|Shares Out. (in M):||30||P/E||0||0|
|Market Cap (in $M):||7||P/FCF||0||0|
|Net Debt (in $M):||-2||EBIT||0||0|
|TEV (in $M):||5||TEV/EBIT||0||0|
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Acorn Energy is a severely undervalued orphaned micro-cap which is debt-free, has an 80% stake in a wireless remote monitoring business growing ~20% per year and about to inflect to cash-flow positive in 2018-2019, $60M in unused NOLs, and a former securities analyst for CEO whom I believe will unlock value in the next 2 years from both organic growth and M&A.
[Note to reader – This is an illiquid micro-cap and thus only suitable for PA’s and/or the more adventurous VIC members. Caveat emptor!]
Stock Price (2/22/18): $0.24
Market Cap: $7.1M (29.5M shares outstanding)
Enterprise Value: $5.2M (~$1.9M of net cash, post 2/14/18 deal close)
Price Target (18-24 months): $0.72 (12.5x 2020 EPS, less 20% director stake, plus $1.1M intercompany loan from OmniMetrix to Acorn)
Illustrative PF OmniMetrix Model
Acorn’s only operating business right now is OmniMetrix, of which they have an 80% stake. Here is my high-level model for what I believe OmniMetrix can earn over the next few years. For the sake of discussion I have: 1) stripped away the corporate overhead that sits at Acorn, 2) ignored the $60M in NOL’s and made ACFN a full tax payer at 25% and 3) assumed no upside from potential M&A over next 2-3 years. (All points to be addressed later on)
NOTE: The right hand side of my model *attempts* to adjust for the discrepancy between reported revenues and sales on a cash basis, which are higher. (Principal difference being both the monitoring services and hardware sales are contracted and paid for upfront, yet recorded on a pro rata basis over the term of the contract making GAAP results lag cash results) While 2017 sales were $4.4M, management said they were over $5M on a cash basis. Management also guided for ~$6M in 2018 revenue.
What is the business?
After selling off several divisions for the past few years, Acorn Energy is just 80% of OmniMerix. Here’s a good summary from the 10K:
OmniMetrix, LLC develops and markets wireless remote monitoring and control systems and services for multiple markets in the Internet of Things ecosystem: critical assets (including stand-by power generators, pumps, pumpjacks, light towers, turbines, compressors, as well as other industrial equipment) as well as corrosion protection for the pipeline industry (gas utilities and pipeline companies).
In plain English, OmniMetrix develops/manages a network of sensors that allow users to monitor their equipment remotely, cutting down the need to send people out into the field. Of the ~$5M in revenue for 2017, there’s about a 50/50 split between equipment and remote monitoring services.
The business is growing ~20% YoY, which I believe can continue given the small revenue base. Their products mostly compete with OEM’s who sell monitoring equipment for their own machines (and who are much larger than Acorn). I am not going to pound the table and say these guys are going to take over the big players. However, there is a demand for a non-OEM provider of these services because some dealers are afraid that if they sell the OEM’s monitoring equipment they will be disintermediated and lose their customer relationships.
Today, gross margins are ~57%, with hardware at 25%-30% GM, and monitoring at ~85%. The monitoring business is a high-margin annuity stream I believe is very undervalued today. In isolation OmniMetrix is a very good business that needs almost no capex.
Now let me explain why the timing/setup makes this stock truly compelling at $0.24/share.
Why should you invest now?
On Feb 14, 2018, Acorn announced it had completed the sale of its remaining 41% interest in DSIT solutions for $5.8M. This is a big deal for 2 reasons:
1) It immediately fixes Acorn’s balance sheet. The company will have about $2M net cash, no debt, which materially de-risks this investment for new investors, and is more enough money to fund OmniMetrix until it breaks even.
2) ACFN is now a pure-play. OmniMetrix is asset-light, high recurring revenue, and will finally inflect to cash-flow breakeven in 2018-2019.
This final asset disposal was a major capstone in what has been a 2 year clean-up effort by Acorn’s CEO Jan Loeb, who has to his credit delivered on his main 3 goals since taking the job in Jan-2016. He has 1) triaged ACFN’s financial position, 2) rationalized/ disposed of disparate operations, and 3) focused on OmniMetrix which I would argue is a very good business. He is also the type of CEO who can create value through M&A by utilizing ACFN’s ~$60M NOL balance (which is 8.5x the current market cap / 11.5x PF enterprise value).
