AMRC - Ameresco: Solid Renewable Play With Consistent Margins

2023-06-21 06:38:02 ET

Summary

• Ameresco Inc. is a strong renewable energy investment option with a significant portion of its revenues coming from recurring sources and a solid growth outlook.
• The company has invested heavily in assets, primarily in solar, and has a 10-year annual growth rate of 16.75% for total assets, with potential for further leveraging.
• Despite some risks and challenges, AMRC's established assets and streamlined business model make it an attractive buy in the renewable energy sector.

Investment Rundown

The renewable energy industry saw strong demand and increases in popularity in 2021 and companies like Plug Power ( PLUG ) saw its share price increase exponentially. Right now Ameresco, Inc. ( AMRC ) is down a fair bit from its highs of $97 per share back in November 2021. But at a P/E of 26 on a forward basis, the company is starting to look quite interesting right now.

AMRC has reminded profitable for a long time, which is quite rare given the sector it's in. This further boosts the investment thesis as AMRC stock is actually trading on fundamentals right now and growing strongly too. Dilution of shares has persisted, but the growth of the bottom line has helped offset some of that. AMRC has set itself up to generate a large amount of revenues from recurring sources, like assets that they hold. For Q1 2023 the numbers were around 25% of the revenues and I see that as a major benefit to owning AMRC compared to other options. For investors seeking a solid renewable play, Ameresco is the one, rating it a buy.

Revenue Streams

Ameresco has set itself up in a very strong position in my opinion where a lot of its revenues come from recurring sources. In the first quarter of 2023 that was $63 million, whilst the remaining revenues came from projects and services and software.

When looking closer at the margins too for the different revenue streams then the assets pull ahead by a large amount. Adjusted EBITDA for the quarter was $27 million and 73% of that was generated from the assets the company has. This really highlights the snowball effect that I think AMRC will have in the coming years as they start up and finishes their projects.

Looking closer at what type of assets AMRC holds right now it is primarily in solar, accounting for 66% of it with the rest being either biogas non-RNG or biogas RNG. The assets account right now for 423 MWe which translates to $0.7 billion in value. But what I find rather bullish going forward is that AMRC still has nearly that same amount in development and construction, $0.6 billion to be exact.

Leveraging Assets For Growth

As just discussed, AMRC has invested heavily in establishing the different assets that they hold. This has been shown to make AMRC and its revenue quite predictable. Going forward they see the remaining revenue from their RNG assets amounting to $1.2 billion.

With plenty of backlogs and projects contracted and some in development, I think we will continue to see yearly growth and even steady quarterly growth for Ameresco for the remaining part of the year.

Over the years this development and eagerness to build out their assets has helped the company immensely in growing their assets. A 10-year annual growth rate of 16.75% for total assets is quite simply put very impressive. But I think they still have the potential to leverage their assets further and create a higher return. The ROA sits at 2.65% right now and reaching higher seems very plausible.

Earnings Highlights

Some of the highlights the last quarter had to offer were most notably the addition of $472 million in new awards for the company, which helped increase the total backlog of orders by 13% sequentially. The CEO George Sakellaris was noted saying the following, "We also placed 34 MWe of solar assets into operation and continued to add long-term O&M contracts. We are seeing an increase in engagement as customers assess and prioritize their projects to optimize the potential benefits of the Inflation Reduction Act (IRA)". I think this will be particularly interesting to watch going into the remaining part of 2023. As the IRA act further clarifies itself then I think backlogs for AMRC will continue to improve as customers as seeing the potential of getting involved.

Right now AMRC is still in its infancy of what it could become. The reports will show slight inconsistencies as the electricity prices in the US increased during 2022. That is creating a slight discrepancy in the earnings and I think that was visible in the recent report. The net income did take a steep dive as the projects the company has did not deliver the same amount of revenues as in Q1 2022. They are down over 50% on a YoY basis, but seeing the still strong margins of the assets the company holds I remain bullish on the outlook for AMRC.

The growth targets for AMRC remain very solid and I think they won't face too many challenges in actually achieving them. For 2023 revenue guidance sits at $1.4 - $1.5 billion which would be a 5-year CAGR of 14.7% if they achieve the higher end of that guidance. I think with growth like that, paying a 25x premium seems rather fair. As mentioned before, AMRC has been diluting shares, but during that same 5 year period the shares have increased by 2.72% annually, which is a lot. But it still means that AMRC has been able to offset a lot of that thanks to both top and bottom-line growth and margin expansion.

Risks

The most prominent risk right now with AMRC seems to be that they need to get as many projects finished as possible to help create a foundation of revenues to support its business. Seeing a yearly decline like we did is discouraging, but looking at the bigger picture it's a bump in the road, and the potential for AMRC still is very high.

The challenges the company will have to face will most likely be related to securing further projects as that is the bread and butter of the business.

Industry Comparison

Looking at a different company that is still exposed to similar trends as AMRC we have MYR Group Inc ( MYRG ). A company engaging primarily with electrical construction services in North America. They service different areas of the energy sector but still are affected by major market trends like the shift towards renewables. Where I think AMRC pulls out ahead is the fact they have established solid assets which they can leverage for strong growth. With the streamlined business model of AMRC, they have achieved gross margins of 16% compared to MYRG with its 10% .

The recent share price momentum for MYRG also makes me quite worried it will experience a pullback in the short term. Running up 63% in the last 12 months and reaching a p/e of 23 doesn't make it such a compelling buy I think.

Final Words

Having some exposure to renewables I think is quite important in this day and age of investing. It's a growing market that will continue to experience a lot of demand in the coming years. Being in a company like Ameresco which operates by securing projects and then leveraging its assets to generate consistent margins is why I think they will be a winner in the years to come.

The share price might be quite high right now, but I think for the quality of the business it's a fair price to pay. Often with explosive growth like AMRC is expected to have, paying a little more will with some patience be rewarded. AMRC stock is rated a buy.

For further details see: