Ameresco has a solid energy efficiency and renewable solutions business and deep customer base in the US; this core will benefit from the US Inflation Reduction Act.
Acquisition of Italian company, ENERQOS Energy Solutions, positions Ameresco to expand its European operations, the second major geography for the business.
Partnership with flow battery company Redflow shows willingness to explore new renewables opportunities with its US and European customers.
Ameresco has been in the clean energy/energy efficiency/emissions reduction space for a long time. Will the world catch up and realise that Ameresco is a mispriced opportunity?
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Sometimes it becomes hard work being a contrarian investor, but being interested in change and the opportunities arising from a historic shift in the global energy system leaves no alternative. The fact is that two historic events are involved with the dramatic shift from a fossil fuel-based energy system to one based on renewables. These are the urgent need to decarbonize the energy system, and the rise of cheap renewable power. This is also leading to a more sophisticated approach to energy supply and management. In the past the system was overbuilt with power supply geared to the maximum power needs, even if peak power only occurred for a few hours each year. Of course I've oversimplified the past, but in general terms my assessment describes the past energy system. Today the focus is no longer primarily on supply, but it is more integrated including consideration of energy storage and demand. Intermittency is a feature of new power generation (solar PV and wind) and as part of management of these power sources, there is increasing focus on efficiently managing clean power including its storage and dispatch. This is the core of Ameresco's (NYSE:AMRC) business. Here I give some insight into Ameresco and why I think it has a bright future after a period where it fell out of favour. Ameresco
Massachusetts-based Ameresco started life in 2000 as a pioneer in the energy service business, seeking to create value through energy efficient and renewable solutions. For its first 20 years of operation the NYSE-listed company's share price was marooned below $20, but in mid-2020 the share price took off, peaking close to $100 in late 2021 as its US sustainability services grew in Federal, State and local government facilities. This has covered healthcare and education, housing, as well as with commercial and industrial customers. Since then it has been a slow decline so that its share price is now trading below $50. In the past six months the share price has fallen by 28.1%. Part of the problem has been lacklustre earnings growth, although this has occurred through difficult times.
In early March, Piper Sandler upgraded Ameresco from neutral to overweight, with a $64 price target (currently Ameresco is trading at $45.88). Piper Sandler indicated that Ameresco is a solid business with a good track record whose share price has suffered from lower earnings expectations. The Piper Sandler argument is that lower earnings have been priced into the share price.
Here I seek to answer the question as to whether this decline will continue by looking at how Ameresco is positioned in a world very focused on energy efficiency and renewables. From what I see of Ameresco, the company is positioning itself for long term growth in the US, Canadian and European markets. Current conditions exhibit major emphasis on renewable energy and decarbonization in both the US (Inflation Reduction Act of 2022, $369 billion in clean energy initiatives over the next decade) and Europe (REPowerEU). This provides favourable market conditions for Ameresco in its two main markets (US and Europe). Ameresco's decline and signs of revival are not random popularity events
Ameresco has been around for a long time with what in the past might have been regarded as a "feel good" business. Today it sits at the center of a revolution as the world decarbonizes. The company is solid with lots of projects and its business covers the whole spectrum from technology to market developments.
Given the bleak recent share price performance I expected a muted Q4 2022 earnings call, but I was pleasantly surprised by the very "up" summary by Chairman and CEO George Sakellaris. He described 2022 as a great year with 50% growth and adjusted EBITDA growth of 34% to a record of $204.5 million. He claimed that the strong performance was because the company's advanced technology portfolio and capabilities aligned with market demand, notwithstanding challenging global issues. He did indicate that the company was confronting some short term issues that will most likely continue in Q1 and Q2 2023, but that the second half of the year will normalize. George Sakellaris contends that the diversified clean tech business model is robust and that in the US the Inflation Reduction Act is a big positive now and in the longer term.
There are some uncomfortable year over year comparisons in the past couple of years, but while these are not structural issues, they might explain why the market lost interest in the company recently. George Sakellaris indicated that Ameresco's business model allows substantial forward visibility and he sees a path to $6 billion in future revenues.
A couple of specific examples indicate strengths of the business and perhaps where it is headed. Ameresco acquires Italian clean energy company
In late February, Ameresco announced acquisition of Italian company ENERQOS Energy Solutions. This acquisition will enable fast entry of Ameresco into the Italian clean energy scene, since ENERQOS has operated for 15 years in this space. Like Ameresco in the US, ENERQOS has a substantial position for cost saving and emissions reduction projects in many Italian markets, including healthcare, real estate, retail and residential markets. ENERQOS brings a strong portfolio of profitable commercial and industrial customers. Ameresco's existing markets in Europe include the UK, Ireland and Greece, so an Italian presence is a significant development. The two companies have closely aligned strategies around renewable energy and sustainability. The acquisition closes this month. In the earnings call, George Sakellaris was enthusiastic about the ENERQOS team and the likelihood that this will help expansion of Ameresco's European footprint. It sounds like more acquisitions are likely. Partnership with flow battery company Redflow
Ameresco recently announced a partnership with Australian zinc-bromine flow battery manufacturer Redflow (ASX:RFX) to supply its US, Canadian and European clients with the Redflow batteries that can be fully cycled daily, are fire resistant and operate in a range of ambient temperatures without the need for heating or cooling. The initial engagement involves Redflow's small commercial 40 kWh demonstration system. These systems meet the Inflation Reduction Act's bonus tax credit local content requirements. The parties expect to deploy a number of systems in retail branches and for critical infrastructure in fire-prone areas. Redflow has deployed its batteries for mobile tower applications in remote areas in Australia. The plan is for the Ameresco/Redflow partnership to offer a utility-scale solution up to hundreds of MWh. Redflow has achieved 12 months of successful operation of its first MW scale (2 MW) installation in Anergia, California.
