Echelon (Nasdaq:ELON) up Last Week 23% - Is There A Deal to Be Announced?

Sep 22, 2008
Author: SCP Editor

September 22, 2008 – Echelon (Nasdaq:ELON) has been trading with relative strength of late, seeing its stock trade higher in the midst of last week’s selloff Monday through Wednesday, up 5%,on stronger than average volume, and by week end, having posted a 23% gain. There weren’t any news announcements issued by management which can be directly attributed to the stock’s performance, but we think that an announcement from Southern California Edison may be worth paying attention to. 

 Last week, Southern California Edison announced that between 2009 and 2012, more than 5 million SCE customers will receive new “smart” meters. The Edison SmartConnect system is set to allow customers with energy-smart thermostats and appliances to automatically respond during critical peak pricing and grid reliability events – reducing overall peak power consumption by about 1,000MW, and greenhouse gases by a minimum of 365,000 metric tons per year.  

Echelon and SCE have a long-standing business relationship, having previously collaborated to deliver Echelon’s LonWorks enabled integration for SCE’s peak-load reduction program.  

Since that time, Echelon has made strides developing its smart metering (NES System) technology. More than 27 million homes are already on a smart grid using the underlying technology of the NES System. We think that there is a reasonable opportunity for Echelon to get the SCE SmartConnect program business, and speculation that this is a possibility could be buoying the stock of late. But beyond SCE, there are plenty of other opportunities for growth in Echelon’s smart metering business, as secular trends driving that growth are firmly in place.

Echelon’s smart metering solutions should continue to benefit from increasing populations and per-person energy consumption. Against this backdrop, governments and utilities are looking for ways to better conserve and shift consumption away from periods of peak demand. Customers will be able to save money by moving away from consumption during afternoon and peak hours.  Industry experts project that smart meters will be in 89% of North America households by 2012. There are about 1.5 billion electricity meters worldwide, and about 80% of them are not ‘smart’.

Overview on Echelon

·         Strong IP – more than 100 patents issued/pending
·         No debt, with about $105 million in cash & securities
·         FY2007 revenue of $137.6 million, up 140% Y.Y
·         Two product lines – LonWorks and NES
·         NES installs with leading European utilities (Germany, Sweden and Russia) and partnership with Duke Energy in America.   

The markets are pulling back again this morning amidst speculation about the impact and efficacy of the government’s bailout of the financial services industry, creating further weakness in Echelon’s stock. In light of Echelon’s proven technology, the timeliness of its solutions in addressing critical issues such as energy management and the need to upgrade the grid’s technology, we see the pullback as an opportunity to accumulate. As we noted above, the stock has been performing relatively well in the midst of the volatility over the past week or so, and we think it is not unreasonable to attribute some of the strength to speculation about the SCE opportunity. To be sure, with 1.5 billion meters out there, 80% of which need to get upgraded, there will be plenty more opportunities for ELON.