RenuEn: A Potential Turnaround Building A Nationwide Franchise 0 comments
Jun 24, 2014 12:55 PM | about stocks: RENU
RenuEn Corporation (OTCPK:RENU) is a renewable energy development, engineering, procurement, and construction ("EPC") company focused on solar, geothermal, and other renewable energy projects for residential and commercial clients. After experiencing some difficulties in the past, a new management team has shown some early signs of success in turning around the company.
In this article, we'll take a look at why investors may want to take a second look at the stock and what catalysts could further bolster its future prospects.
Existing Profitable Growth
RenuEn Corporation's primary focus is on residential solar water heating solutions in Florida. Under the Energy Policy Act of 2005, homeowners can receive a federal tax credit worth up to 30% of the water heater's cost and dramatically reduce their gas and electric bill over time. The smaller ticket price of these items has made them attractive compared to higher cost rooftop solar and other systems.
During the first quarter of 2014, the company reported revenue of $1,357,092 and net income of $128,527 compared to $137,000 in revenue and $11,000 in net income during the year ago period. CEO Jeff Nemes also indicated that the company had its best sales month ever in April 2014 with $800,000 in sales, which means that second quarter financial results could come in significantly higher.
The company's balance sheet also appears well positioned for growth, with $93,224 in net cash from operations contributing to $133,266 in cash on its balance sheet. While the company has a quick ratio below 1.0, its current ratio is above 1.0 and much of its long-term debt can be considered "friendly" debt. The refocusing on profitability should also help ensure that it has a low risk of default on its debt.
Undervalued with Catalysts
RenuEn Corporation generated approximately $0.004 per share in net income during the first quarter of 2014. Assuming no sequential growth, these figures would equate to net income of approximately $0.012 per share for FY 2014, valuing the stock at just 9.1x earnings. A PEG ratio of 1.0x would suggest that the market is assuming management will achieve long-term growth rates of less than 10%.
There are many indications that the management team can surpass these expectations and achieve a higher valuation. In particular, management plans to grow its footprint outside of Florida via a nationwide "dealership network" model that has already shown early signs of success. Management believes that it can implement such a model with little to no dilution or additional debt.
Earlier this month, the company also launched an in-house consumer finance division called RenuEn Finance Solutions ("RFS"). The new division will offer custom designed consumer finance programs for those looking for energy efficient home improvements. By providing its dealership network with new financing options, the firm could further leverage its growth and accelerate future sales.
Looking Ahead
RenuEn Corporation has already seen significant growth during the first two months of Q2 2014. According to the aforementioned press release, April and May sales were over $800,000, respectively, suggesting top-line revenue that exceeds $1.6 million. Management further indicated that they "expect to see million dollar months in the very near future" which would represent substantial growth rates.
The company's National Team is actively seeking dealers from both the renewable energy and exterior industries, such as home improvement companies, water treatment dealers, HVAC, and electrical contractors. By empowering these dealerships with in-house consumer financing, it aims to accelerate sales while improving its own profitability by reducing financed dealer fees.
With net margins of around 9.4% in Q1 2014, a full quarter of "million dollar months" would generate about $282,000 in net income and $0.009 in earnings per share. Annualizing these figures would represent earnings per share of about $0.034 or a P/E ratio of about 3.23x at the current $0.11 per share price. These figures demonstrate just how undervalued the stock could be if management executes.
Transparency & Risks
RenuEn Corporation trades on the OTC Markets' Pink Sheets and does not report with the U.S. Securities and Exchange Commission ("SEC"). While it remains current with the OTC Markets, the company plans to undergo an audit and then begin filing with the SEC over the near-term. The move will both help increase transparency for existing shareholders and potentially attract new investors.
There are a few other risks that investors should also keep in mind though:
Microcap Stock. The company's trades with a market capitalization of less than $5 million, which means that it's off limits for most institutional investors and has limited liquidity for investors to buy and sell. Large Debt. The company trades with a quick ratio of less than 1.0, which means that it has more liabilities than assets. While the debt is "friendly" and the firm is profitable, the risk of default remains in the cards for now. Insider Stakes. The company's insiders own the majority of the stock, which means that outside investors may have troubles implementing policies designed to unlock value, although it is a vote of confidence in the future. Takeaway Points
RenuEn Corporation provides energy efficient solutions that are attractive to consumers, particularly when accounting for federal tax credits. While the market assumes sub-10% growth rates, investors may want to reevaluate given the new management team's ability to execute and plans to build a nationwide dealership network that expands upon its already-profitable Florida-based business.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