This is an interesting opportunity for both companies to explore non-lithium battery storage in the US and Europe. It has lit up Redflow's share price on the ASX (up 35% today!). It shows that Ameresco is looking for opportunity in battery storage technologies to complement the current focus on lithium ion batteries. This is early days for flow batteries which have struggled to compete with the dramatic cost reductions as lithium ion battery technology has grown massively. Ameresco has recognised that there are areas where Redflow's batteries may have features that are attractive to clients for some applications. It has been a long and eventful ride for Redflow, but the timing could be good for a mutually beneficial partnership with Ameresco. Curious "renewable gas" interest
Renewable Natural Gas is one area of Ameresco's business makes less sense to me, although Ameresco comes with 20 years of experience of biogas plants. "Renewable gas" still has CO2 emissions, so it doesn't work for me as a business opportunity in a time when emissions are out of control. The company has a portfolio of 20 biogas plants in its development pipeline. I'm cautious about assuming asset lives of 20 years for any gas projects (even renewable ones!), but some investors might consider that eccentric.
To be fair to Ameresco they are not alone in taking opportunity from a controversial time for the gas industry. I note a lot of activity around natural gas and LNG in the European REPowerEU initiative. What the market thinks
Seeking Alpha has a Quant rating system that alerts investors to companies at risk of performing badly. I find a lot of the stocks I cover get a "sell" rating from Seeking Alpha and Ameresco is in that category. I argue that there is a systematic problem with Seeking Alpha's Quant rating as it applies to emerging renewable energy companies. The comparator that Seeking Alpha uses for companies like Ameresco is traditional industrial companies with a long record of profitability. I argue that Ameresco is a company engaged with a historic change in the energy sector and it is helping build the new energy paradigm. Of course investors should take Seeking Alpha's warning into account when considering investment, but Seeking Alpha authors and Wall Street have a different view. I'm with these analysts. Two Seeking Alpha authors had a "strong buy" and "hold" rating, while Wall Street Analysts in the past 90 days were strongly positive, with 10 "strong buy", 2 "buy" and 1 "hold". For a positive analysis of Ameresco's position amongst comparable competitor's see a recent article by Peter Way. Peter's analysis helps investors see where the Piper Sandler re-rating is coming from. Conclusion
It is always good to be pleasantly surprised about a company when one digs into the detail. I only recently looked at Ameresco when the announcement about the partnership with one of my "minnow" (too) early stage investments (Redflow) was made recently. I was ready to read about a partnership that probably wouldn't amount to much. The more I looked the more interesting Ameresco seemed. The team seems grounded and with a really deep understanding of their world. This seems the case both at the level of team cohesion and focus. The changes happening in both the US and Europe are remarkable and Ameresco seems well positioned to benefit from a lot of hard work over many years. I think Piper Sandler is on to something here. Ameresco is on my watch list.
I'm not a financial advisor but I pay close attention to the massive changes happening in the way energy is harvested and managed. I hope that my comments are of interest to you and your financial advisor as you explore how you manage your own investment portfolio in the energy area.
This article was written by Keith Williams
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Keith began his career as a research scientist (developmental biology, biochemistry, molecular biology) at the Australian National University, University of Oxford (UK), the Max Planck Institute for Biochemistry (Munich, Germany) and finally Macquarie University (Sydney) where he held a Chair in Biology and established the Centre for Analytical Biotechnology. Pioneering the area of proteomics (with Marc Wilkins in his group coining the term), Keith established the world’s first government-funded Major National Proteomics Facility (Australian Proteome Analysis Facility) which was involved with industrialising protein science. Keith left academe with his team to found Proteome Systems Ltd in 1999 to commercialise proteomics. The company had a strong focus on intellectual property, engineering/technology and bioinformatics. As CEO he led the company to ASX listing in 2004. Since 2005 Keith has been involved in new business development in biotech, e-health and other emerging technologies. Keith sees climate change and sustainable development as a major issue for humankind and also a major business disruptor/risk and opportunity. Keith holds a Bachelor Agr Science from the University of Melbourne and a PhD from the Australian National University. He is a Fellow of the Australian Academy of Technological Sciences & Engineering and received an AM (Member of the Order of Australia) for services to the Biotechnology Industry. He has received various industry awards including an Innovation Hero Medal from the Warren Centre for Advanced Engineering. With 300 scientific papers and many patents written, Keith has a clear view of innovation in the Biotechnology and Climate/Renewable Energy space. He is not a financial advisor but his perspective adds relevance to decision-making concerning feasibility and investment in technology innovation.
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RFX Price at posting:
23.0¢ Sentiment: Buy Disclosure: Held
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