"We estimate that investment into energy efficiency markets worldwide totaled up to USD 300 billion in 2011. This is similar in magnitude to supply side investment in renewable or fossil fuel electricity generation."
-- International Energy Agency presentation, Hidden Fuel, First Fuel
Think about that opening quote for a moment. The investment in energy efficiency in 2011 was equal to the investment in the supply side of electricity generation. Wow.
The thing is, a lot more investment in energy efficiency will be needed in coming years. After all, the global middle class is expected to increase by about 1 billion over the next 20 years, adding a lot more demand for energy. A big part of the way that demand will be met, is by better using the energy we have. This is where Ameresco (NYSE:AMRC) comes in. The thing is, over the past year, the company hasn't lived up to expectations, and the stock is down 30% from its IPO price, and almost 60% from the all-time high.
The good news? Over the past year and a half, CEO George Sakellaris has bought more than $4 million worth of shares, and now holds more than 6% of the company's class A shares in addition to his majority interest through the class B shares, of which he is the sole owner.
Is a turnaround coming, or is this founder and insider blind to the challenges his company faces, especially from larger and better capitalized competitors such as Johnson Controls (NYSE:JCI)? Let's take a closer look.
Opportunity is great. Execution? Not quite.
The reality is, Ameresco has performed poorly as a business since going public. Revenue has declined over the past couple of years:
For a business that is supposed to be growing, this isn't what investors want to see. A lot of the thesis for Ameresco has been based on expectations that municipal, state, and federal government agencies would be leading the charge in investments into energy efficiency. The reality is, even as the rest of the economy has improved, government spending has actually fallen. Federal spending as a percentage of GDP has dropped 10% since 2009, while GDP has increased 12%. Discretionary spending by the federal government has decreased in real numbers some 10.8% over this timeframe:
Without getting into the political debate over government spending, the impact of what was expected to be an increased amount of government investment into energy efficiency is one of the biggest drags on Ameresco's performance over the past several years. The truth is, the downturn has lasted much longer than anyone expected it to, because many of these investments would actually lead to further reductions in government spending, by reducing energy-related expenses, which are a significant cost for many government entities at the federal, state, and local level, and there has been a lot of political will around reducing the cost of government.
Ameresco touts itself as "agnostic" to specific kinds of products that can be used to increase efficiency, which is an attractive position. But when the competition includes companies like Johnson Controls, and industrial leader in energy efficient HVAC and refrigeration systems, as only a part of its $40 billion-plus in annual sales, it's a stiff competitor in the energy services company arena. As a trusted name in energy efficiency, Johnson Controls may not be agnostic when it comes to recommending Johnson Controls systems, but its reputation carries a lot of weight.
The company also is involved in a number of other energy areas, including manufacturing of batteries for electric, hybrid, and conventional vehicles, building management systems, and is the largest supplier of automotive seats in the world. Simply put, it's a global giant with diversification. And business is good, with sales having grown 28% since Ameresco's IPO in 2010, while Ameresco's own revenue is essentially flat since then:
And the market has rewarded Johnson Controls shareholders, who are up almost 80% in total return since.
Final thoughts: Room for winners, once the cycle turns
The fact is, as the International Energy Agency says, this is a really big market, and despite competition from really big competitors like Johnson controls, Ameresco should be able to profit once investments into energy efficiency begin happening at a larger rate. Besides, there are a lot of things that Ameresco does that aren't within the scope of a Johnson Controls. Besides, it's not all about government spending on these projects; there's plenty of industrial and corporate opportunity as well. But it is a significant part of the opportunity.
Eventually, spending will return, but it's not clear if it will happen this year, or even the next with regard to government -- the biggest consumer of energy -- efforts to improve energy efficiency. Until that happens, Ameresco's pure play as an energy services company, will continue to be a speculative and volatile investment. With Johnson Controls, investors have the diversity of its business, and a century-long track record of paying a dividend to fall back on.