Don't Dump EnerNOC

Apparently EnerNOC's (NASDAQ: ENOC  ) first-quarter results didn't do much for investors. The stock sagged after it reported its financial results several days ago. Still, trader-centric investors are likely missing a lot about this disruptive company's story and long-term prognosis. 

In demand
EnerNOC increased revenue by 34.4%, although it still reported a loss of $30.5 million, or $1.12 per share. Gross margin increased on a year-over-year basis, though, to 32%. Quarterly losses certainly aren't optimal, but strong revenue growth and increasing gross margin both are positive indicators for the future of a company in a nascent sector. 

Some investors may have decided to bail when the company simply reiterated yearly guidance, but that's a shortsighted view. In obvious positives, EnerNOC expects to achieve profitability and positive free cash flow later this year. Some of its capital expenditures relate to its new headquarters, and those costs should end by the second quarter.

The demand-response company's strengths are more compelling than short-term investors probably believe. EnerNOC's customers use its solutions to manage energy usage, cutting costs and increasing efficiency; they're even incentivized to do so because they can sell back savings to utilities and grid operators. And of course, managing and saving energy is an environmental plus as well. 

But that's not where EnerNOC's story ends. EnerNOC's products also take advantage of the burgeoning trend in data analytic software. In the first-quarter conference call, management mentioned an IDC report showing that that sector generates double the growth of the overall software market.

EnerNOC has myriad customers of all types. Some commonly known end-users of its services include AT&T, Genentech, PfizerKimberly-ClarkWhole Foods Market, Carnegie Mellon, and the Commonwealth of Massachusetts.

Secret strength 
Another area investors may not factor into their theses is EnerNOC's role in the relationship between energy and water. Some of its customers seek solutions for irrigation load control in agriculture, for example. In March, it signed a related 10-year agreement with PacifiCorp, its largest single agricultural contract yet. 

In EnerNOC's conference call, management pointed out that there are 10,000 megawatts of agricultural energy demand, and 7,000 of those are related to water, irrigation, and pumping load.

Some investors may remember the company's distressing relationship with PJM and the shadow of damaging regulatory changes several years ago. Overhang from that situation drove the stock's price into the single digits for quite some time.

Not only has that situation gained some certainty, but EnerNOC's going one better: It has lessened its reliance on its business relationship with PJM. Whereas PJM represented about 60% of EnerNOC's revenue several years ago, it decreased to about 40% in 2012.

Don't forget the risks
While disruptive companies are exciting, they're also not for the faint of heart. EnerNOC's got a lot of things going for it, but risks remain.

Just for starters, it's got plenty of competition in this marketplace, such as energy management service providers like Comverge, Exelon (NYSE: EXC  ) , and Hess (NYSE: HES  ) , as well as energy technology companies like Lucid Design Group, Building IQ, and SCIEnergy. Utilities themselves could and sometimes do use their own demand response solutions, which also lessens the business companies like EnerNOC can gather.

Exelon is an energy giant that's been expanding its presence in the smart grid space. Hess has its own Intelligent Demand Response product. (Granted, Hess is currently probably pretty distracted by a dissident shareholder campaign to replace directors.) Comverge may be the eeriest rival of all, given its focused competition in demand response and its stated mission to create a greener planet on top of providing energy- and cost-saving tools.

The emotional response to demand response 
I bought shares of EnerNOC for the Prosocial Portfolio I manage for Fool.com about two years ago, and the stock price has definitely had its ups and downs -- well, let's face it, for a long while, we experienced mostly downs. At the time, I acknowledged the risks inherent in such a disruptive company, and when its shares dropped to single-digit lows, I noticed that uncertainty generally drove the stock down lower and lower. At times it seemed like it could do nothing right in the eyes of investors -- and sometimes, those downward price moves happened for no new reason at all. The demand response company was subject to emotional response: investor pessimism.

Today, the stock's in the red, but has crept near my original purchase price. I'm glad I've been patient on this one, and it wasn't one I believed would be a short-term story in the least, so more patience is required. Stocks like this take a while for early potential to play out, and, of course, sometimes can end up being busts.

Investors may not have felt EnerNOC was so powerful this week, but it's certainly stabilized from past dark times, having plugged into more business and a better position than it had two years ago. Additional possibilities sound more exciting than ever. All's well for now at EnerNOC, and it might even be a good time to consider buying more, given the fact that it's teetering on the brink of profitability.

As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. This strength, combined with an increased focus on balance sheet health and its recent merger with Constellation, places Exelon and its resized dividend on a short list of the top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


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  • Report this Comment On May 23, 2013, at 3:59 PM, PaulEkman wrote:

    *NOTE - I work in the electricity markets.

    EnerNOC is a bad investment, because their management is short-sighted.

    In a nut-shell, EnerNOC has a pump-and-dump strategy to acquiring new clients. Basically, EnerNOC hired a ton of energy consultants, mined them for their book of business and then let all the consultants go. Their clients are now locked into 5 year contracts (which are now about to expire). Now EnerNOC has hired replacement account managers who are inexperienced which has lead to an inadequate level of service to their existing book of customers.

    Good luck if you want to put your money in that business model!

  • Report this Comment On May 23, 2013, at 4:01 PM, PaulEkman wrote:

    ALSO note - Good luck with your Whole Foods investment as well. Central Market (HEB) is going to dominate that sector. As we all know, if you are not 1st or 2nd, you might as well not play ball.

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