide energy efficiency lighting upgrades in over 1,200 bank branches and throughout 1.6 million square feet of corporate headquarter space. The branches and offices are spread out over several states.

Lime management expects to complete the installation by the end of 2008. Adding in utility incentives, the three projects are expected to yield a 30% savings on the light bills of Lime’s customers - $4.6 million per year in energy and maintenance cost savings.

The utility incentives, totaling $650,000 per year, will not be lost. Part of the savings to the banks comes in the form of reduced energy consumption by as much as 10.5 million kilowatt hours per year. The community gets the benefit of reduced emissions equal to taking 1,600 passenger cars off the road.

It might not make any sense to invest in the financial sector during this period of unprecedented volatility. Bank of America Corp. (BAC: NYSE) is down 56% from its 52-week high and JP Morgan Chase Co. (JPM: NYSE) is off 16.9%.

Suppliers to the financial sector such as computer hardware and software supplier Diebold, Inc. (DBD: NYSE) might also be “untouchable." DBD shares have been trimmed back 34.1% from that stock’s 52-week high. Yet the Lime contracts demonstrate the financial industry is still a buyer where it counts - any product or service that helps reduce operating expenses.

Lime Energy produced $22.7 million in revenue in the twelve months ending June 2008, and a loss of $19.0 million. Ouch! - an early stage customer that has yet to produce a profit. An energy conservation business model is clearly recession resistant, but is LIME worth the risk?

The three bank institution contracts are game changers for Lime Energy. The $8.0 million will pump up revenue in the fourth quarter, but with a trailing gross margin of 17.3% it is not certain the windfall is enough to generate a profit in the quarter. Investors might have to wait for deeper market penetration and even higher revenue levels to see positive cash flow. The other problem is that Lime Energy does not have very deep pockets. Cash balances had dwindled to $470,000 at the end of June 2008.

Under other market conditions, a contrarian investor like me might take a position on LIME shares are the current price level. Yet it is not entirely certain that “the worst is over” for the U.S. equity markets. The contracts may turn the game in Lime’s favor, but the stock price “score” may not change.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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