Orion Energy Systems Inc. (OESX) is a small company (~$105 million market cap) headquartered in Wisconsin that manufactures and sells lighting and energy management systems. The company has provided lighting solutions for major customers such as PepsiCo, Sysco, Kraft Foods and Coca-Cola. Heavy insider buying and a compelling growth story make Orion an intriguing investment opportunity.
Background and management
In 2012 Orion founder and CEO Neal Verfuerth was replaced as CEO by Engineering Systems division president John Scribante. While no official reason was cited, the company’s performance and share price had struggled after its 2007 IPO. Scribante and his team made several major changes. First, they began a gradual exit from the solar generating photovoltaic (PV) systems market, which was nearly complete by mid-2014. Second, they acquired Harris Manufacturing and Harris LED in July 2013 for $10.8 million. Harris engineers, designs and manufactures light emitting diode (LED) lighting fixtures. Third, they implemented cost-cutting measures including selling the corporate jet, and consolidating operations from their facilities in Plymouth, WI into the headquarters in Manitowoc, Wisconsin.
Since the management transition, insider activity has been decidedly bullish. Officers and directors have purchased over 150,000 shares since the appointment of Scribante, and there have been no open market sells during that time period. The lack of sales is especially notable given that the stock traded for over $6.00 per share during the first part of 2014, or 25% higher than the current price of $4.80. However, the company’s financial performance has remained inconsistent with revenue down around 12% from FY 2012 to FY 2014 (the company’s fiscal year ends in March), and small net losses each of the past two years.
A massive opportunity
So why are insiders so excited about the stock? They believe Orion’s new focus on energy-efficient lighting fixtures in combination with Harris’ LED technology have created an enormous market opportunity. According their 2014 10-K SEC filing (p. 6), Orion believes the potential market for retrofitting legacy lighting exceeds $100 billion in revenue, and their restructuring has left them focused solely on this market. Orion has announced they intend to increase the size of their salesforce, and while their efforts have yet to have a major impact on the company’s overall performance, Orion has drawn attention to its small but rapidly growing revenue from LED lighting:
Source: Orion investor presentation
Estimates in the same presentation indicated potential earnings of $0.44/share by fiscal 2017 and $1.11/share by fiscal 2019. While these are only potential numbers, if the company is able to meet them, the 2019 stock price would almost certainly surpass $11/share (10x EPS), which based on the current price of $4.80 would translate into an 18% CAGR for the next five years. If insiders believe the company will be able to execute and meet these projections, it would explain why they have been accumulating the stock.
Valuation and liquidity
Orion is currently not profitable so there is no P/E ratio. It currently trades at a P/S of 1.3 and a P/B of 1.4. These levels are not that attractive for a struggling company, but they are not expensive, either. The investment thesis is wholly dependent on the growth story playing out. They have $16.8 million in cash and $44.2 million in current assets compared to $14.5 million in current liabilities and $18.7 million in total liabilities so the balance sheet is quite strong.
The company’s first-quarter performance badly missed expectations, with sales at $13.3 million and EPS of -$0.20. They blamed potential customers’ delayed purchases and reluctance to adopt LED technology until the payback period was shorter. However, they also reported a higher backlog, and did not change their full-year revenue guidance of$80 - $105 million. The cost and energy savings associated with more energy-efficient lighting make widespread adoption of new technology such as LED inevitable, but the timing is very hard to predict.
Risks and concerns
This is an investment that carries a substantial amount of risk:
- Lighting competitors such as Acuity Brands (AYI), Cree (CREE), Hubbell (HUB-B), and electronics giants Samsung and LG may dominate the LED market or drive prices down to levels where Orion cannot compete.
- A cheaper or more efficient product could be developed, putting Orion’s business at a disadvantage.
- For these or any number of other reasons, Orion may be unable to execute its strategy of growing its lighting business. If it remains unprofitable, the stock price could suffer.
- The former CEO has raised questions about his departure and since has sued Orion. Another former employee is involved with a legal dispute relating to mandatory participation in a voluntary wellness program.
- Orion’s small size and lack of established profitability may mean the stock price will remain quite volatile.
Insider buying and a massive growth opportunity make Orion Energy Systems a potentially attractive investment despite disappointing performance over the last few years. Some investors may want to wait in hopes of a lower entry price, or for additional signs Orion can deliver on their new strategy. I certainly believe this stock is worth keeping an eye on.