Today's Buy Opportunity: EnerNOC

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"Smart grid technology is almost a no-brainer [investment]; utilities want it, need it, might depend on it. What happened to the telecom industry over the last 20 years in terms of efficiency gains, connectivity and bandwidth will happen to the utility industry over the next 10 years. Management and control of energy assets is a fundamental priority."

So said a major investor at a venture capital presentation I attended in New York late last year just before he revealed a few of his top ideas in smart grid technology. One of them caught my attention, and I've been following its remarkable story ever since. It's the clear leader in a fast-growing marketplace that I expect will be worth billions in the very near future. It's my "11 O'Clock Stock" pick: EnerNOC (Nasdaq: ENOC  ) .  

EnerNOC fast facts

Market Capitalization

$855 million

Industry

Energy

Revenue (TTM)

$200 million

3-Year Revenue Growth (Annualized)

86%

Cash | Debt

$117.4 million | $0

Competitors

Comverge, CPower, Honeywell (NYSE: HON  )

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

A wide-open market opportunity
The U.S. currently has 1,075,000 megawatts (MW) of electric generation capacity. That sounds like a big number, but it's barely enough to keep up with demand under normal conditions. Under abnormal conditions, like say the heat wave we're experiencing right now in the Northeast that has everyone and their best friend's cousin cranking up the A/C, it's woefully insufficient. In fact, frequent brownouts have become a fact of life in certain places around the country, costing U.S. consumers and businesses an estimated $80 billion per year in lost productivity.

And it's only going to get worse. Electricity demand in the United States is projected to climb by 19% over the next 10 years, but generation capacity is expected to increase by only 12%. In fact, North America will need to add almost 700,000 MW by 2030 just to meet expected demand. We're talking new power plants, transmission lines, and grid infrastructure at a cost of a mere $2.4 trillion.

Regulators and utilities therefore have two choices. Invest tens of billions per year to build new capacity. Or, spend a small fraction of that to make the grid more efficient, or smarter.

EnerNOC to the rescue!
EnerNOC is the leader in the emerging field of demand response. Here's how it works. EnerNOC has a network of more than 7,000 customer sites -- places like commercial buildings, supermarkets, industrial sites, and universities -- that have hooked up to EnerNOC's metering and control technology. EnerNOC monitors the energy use at the customer's site in near-real time. When a utility company or grid operator experiences a sudden surge in demand, it notifies EnerNOC, which signals its customers to cut back on energy use, freeing up valuable MWs.

For instance, supermarket chain SUPERVALU (NYSE: SVU  ) , an EnerNOC customer, may switch over to its generator and cut selected lighting, or reduce power to refrigeration units that were recently destocked. Or an IT manager might know the best time of day to reduce power to his company's network servers.  

Just a few of EnerNOC's customers

  • Adobe Systems (Nasdaq: ADBE  )
  • Albertsons (SUPERVALU)
  • AT&T (NYSE: T  )
  • Beacon Properties
  • City of Boston
  • General Electric
  • Pfizer (NYSE: PFE  )
  • State of Vermont
  • Stop & Shop
  • University of San Diego

The key part of this equation is that utility companies and grid operators pay both EnerNOC and its customers for that power. So not only do EnerNOC's customers save money on their energy costs, they actually get money back from the power companies for freeing up power through EnerNOC's network. With that kind of win-win situation, it's no wonder EnerNOC's growth has been through the roof.

Metric

2007

2008

2009

Revenue (in millions)

$60.8

$106.1

$190.7

Demand response capacity (MW)

1,112 MW

2,050 MW

3,550 MW

Reach

22 states

22 states, Ontario

31 states, Canada, U.K.

Customer sites

2,189

4,000

6,500

Source: Company filings.

EnerNOC ended the first quarter of 2010 managing 4,350 megawatts across more than 7,200 sites. It added about 800 megawatts during the quarter, which represents a huge 23% sequential gain in business. That tells me that EnerNOC's services are gaining rapid adoption. And as EnerNOC continuously expands its network and demand-response capacity, utility companies and grid operators are happy to keep renewing long-term service contracts. After all, they're saving potentially billions in capital investments they would otherwise have to make without EnerNOC's demand-response capabilities.

But EnerNOC's growth opportunity doesn't begin and end with demand response (although the growth from that alone could be huge). With its foot in the door at its customers' sites, EnerNOC has a number of additional services to offer.

By analyzing clients' power consumption, its PowerTrak software can offer savings opportunities and even be used to automate processes to decrease power usage. Its SupplySmart system combines software and consulting to help power companies buy energy efficiently and manage price risk. Other solutions include tracking and managing carbon emissions, something that becomes ever more crucial as new "green" regulations get imposed on commercial and industrial buildings, particularly in urban areas.

Bottom line and risks
There are other companies in the demand-response business, including the smaller Comverge, but they have a much larger focus on the residential market. There are many companies that make metering equipment that could be capable of demand response, including giants like Honeywell and Johnson Controls (NYSE: JCI  ) . But I think EnerNOC's first-mover advantage gives it a solid moat, since each new client increases the company's ability to reduce loads on utilities.

Still, despite its rapid growth, EnerNOC has yet to report a full year of profitability since its IPO in 2007. The company recently became cash flow positive, and analysts predict EnerNOC will earn its first profit this year and $0.82 per share in 2011. At $34 a share, the stock looks expensive, but I think the company will grow faster than analysts predict and sustain that growth for an extraordinary period. We need a smarter grid, and EnerNOC's substantial head start in a crucial new field makes it, well, almost a no-brainer.

