EnerNOC (ENOC) is a play on the intersection between technology and energy. ENOC is a relatively small tech firm ($560 million market cap), and it operates in two revenue segments, providing what is known as “demand response” services to utilities and “energy management” services to enterprises. The biggest segment by far is utilities, which brings in 90% of revenue, while the remaining 10% comes from enterprises.
Key customers are found within the commercial and industrial segments, and all told the company helps manage more than 8,600 megawatts (MW) at nearly 13,700 sites across the U.S., the UK, Australia and New Zealand.
EnerNOC’s utility model connects electric utilities with commercial and industrial power consumers and helps to reduce the need to rely on peak power plants (which are expensive to build and operate). The company does this through software as a service (SaaS) offerings that help utilities track, manage and regulate demand response. Management estimates such energy intelligence software represents a $5 billion market. ENOC’s revenues last year were $383 million, so you can see the growth potential.
EnerNOC has been growing at a good clip over the past several years, and that trend is likely to continue, given energy demand and the need for regulation. ENOC will also benefit over the longer term from recent EPA proposals that would cut carbon pollution from the nation’s power plants. Though the details have yet to be finalized, and there will be at least a year before final rules take shape, it’s likely that any net impact to the “smart meter” and “smart grid” industries will be positive, as utilities will look for additional ways to cut power usage.
EBITDA margins are strong at mid-teen levels. Should the top line be able to grow at double-digit rates through 2015, pro forma earnings should be able to touch $1.80 per share by 2015, and current free cash flow yields at around 10% should also lend some support to ENOC. With a mid-teens forward multiple, ENOC stock could reach $27.
The stock hit its 52-week high of $24 in May, and it has since pulled back in the wake of the PJM 2016/17 capacity market auction, which saw a drop in demand response clearing as gas fired plants have come on line. However, pricing has remained stable, and as demand continues to rise, additional, incremental auctions would bring more revenues to ENOC.
Hilary Kramer is the editor of GameChangers.