Tuesday, September 29, 2009

Light on Demand Destruction

Resolving the U.S. energy problem along with the attendant environmental issues is not just a matter of finding alternatives to fossil fuels. It is also a matter of creating efficiencies in the machines and systems that draw power. Edison’s pride and joy, the incandescent light bulb, has been banned by many governments around the world. Incandescent bulbs create light as electric current passes through and heats a filament.

The problem with incandescent bulbs is that as much as 90% of the power consumed by an incandescent light bulb is emitted as heat, rather than as visible light. Both florescent and light emitting diode (LED) technologies offer higher efficiencies.

Accordingly, many governments have introduced measures to phase out the use of incandescent bulbs. Brazil and Venezuela started to phase them out in 2005, and other nations are planning scheduled phase-outs: Australia, Ireland and Switzerland in 2009; Argentina, Italy, Russia and the United Kingdom by 2011. Canada the European Union are targeting 2012. The U.S. is phasing out incandescent bulbs by 2014.

The mandates to eliminate incandescent light bulbs has created a market opportunity for new entrants to the lighting industry that has been dominated by such large players as General Electric (GE: NYSE) and Philips (PHG: NYSE).

The desired product of any electric lighting system is light (lumens), not power (watts). Overall cost of lighting must also take into account light lost within the lamp holder fixture; internal reflectors and updated design of lighting fixtures can improve the amount of usable light delivered.

Orion Energy Systems, Inc. (OESX: Nasdaq) offers a line of high-performance High Intensity Lighting systems, which operate at lower temperatures than legacy lighting fixtures in commercial and industrial facilities. A patent was recently awarded for the modular features of the company’s modular lighting system. The modularity feature makes initial installation, and the integration of additional energy saving technologies, easy and affordable.

The company has yet to turn a profit, but sales have ramped steadily. Economic recovery should restart Orion’s march toward profitability. Subsidies for investments in energy saving devices should also spur demand for Orion’s products. With the phase out of incandescent bulbs we expect Orion to benefit from a large and growing addressable market.

With $1.57 in cash per share OESX is trading at 2.0 times cash. Even adjusting for cash required to support operations for the next two years, cash is $1.20 per share or 2.6 times adjusted cash. The value proposition is compelling given the large market opportunity that is developing out of the most unlikely force - the destruction of demand for electricity.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. OESX was profiled in the June 2008 issue of the Small Cap SEARCH newsletter with generally favorable commentary.

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