Previous recommendations (Click here for full list of recommendations and performance)

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"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of EnerNOC. To see an FAQ on "11 O'Clock Stock," click here.

Matthew Argersinger wishes he had EnerNOC for his house and does own shares in General Electric. Pfizer is a Motley Fool Inside Value selection. EnerNOC is a Motley Fool Rule Breakers pick. Adobe Systems is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2010, at 11:59 AM, TMFMattyA wrote:

    If anyone has any questions about EnerNOC or anything mentioned in the article, please post them. I'll do my best to answer them as quickly as possible. Thanks! --Matt

  • Report this Comment On August 03, 2010, at 12:17 PM, FleaBagger wrote:

    Why don't you already own ENOC?

  • Report this Comment On August 03, 2010, at 12:23 PM, dargus wrote:

    I love the story here. This sounds like a fantastic business model. However, right now the stock seems to be at the high end of its price range. Is there any reason to expect the stock won't pull back again? I don't like trying to time the market, but at the same time I tend to be wary of stocks at the high end of their range.

  • Report this Comment On August 03, 2010, at 12:31 PM, shivy1 wrote:

    great growth, great service, great company, terrible stock price

  • Report this Comment On August 03, 2010, at 12:46 PM, Melaschasm wrote:

    I like this company, and their growth rate. I think the trends favor continued growth, and likely some nice profits in the near future.

    However, if this does become a huge industry, I am not confident that ENOC has built a strong moat. What is to stop some other major energy company from buying the next generation of technology and offering lower prices?

    For the risk involved, I would want to at least double the value of my investment over the next 5 to 10 years. To justify a $60 stock price, earnings would need to be somehere close to $4/share. With the likely growth rate for this industry, such earnings are very possible, but I remain concerned about how easily competitors will be able to enter the market, once big profits are available.

  • Report this Comment On August 03, 2010, at 1:49 PM, TMFMattyA wrote:

    Hey all,

    Because I had pitched EnerNOC to one of our premium services a short while ago and knew that I was going to be picking it as an 11 'O'clock stock, I've been restricted from buying shares myself.

    As for the current stock price being high, well I'll say this. This is definitely one of the more riskier stocks with plenty of expectations built into it.

    I put together a model (which I think is conservative) that has ENOC's revenues growing at a 30% clip over the next 5 years (versus 90%+ over the last 5). Assuming a 15% EBIT margin, about average for a capital light, software business, and a 15x multiple to EBIT, conservative for a company with that kind of growth, gets me a stock price of around $65.

    So ENOC might not be a super bargain, but I think it's pretty compelling as long as it hits my growth targets.

    That said, growth companies like this with lots of expectations built in are always susceptible to disappointments along the way. It wouldn't surprise me at all if it had the occasional 20% drop after slightly missing earnings expectations (like tomorrow for instance!). I'd use those opportunities to build a long-term position.

    Thanks for your comments and I hope you enjoyed the article.

    --Matt (TMFMattyA)

  • Report this Comment On August 03, 2010, at 1:55 PM, dargus wrote:

    Perhaps this has been disclosed elsewhere, but when is the Fool purchasing these stocks? Do they buy a recommended stock on the day it is recommended, soon before or after, or did you guys make a list and buy all the stocks ahead of time?

  • Report this Comment On August 03, 2010, at 2:07 PM, TMFKris wrote:

    @dargus: The following is from the FAQ on the 11 O'Clock Stocks. The full FAQ is here http://www.fool.com/investing/general/2010/07/26/the-11-oclo...

    How is the Fool investing $50,000?

    We'll buy the stocks at least 24 hours after we announce the pick on Fool.com. As much as possible, we'll try to buy $1,000 of each stock, so that it remains an equally weighted portfolio. As the series continues, we'll publish our purchasing price in an summary article tracking the portfolio's performance against the market.

    All stocks will be held for a minimum of one year.

    Hope this helps. Kris - TMF copyeditor

  • Report this Comment On August 04, 2010, at 2:12 AM, pussygato wrote:

    How does ENOC compare with ITRI and ESE?

  • Report this Comment On August 04, 2010, at 10:54 AM, TMFMattyA wrote:

    @pussygato,

    Not too familiar with either, but they are certainly playing on ENOC's turf. The critical difference, I think, is ENOC's deployable network. For example, ITRI provides smart, energy metering services for customers to help them manage onsite, but there's no communication there between the utility/grid operators and the customers. That's the critical link that ENOC provides.

    Thanks for the question!

    Matt

  • Report this Comment On August 04, 2010, at 5:46 PM, cmbourne wrote:

    Thanks

    I put ene on my watchlist last night ; it went up 12% today!

  • Report this Comment On September 02, 2010, at 12:16 AM, FoolishJayhawk wrote:

    @cmbourne: You probably just said "ene" as an abbreviation for EnerNOC, but I couldn't help snicker since ENE was the ticker of... Enron. EnerNOC's ticker is ENOC.

  • Report this Comment On April 01, 2012, at 11:59 AM, cattywampus wrote:

    Hope this stock has seen the lower end of the trading range. Is there a bright future in the crystal ball for ENOC?

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