Q2 sales grew by over $10 million on price increases as well as pandemic-related disruptions subsiding.
The LED space will continue to enjoy carbon-related tailwinds which going forward should only intensify.
We continue to wait for a convincing swing before deploying capital here.
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ControlMedia/iStock via Getty Images We wrote about Orion Energy (NASDAQ: OESX ) back in September of this year when we stated that the carnage we had witnessed with respect to how shares had collapsed this year would eventually end. Orion has had a horrific calendar 2021 already having lost approximately 67% of its market cap over the past 11 months. Since we penned that piece in September, shares have lost a further 7%+ so investors need to be patient here before a final long-term bottom is printed. Suffice it to say, we are still waiting for a bottom here and will remain out of Orion until the technicals change in earnest.
This is essentially the problem value investors face throughout their careers. When one decides to invest against the tide, the investor in question must remain steadfast many times for a prolonged period of time before the tide changes. The flip-side of the above pretense is the opportunity cost which value investing brings to the table. Remember, Orion does not pay a dividend so investors have not had the opportunity to reduce their cost basis, for example, by reinvesting a growing dividend. Suffice it to say, a potential 67% drawdown this year is a sizeable opportunity cost especially if Orion does not manage to eventually turn the corner here.
We maintain an up move is coming through for reasons we will get into. To confirm an up move on the technical charts, however, we would need to see shares take out their 10-day move average. This resistance level actually more or less coincides with the stock’s 10-week moving average of approximately $4 per share. Essentially, all we can do in our investing exploits is place the odds in our favor as much as possible. The first reason why we remain bullish on Orion is down to the company’s improving financials. In the recent second quarter earnings report, for example, we witnessed top-line growth once more both sequentially and over the same period of 12 months prior. LED retrofit sales drove sales forward in the quarter.
In saying this, present trading conditions are really separating the wheat from the chaff with respect to supply chain efficiencies. Although Orion (being predominantly a US-based manufacturer) is in an advantageous position here over some of its struggling counterparts, the company still sources components in international markets. Thankfully up to now, the firm has been able to execute with respect to getting goods to its facilities in a timely manner. Shareholders will obviously be hoping this trend continues going forward as market share gains will undoubtedly be the end result here.
Suffice it to say, Orion continues to execute in areas where it has control. It is in other areas (such as how well Orion’s customers are sourcing their own material) where sales and profitability may get affected due to delays in project starts. The financials though have not been demonstrating this risk as EBITDA of $5.4 million and net earnings of $3.7 million in the recently reported second quarter numbers were well up sequentially as well as against the same quarter of 12 months prior. Furthermore, operating margins continue to increase (10.2% TTM) and the interest expense is negligible on the income statement. Suffice it to say, the company’s growing profitability is leading to cash flow and shareholder equity gains. This is an encouraging start.
Another clear tailwind is how countries are demanding that companies and citizens alike reduce their carbon footprints as much as possible. The great thing here for Orion is that the return on investment for LED offerings over conventional lighting can be calculated very accurately as opposed to other industries. Take the heating industry for example and the renewable solar panel option which in many countries is still only being used to heat water for companies due to the lack of sunlight. The ROI in these types of projects remains very high when one compares this option to using electricity, oil or gas to heat the water. On the contrary, as we can see below, Orion has completed multi-million projects where the return on investment can come in under 4 years. These […]