Revolution Lighting Technologies (NASDAQ:RVLT) announced on Oct. 1 a "business update" that seemed to beg a numbers geek like myself to do a little math and get to the bottom line by working backwards. Pro forma revenue for 2013 was forecasted at $35 million. Organic growth was forecasted at 50% for 2014-2016, which comes out to $52.5 million, $78.75 million, and $118.13 million for each year, respectively. Revolution also targeted 15% earnings before interest, taxes, depreciation, and amortization, or EBITDA. An EBITDA of 15% for 2014-2016 comes to $7.88 million, $11.81 million, and $17.72 million for each year, respectively.
Interest, taxes, depreciation, and amortization
Revolution has had a consistent zero-dollar interest expense and enough carryforwards to have zero dollars in taxes for the foreseeable future. This means net income will only differ from EBITDA on the depreciation and amortization, which has been running at $1 million-$1.1 million per quarter. Back that out, and you're looking at a forecasted 2014-2016 net income of around $7 million-$17 million. Not bad at all. But is it worthy of a $300 million market cap? Divide the $300 million by $7 million and $17 million, and you get a P/E range of somewhere between 18 and 43. If you use the midpoint P/E range of 30, the company may seem a bit pricey. Compare it to competitor Hubbell (NYSE:HUBB), who trades at a forward P/E of around 15, and Revolution looks twice as expensive in comparison. Hubbell may not be forecasting such fast growth, but it has a long history of successful and growing profits. Investors with Hubbell don't just have to rely on optimistic forecasts. Add to that the fact that Hubbell is far better capitalized, with a current ratio of over three, meaning that it has over three times the short-term liquid assets as it has short-term debt obligations. Revolution's current ratio is just over two.
A problem of credibility
Midway through its second quarter, Revolution stated in a press release: "Our new business pipeline is robust and we expect a continued acceleration in revenue and profitability as the year progresses." Instead, Revolution is looking at a 24% drop in sales for its third quarter due to the "result of certain international orders coming in later than expected." No further information was given, leaving investors scratching their heads in confusion and disappointment. If management has such a poor handle a mere six weeks into the future, how can investors rely on its forecasts three years into the future? The prudent reaction would be to take three-year forecasts with a grain of salt. It's important for companies, especially those that aren't yet profitable, to get a good handle on their short-term future and communicate it properly. KiOR (NASDAQOTH:KIORQ) learned that the hard way. The cellulosic biofuel company guided halfway through its second quarter for production of 300,000-500,000 gallons of fuel. It delivered only 75,000 gallons. Its stock price got slaughtered, and a parade of class action attorneys has been circling overhead. Though KiOR is in a completely different industry, it serves as a good recent example of what can happen if a management overpromises and underdelivers.
The wild card
The most encouraging part of the news was the casual mention of "a robust pipeline of $150M in actionable opportunities over the next three to twelve months." Since Revolution is only targeting $52.5 million in 2014, the opportunity is nearly three times higher. If it's successful in snatching a large chunk of this opportunity, it would do wonders toward justifying the company's valuation. Has management perhaps learned to underpromise while attempting to overdeliver, hence the small forecast despite the much larger potential? In light of the expected weak third-quarter results without much detail, it's hard to have blind faith in management's promises. We obviously won't know for sure until further results are posted. If Revolution is able to achieve $150 million instead of just $52.5 million over the next year, 15% EBITDA comes in at $22.5 million. If you drop that $22.5 million down to $20 million net income just to be a bit conservative, then a $300 million market cap becomes a P/E of 15, in line with Hubbell.
Investors should watch closely for further developments from Revolution that confirm, beat, or fall short of its forecast numbers. The current price is a bit lofty based on current information, despite it being a company with much hope and promise. However, if Revolution meets or beats its forecasted goals, the credibility and rapid growth could command a higher, possibly even much higher trading multiple versus its peers. Until then, Revolution remains a highly speculative long-term investment at current prices.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.