AMRC - Ameresco: The Delayed Execution Of Projects Resulting In Subdued Performance

2023-11-22 21:42:28 ET

Summary

• AMRC reported weak Q3 results, with a significant decline in revenue and earnings due to delayed energy projects.
• The company's backlog has increased, but it needs to focus on executing these projects rather than acquiring more.
• AMRC is trading at a high valuation and there is limited room for stock price growth. Hold rating recommended.

Investment Thesis

Ameresco, Inc. ( AMRC ) is an American energy infrastructure and solutions provider headquartered in Framingham, Massachusetts. In this thesis, I will analyze the third-quarter results of AMRC and its future growth prospects. I will also be analyzing its valuation at the current price level and its upside potential. I believe the company has been experiencing delayed execution of orders, which is resulting in muted revenue growth and increased costs. Therefore, until the company Improves its order execution efficiency, I assign a hold rating for AMRC.

Company Overview

AMRC is a leading provider of comprehensive energy efficiency and renewable energy solutions for businesses and organizations across North America and Europe. The company develops, designs, and installs renewable energy systems such as solar, wind, and biomass infrastructure. It also specializes in upgrading and modernizing existing infrastructure to meet current energy efficiency standards. AMRC serves a diverse range of clients, including government agencies, educational institutions, healthcare facilities, commercial and industrial enterprises, and municipalities. The company’s business can be segregated into three business segments, namely, Projects, Energy Assets, and Others.

Q3 FY23 Results

AMRC reported a weak third-quarter result, missing both market revenue and EPS estimates by 13%. The company faced headwinds from the slowdown in the economy post-Covid-19. The slowdown has resulted in the postponement of energy infrastructure orders, resulting in a fall in revenues. I believe the company will continue to face difficulty in executing energy projects throughout FY23, given that there is no significant improvement in order timeline; in fact, it has worsened over the past three quarters. The only positive for the company was increased revenues from self-owned energy assets in the form of biogas and solar energy. The company is planning on expanding its energy asset portfolio to increase the recurring revenues from that channel.

AMRC reported total revenue of $335 million, down a significant 24% compared to $441 million in the same quarter last year. As per my analysis, the primary reason behind this fall is the delayed energy projects, which are being converted into backlogs. The industry is experiencing a slowdown, due to which the clients are pushing new project initiation further. AMRC has not faced any significant order cancelation, but the delay in the start is hurting its revenues to a great extent. The revenues from the Projects segment stood at $242.7 million, a massive decline of 31% compared to $351.5 million in the same quarter last year. The revenues from Energy Assets stood at $44.3 million, a slight increase from the Q3 FY22 revenues of $41.7 million. The company reported its project backlog increased 41% to $3.7 billion y-o-y. However, this increase in backlog is not necessarily positive news for the company. These projects' backlog will only prove to be beneficial if the company manages to execute them. I believe the company should emphasize converting these orders into execution rather than acquiring more projects and increasing its backlog. AMRC reported diluted EPS of $0.40, down $0.11 compared to $0.51 in the corresponding quarter last year.

Let's look at the balance sheet. As of 30 September 2023, the company reported cash and cash equivalent of $107.7 million against long-term debt of $1.02 billion. Here's the problem: The increasing long-term debt is stressing the balance sheet and causing higher interest expenses. A high debt obligation will make future fundraising difficult and might result in the company being overleveraged.

Overall, the company reported weak results with declining revenues and profits. The future guidance by the management doesn’t instill much confidence either. The management has cut its FY23 revenue guidance, and the updated FY23 revenue is expected to be in the range of $1.31-$1.37 billion. The management expects the headwinds to persist for the rest of FY23 and FY24. I believe the investors should wait till the company’s execution gets back on track and only then think of initiating any buying position.

Valuation

AMRC is currently trading at a share price of $28.43, a YTD decline of 49%. It has a market cap of $1.45 billion. It is trading at a forward P/E multiple of 24.7x with an FY23 EPS estimate of $1.15, which is the lower end of its FY23 EPS guidance. AMRC is trading at a significantly higher P/E multiple compared to the sector median P/E of 17.3x. I do not see any reason why it should trade at a premium valuation compared to the sector. I believe there is no significant room for growth in the stock price from current price levels.

Conclusion

The growing backlog needs to be reduced by timely project execution. Revenues and profits are expected to remain stressed in the near future. Investors should wait until the company improves its execution efficiency, which will happen only when the industry revives. The company is trading at a high valuation, which leaves little room for stock price growth. Considering all the growth and risk factors, I recommend holding AMRC.

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