(Note: DSIT Solutions is a business that specializes in the field of underwater security systems, sonar and acoustics, designed for the energy, defense and homeland security markets. For the sake of brevity, this write-up will not focus on the disposed assets, other than to say Acorn was correct in slimming down.)
Why does this opportunity exist?
ACFN checks of almost all the “special situations” boxes; almost nothing about this business is quite what it seems a first glance:
Wrong name: “Acorn Energy” is deceiving after several years of shedding ancillary businesses, all that’s left is 80% of OmniMetrix (an Acorn director owns the other 20%). On the Feb 15th update call the CEO (Jan Loeb) said the name will eventually change to “OmniMetrix”.
Ugly chart: After falling -97% over the past 5 years from $7.30 to $0.24, chart looks like a bankruptcy, when in fact OmniMetrix is the opposite – it’s now virtually debt-free, has an asset-light business model with high incremental margins, recurring revenue and growing.
Consolidated historical financials not relevant due to all the moving parts: I think this situation is simple to analyze, but first you have to pro-forma and remove the disposed businesses and corporate overate. For example, beginning in Q2-16, Acorn stopped consolidating DSIT’s results after selling their first half of the business. So you cannot just look at 2017 vs. 2016 comparisons on the 10Q / 10K.
Illiquid/OTC/Low Investor Visibility: Sub $10M micro-cap stocks that trade OTC are at a discount for a reason. Up until now, management has been unable to really market this opportunity because for 2 years they were in triage mode trying to fix numerous problems. With a clean balance sheet they are ready to go on offense. It will take time, but ACFN will eventually uplist to the NASDAQ. Long-term investors would be wise to get in now.
I would strongly recommend reading the transcript from the Feb 15th update call:
Why do you think the CEO Jan Loeb is core to the investment thesis?
CEO was previously a Special Situations analyst: Jan Loeb joined the board in Aug 2015, at the behest of a friend, to help a company that was running out of cash and in trouble. I am summarizing a lot here – but he eventually replaced the CEO about 5 months later and has been cleaning up ever since.
The previous CEO was the prototypical salesman. Loeb is the opposite. He had worked previously in various buyside/sellside roles with a focus on “special situations” stocks. He’s the #1 shareholder with ~3.85% of shares, and thinks very much like the investors on this message board. (I would suggest reaching out to speak with him; he is very accessible)
Management successfully downsized corporate overhead with more to come: ACFN will keep its holding company structure in order to preserve the value of its $60M in NOL’s. However, I do not expect them to go back to being a mini-conglomerate.
For 2017, non-OmniMetrix corporate overhead was about $1.2M at Acorn. This is already down -67% from 2 years ago. I expect management to cut further. If OmniMetrix is breakeven by 2018 (as I fully expect), then Acorn should be cash-flow positive on a consolidated basis by ~2019, even with no M&A.
Notice how Acorn overhead has declined the past few years:
CEO will make good use of NOLs: Let me be clear – at $0.24, ACFN is cheap, even ignoring the NOL.
Loeb is actively looking for M&A opportunities to put the NOL to work, but I trust he will be thoughtful about it. Everyone is aware that IoT (Internet of things) type companies are hot now, with M&A comps trading at 3x – 6x revenue. (ACFN trades at about ~1x 2018 cash revenue) Acorn most likely will not be the high bidder in a big competition auction. Management has no intention of issuing shares anywhere near the current stock price, and they are in no hurry to do a reverse stock-split. (That will likely happen only after they found a deal)
However, since the $60M NOL balance is so large relative to the current enterprise value (11.5x) and material to this company’s future, there is tremendous upside from having a competent, shareholder-friendly management. I would consider this as a “free call option” since the NOL is definitely not in the stock price today.
For all of the above reasons, at $0.24, I believe there is compelling upside at Acorn that should result in a much higher stock price in 18-24 months as investors figure out what is going on.
-OmniMetrix will be cash-flow breakeven on a run-rate basis before the end of 2018. Don’t be surprised if they are breakeven for the entire year on a reported basis.
-Acorn (including HoldCo corporate overhead) should be breakeven sometime in 2019. (With M&A this could happen sooner)
-Any M&A deal announcement would be most immediately accretive due to ~$60 million in NOL’s
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