Lime Energy Strategy Validated by Award from Central Hudson
Tom Konrad CFA
Lime Energy (NASD:LIME) has been a star in the very competitive energy services space recently because of its ability to maintain margins in what has been a very competitive environment. While competing small efficiency companies have been closing up shop in the Northeast, Lime has been growing revenues at 30% a year, while maintaining a gross margin of around 20%.
Recently, Lime sold off due to an earnings miss arising from a big write-off and less than expected revenues in the company’s Commercial and Industrial (C&I) division. This was the buying opportunity I was waiting for since I first wrote about the Lime last October.
Central Hudson Award
The stock has not yet recovered, but today’s announcement of the award of Central Hudson’s (NYSE:CHG) direct install program may change that.
Lime anticipates that the contract will be worth up to $25 million over a four year period, which should add about 5% to the company’s 2011 revenues for the next four years. With gross margins of approximately 20%, it should also add $500 thousand to $1 million (2 to 4 cents a share) to earnings, depending on how much extra overhead the program requires.
But the earnings impact is likely to be much bigger than 2 to 4 cents a share. To understand the true impact of this announcement, you have to understand the key to how Lime has maintained margins in the current tough environment, and why they took that big write-off to restructure their C&I division.
While large C&I projects are extremely competitive, and have led to shrinking margins for most of the industry, Lime has been able to leverage their utility contracts to do follow-on business with small to mid-size C&I customers. Most efficiency companies have trouble reaching these smaller customers because of the high acquisition costs for projects that only produce moderate revenue.
In the context of a utility program, the utility pays Lime to contact the businesses and implement a menu of energy efficiency measures. Lime can then offer the business a number of additional efficiency measures which will be profitable to both the business and to Lime.
The recent restructuring was intended to better align Lime’s C&I business with these utility programs, and to take advantage of the selling opportunity afforded by Lime’s utility programs.
That’s why today’s announcement is big news. The award of additional utility programs is key to Lime’s strategy. Today’s announcement tells us that strategy is working.
Disclosure: Long LIME
This article first
appeared on the author's Forbes.com Green Stocks blog.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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