Tuesday, April 10, 2012

New Utility Contract Puts Shine on LIME

Lime Energy (LIME:  Nasdaq) is getting a taste of a new $25 million program initiated by Public Service Electric & Gas of New Jersey (PSE&G of NJ).  One of three companies contracted to implement an energy efficiency direct installation program, Lime has exclusivity in serving forty-two towns in northern New Jersey.  That may not seem so impressive on its singular merits, but I took note because Lime has made good hay out of another direct installation program for New Jersey’s Board of Public Utilities (NJ-BPU).  It seems reasonable that on its experience Lime can stage a repeat performance.

New Jersey is having an apparent love affair with Lime Energy because the company offers energy efficiency solutions for large energy users like manufacturers, office buildings, industrial producers and government agencies. Lime works directly with energy users or through utilities and energy service companies.  Lime consults on lighting upgrades, weatherization, mechanical and electrical conservation solutions, water conservation, cogeneration and renewable energy projects.

Lime’s business model is predicated on the view that there is economic value in energy consumption.  Top-line growth over the past three years appears to bear that wout.  Lime won their first utility customer in 2009 and has since built up revenue to $120.1 million 2011.  Business with utilities such as NJ-PBU and direct relationships with federal agencies such as the U.S. Postal Service represented 45% of total sales in 2011.

Unfortunately profits have eluded Lime.  The company reported a net loss of $11.6 million in 2011.  However, excluding certain one-time, non-cash charges related to restructuring and intangible asset impairment, we estimate the net loss was $4.5 million. The loss notwithstanding it represents a significant improvement over the previous year largely on better coverage of fixed operating expenses by a 26% higher revenue level year-over-year. 

It is not unreasonable to expect the new contract award, apparently one of the large utility relationships Lime has landed so far, could generate more improvement in bottom-line results in 2012.  Indeed, the two analysts who publish estimates for Lime already expect the company to reach profitability by the end of 2012.  The average of the two sets of estimates is $0.06 EPS on $147.3 million in 2012 and $0.21 EPS on $175.0 million in 2013.  These were estimates in place before the PSE&G of NJ announcement and it is not clear if those analysts already had this contract in mind when last issuing estimates.  I also note that Lime failed to meet the consensus in each of the last four quarters, suggesting that there is a bit of a love-fest going on for LIME.

That affection has not been translated to the LIME price.  The stock is stuck just above its 52-week low of $2.58.  Noise in the 2011 net loss from one-time, non-cash expenses might be part of the problem.  The company’s also has significant “Costs and estimated earnings in excess of billings on uncompleted contracts.”  The asset account increased $17.4 million in 2011 over 2010, meaning that amount of revenue booked in 2011 was actually not billed to customers.  The build-up in 2011 represented 71% of the total growth in revenue in 2011 over 2010.

LIME is included in the Efficiency Group in Crystal Equity Research’s The Mothers of Invention Index.  I think Lime Energy is worth watching so see where bookings and billings shake out as the Company gains more experience in its sector.  It will also be interesting to see if Lime can take its successes in the Garden State into other regions of the U.S. where utilities are ostensibly in just as great a need for energy efficiency solutions.  The first whiff of profits should turn serve as a strong catalyst for the stock.

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. LIME is included in the Efficiency Group of Crystal Equity Research’s The Mothers of Invention Index.

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