OESX - Orion Energy: Recent Investments Still In Their Initial Innings

2023-04-12 01:27:52 ET

Summary

• Orion misses earnings estimates in its third quarter.
• Shares though have managed to print lower highs for multiple months now.
• The market sees the potential of the company's recent investments. Sales growth to continue.

Intro

Our most recent commentary on Orion Energy Systems, Inc. ( OESX ) was back in May of last year post the company's fiscal 2022 third-quarter earnings. At the time, we reiterated the point the company still had the potential to finally come good. Some reasons for our optimism at the time were the company's rising gross margins as well as the expectation for rising organic growth at the tail-end of fiscal 2022. In saying this, forward-looking earnings expectations for both sales and earnings were beginning to break down which finally resulted in revenues of $124.4 million for the full year alongside an operating profit of $8.9 million.

Suffice it to say, the lower-than-expected growth rates did little for the share price as we see below. In fact, shares resumed their downward trend before finally printing a hard bottom in August of last year. Since then, shares of Orion Energy have managed to consistently print higher lows. Furthermore and although symbolic in nature, the recent trend of sustained buying by insiders well below $2 a share is encouraging from a shareholder's perspective. However, another test of the rising trend-line may be on the cards over the near term as a bearish trend seems to be underway here fueled by elevated selling volume.

Fiscal 2023 Trends

Through the first three quarters of this year, Orion has predominately missed its estimates although the company's recent third-quarter sales of $20.29 million beat estimates by a small margin. However, this Q3 top-line beat still constituted a 34% drop in sales over the same period of 12 months prior. The sizable drop in Orion's sales this year is due to the drawing down of a multi-year project with Orion's biggest customer. This means despite the company's lower current stock price over 12 months ago, for example, Orion's current trailing sales multiple of 0.77 has not contracted as much as shareholders would have liked.

Sometimes though, having too many eggs in one basket (Referencing Orion's previous reliance on its largest customer) can be beneficial in that many times, it forces management to look outside its principal line of business. In fact, taking Orion's biggest customer out of fiscal 2023 calculations, the remaining businesses increased their sales by 9% post the company's third-quarter earnings. Further growth is expected going forward as we see below with the likes of the company's EV Charging business expected to keep on growing rapidly and the company's maintenance business to bring in more recurring income over time.

Expected Growth

Investors may bemoan Orion's current lack of profitability (Negative operating profit of $2.6 million in Q3) but it was still refreshing to see positive operating cash flow of $1.3 million in the same quarter. Being able to generate positive cash flow really is the key for Orion for the following reasons.

• If Orion's sales can continue to grow organically, through more acquisitions and through a higher number of ESCO partners (All without significant share dilution or balance sheet impairment), then over time, profitability simply has to take care of itself. Now obviously, profitability would come a lot sooner if trading conditions were to stack up for the company which would enable Orion to turn over its backlog at a faster clip. However, take the recent Stay-Lite deal which immediately affected Orion's sales for the better. Given that the integration of this business is still in its initial innings and the balance sheet was not impaired in this acquisition, we see a long runway of growth in this business.
• Then you have the recent Voltrek (EV Charging provider) acquisition which was completed in October of last year. This was a solid add-on given Orion's base lighting business and given the accelerating EV tailwinds, growth could come here faster here than many anticipate. Suffice it to say, given the cross-selling opportunities here as well as the infrastructure being rolled out in this space, there is also ample runway for growth in this business going forward. In fact, almost $3 million in revenue from the Voltrek business was booked in Q3 alone.

Conclusion

To sum up, our most recent rating on this stock was a "HOLD" and we believe this remains the correct rating until bottom-line profitability can improve somewhat going forward. To achieve this, Orion has to hit its top-line numbers if not exceed them in upcoming quarters. As always external conditions will have to cooperate. We look forward to continued coverage.

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