OESX - Orion Energy: Worst May Be Over As We Approach Q1 Earnings Numbers

2023-08-02 14:07:35 ET

Summary

• Orion Energy Systems reported a fifth consecutive quarterly loss in Q4, but shares have remained above their 2022 lows for 11 months, suggesting a potential bottoming pattern.
• Downside risk remains due to the lack of sustained profitability and the possibility of heavy selling in micro-cap stocks.
• Orion's expansion into EV charging and maintenance services offers growth potential, but the success of these segments remains to be seen.

Intro

We wrote about Orion Energy Systems, Inc. ( OESX ) back in April after the company's fiscal third-quarter earnings, where GAAP earnings of -$0.75 per share were announced for the quarter. Unfortunately, Orion announced a further earnings miss in the fourth quarter (EPS of -$0.16 per share) although the magnitude of the loss was far smaller than what we witnessed in Q3 (-$0.06 in GAAP earnings was the bottom line number expected for Q4).

Furthermore, despite reporting a fifth consecutive loss, shares did not stoop to lower lows post the report. In fact, as we see below, we may finally have a bottoming pattern playing itself out in this stock as shares have been able to remain above their 2022 lows for approximately 11 months now.

Downside Risk Remains

Although Orion's technical chart may be pointing to a long-awaited multi-year bottom, downside risk remains elevated (thus reiterating our 'Hold' rating) until the stock's December 2022 high of roughly $2.40 a share can get taken out to the upside. On the contrary, if shares fail to gain traction and break below downside support over a sustained period of time, this would be time for long holders to liquidate positions swiftly.

In effect, Orion's downside risk stems from its lack of sustained profitability , which means the market (thus far) is not willing to price shares higher. In fact, although the CFO gave top-line fiscal 2024 guidance of approximately $100 million, a bottom-line number was not guided. Analysts who cover Orion are guiding earnings of-$0.24 per share for the fiscal year, so negative earnings are expected for some time to come here.

Although Orion managed to generate positive operating cash flow in Q4, and sales have rarely been cheaper (forward sales multiple of 0.53), poor profitability trends are always a risk because we do not know where they will lead to. Furthermore, losses can also be compounded by heavy selling, which always affects micro-cap stocks in a more aggressive manner due to the below-average trading volume in the stock overall.

Suffice it to say, poor profitability trends and microcap trading risk are sufficient reasons not to add to an existing long position at present. Time will tell whether Orion's decision to diversify its business away from its core LED lighting business will bear fruit.

Company Now Offers More Products And Services

With respect to the EV charging segment, recently acquired Voltrek is already beating growth expectations. We definitely see potential here as Orion can leverage its balance sheet to fund ongoing growth initiatives which will increase Voltrek's footprint away from the northeast of the US. Although long-term debt increased to $10 million recently on Orion's balance sheet, the company's strong treasury stock position (shares that have been bought back but have yet to be retired) of $36+ million demonstrates that the reported book-value ($33.2 million) is actually stronger than what it looks like on paper.

One would think that the maintenance side of the business will automatically ramp up more as companies will be literally forced to double down on their carbon-neutral goals going forward. Moreover, it was encouraging to see the 'maintenance' segment reporting organic growth in fiscal 2023 as 'Stay-Lite Lighting' was already doing $9 million a year prior to its acquisition.

Suffice it to say, the more LED projects that are installed over time, the more potential for signing up customers onto lucrative long-term maintenance contracts. Maintenance contracts carry higher margins, so bulls will be looking for this segment's current annual sales of almost $15 million to continue to ramp up, which should boost overall company margins respectively.

'ESCO' Should Boost LED Sales Growth

Remember, the reason Orion expanded into these areas was because it was too reliant on its LED lighting business. The disadvantages of the project side of the LED business are that sales are not obviously recurring, and any cancellations or delays with respect to execution can meaningfully affect the sales figures (due to not having enough prospects in the pipeline). Therefore, in order to build out the sales funnel (through the ESCO channel) where the company does not have to necessarily manage the installation, for example, Orion has the ability to team up with multiple partners on retrofit plays where significant energy savings can also be realized. The ESCO initiative definitely opens up Orion to a significant scale, so it will be interesting to see how this segment plays itself out in 2024.

Conclusion

To sum up, Orion Energy looks like it is undergoing a bottoming pattern, but downside risk persists due to poor profitability trends and below-average trading volumes. Fiscal Q1 numbers for 2024 are expected to be announced next week, so it will be interesting to see how the numbers fare out. We look forward to continued coverage.

For further details see: