Graffiti etched into walls of the ancient city of Aphrodisias reveals life some 1,500 years ago, including gladiator combat, chariot racing and religious fighting.
- EFOI manufactures one of the most reliable tubular LED lamps in the industry, offering an incredible 10-Year warranty;
- The LED lighting market is expected to grow 45% per year, reaching sales of $63 billion by 2020;
- Nearly 40% of the stock price was in cash at year-end 2015
Energy Focus (NASDAQ:EFOI) is a Solon, Ohio, based manufacturer of LED lighting products. EFOI is a microcap stock, with a market cap of only $85 million. James Tu, founder of 5 Elements Global Advisors (a clean energy fund), became Executive Chairman and CEO in 2012 and began the company’s current emphasis on LED products.
Working with the US Navy, DOE and DARPA, Energy Focus has developed a superior tubular LED lamp. Energy Focus’ unique selling proposition is that they are currently the only domestic manufacturer of LED lamps certified by the US Navy to provide replacements for the existing fluorescent lighting on its warships.
These military-grade LED tubes by Energy Focus are amazing devices, impervious to EMF pulse, physical shocks, very reliable, and durable. The Navy tested them on several ships in 2013 and 2014 and last year started buying them in mass. The company currently has products in 30% of the Navy’s fleet, and last year added its first foreign navy, the Australian Navy, to its customer base.
In 2015, Energy Focus introduced a commercial tubular LED product (“Intellitube”) which they hope will replace the military sales when the complete US Naval fleet has been retrofitted (in 2 or 3 years). The margins are lower in the commercial market and it is an open question how EFOI will fare in this highly competitive market based largely on price. But EFOI arguably has the most advanced and reliable product in the market thanks to their work with the Navy.
EFOI’s first commercial installation of tubular LEDs (“TLED”) reached a 5-year anniversary in 2015. With a performance reliability rate of 99.8%, as a mere 2 out of 930 TLEDs burnt out during the first 5 years. This performance virtually eliminated the need for labor costs of frequent lamp replacements associated with fluorescent lighting. EFOI offers an incredible 10-year warranty on their tubular LED lamps, 5 years longer than industry standard.
LED lighting products are coming to market rapidly. Suppliers carry LED lamps from over 150 different manufacturers (many Chinese of questionable reliability) to fit the various needs of consumers and businesses. Frequent product introductions have characterized the LED lighting industry. There is a highly competitive pricing environment.
The Market and its Potential
LEDs are quickly becoming the efficient lighting technology of choice, rapidly gaining on Fluorescent tubes and CFLs. The market potential is huge, as linear fluorescent tubes (which haven’t changed much since the 1940’s) comprise about 70% of commercial lighting in the US. Penetration is still very low, as LED’s occupy only 1% of the linear fixture lighting market (DOE 2014).
LED lamps offer energy savings (consume 50–85% less energy than fluorescents), labor savings (last 3-10x longer, extending time between bulb replacement) and generate 90% less heat than incandescent (saves on HVAC loading). Switching to LED lighting is one of the simplest energy efficiency projects an organization can undertake, with an economic payback often less than a year.
The LED market is still in its infancy. The LED lighting market is expected to grow 45% per year through 2020. LED sales are anticipated to reach $63.1 billion by 2020. LED manufacturers are leveraging economies of scale to achieve price points attractive to users. Markets appear to be moving toward 100% LED replacement of existing technology including incandescent bulbs.
Strong sales of EFOI’s proprietary tubular LED product to the US Navy has been the stock’s main catalyst. However, they are rapidly expanding into the commercial market. The company’s long-term target is +50% organic sales growth.
Net sales for the full 2015 year was $64.4 million, an increase of 184% compared to 2014. Commercial product sales increased 148% as EFOI continued to penetrate markets of education, industrial manufacturers, national retailers and hospitals. Military maritime product sales increased 196% as a result of continued high volume sales to distributors for the U.S. Navy.
I’m interested in EFOI due to their excellent return on capital and Gross Margin of 42%. Energy Focus currently has no debt (debt was converted to equity last year). The stock price spiked from $4 to $27 last year as sales to the US Navy ramped up, then fell hard and has settled around $7.20 recently. EFOI has about $15M of remaining net operating loss carry-forwards to offset future taxable income. Net income from continuing operations was $9.5 million in 2015.
In the 4th Quarter 2015 sales to the Navy fell sharply, reportedly due to a short-term delay of military funding, which is expected to be back on track in 2016.
EFOI has had several rounds of equity financing, most recently at $16.50 per share.
On March 16th a director purchased $24,000 of stock at $8.05 per share.
Key Variables and their Predictability
The product mix in 2015 was 80/20 military/commercial. Energy Focus knows they must succeed in the commercial market as sales to the military will eventually reach a point of diminishing returns.
Sales to the US Navy fell to $10M in the 4th Quarter 2015, and are expected to stabilize around $10-15M per quarter. Most notably, in the fourth quarter of 2015, EFOI saw accelerating growth momentum for the commercial lines business, which generated $6.9 million in sales, almost five times the sales a year ago, and 107% increase from third quarter 2015.
If military sales are $40M in 2016, and commercial sales simply remain at 4Q 2015 levels, 2016 revenue would be around $68M (compared to $64M for 2015). This would be a no-growth scenario, and perhaps is a worst-case.
Commercial sales continue to impress, however. “Our growth right now is pretty much limited by the ability for us to expand our staff” according to the CEO. If commercial sales continue growing, sales to the US Navy stabilize and 2015 profit margins hold up, the stock price should resume its upward momentum.
Notable commercial sales made during 2015 include: a 2 million square foot factory of the largest tire manufacturer in the world that operates 140 factories worldwide; the first 17 malls of a Fortune 500 mall operator with 120 locations throughout the US; a large private university in New York City; and numerous school districts throughout the country. They also made inroads into the VA Hospital system and the federal prison system. EFOI retrofitted a total of 41 school districts, entered into the largest healthcare retrofit contract ever in the country with the Cleveland Clinic, obtained initial sales with 10 national accounts with over 3,800 locations. They have also initiated an exclusive partnership with the US Green Building Council, the premier global leader in building sustainability standards to jointly promote LED lighting in the K-12 school space.
Here’s how Roy Williams’ UNC Tar Heels has success against Syracuse tough 2-3 Zone. The movement is a 3-Out, 2-In with High/Low Post switches. Look for it this weekend when North Carolina meets the Orangemen in the NCAA Final Four on Saturday night:
In a 2001 Fortune magazine article, Warren Buffett commented that the ratio of stock market capitalization to GDP is “probably the single best measure of where valuations stand at any given moment.”
The present ratio of MarketCap/GDP is about 1.2, which translates to nominal total returns (including dividends) in the S&P 500 of about 2% annually over the coming 12 years. Unfortunately, this just reflects objective evidence that has remained reliable over a century of market cycles.
Individual investors can fight back against these abysmal returns in two ways:
- Individual stock selection: see the HWWP Portfolio Page
- Value-weighted Asset Allocation: see Optimal Asset Allocation
Especially when nuclear weapons are involved and you don’t—you can’t—know what the enemy is up to, and you’re scared. Then it helps (it helps a lot) to be calm.
The world owes an enormous debt to a quiet, steady Russian naval officer who probably saved my life. And yours. And everyone you know. Even those of you who weren’t yet born. I want to tell his story …
It’s October 1962, the height of the Cuban missile crisis, and there’s a Soviet submarine in the Caribbean that’s been spotted by the American Navy. President Kennedy has blockaded Cuba. No sea traffic is permitted through.
The sub is hiding in the ocean, and the Americans are dropping depth charges left and right of the hull. Inside, the sub is rocking, shaking with each new explosion. What the Americans don’t know is that this sub has a tactical nuclear torpedo on board, available to launch, and that the Russian captain is asking himself, Shall I fire?
The blind cavefish can actually walk and crawl up waterfalls like a four-footed animal; researchers are calling it a major discovery.
It walks, it crawls, it’s a blind cave-dwelling fish that lives in Thailand and scientists have never seen anything like it before. Welcome to the world, little Cryptotora thamicola.
“Fishes have adapted a number of different behaviors to move out of the water, but none have been described as being able to walk on land with a tetrapod-like gait,” notes the study in which the new species is described. “Here we show that the blind cavefish C. thamicola walks and climbs waterfalls with a salamander-like diagonal-couplets lateral sequence gait and has evolved a robust pelvic girdle that shares morphological features associated with terrestrial vertebrates.” Wow!
The researchers from New Jersey Institute of Technology (NJIT), who observed C. thamicola walking on rough and smooth wet surfaces while out of water, say that the discovery has implications for understanding how land-walking anatomy evolved during the transition from fins to limbs, which began around 420 million years ago.
Of the novel anatomy seen in C. thamicola, researcher on the study Brooke E. Flammang says, “It possesses morphological features that have previously only been attributed to tetrapods. The pelvis and vertebral column of this fish allow it to support its body weight against gravity and provide large sites for muscle attachment for walking.” She adds, “This research gives us insight into the plasticity of the fish body plan and the convergent morphological features that were seen in the evolution of tetrapods.”
It’s basically a video game slam.
Lee Sedol had seen all the tricks. He knew all the moves. As one of the world’s best and most experienced players of the complex board game Go, it was difficult to surprise him. But halfway through his first match against AlphaGo, the artificially intelligent player developed by Google DeepMind, Lee was already flabbergasted.
AlphaGo’s moves throughout the competition, which it won earlier this month, four games to one, weren’t just notable for their effectiveness. The AI also came up with entirely new ways of approaching a game that originated in China two or three millennia ago and has been played obsessively since then. By their fourth game, even Lee was thinking differently about Go and its deceptively simple grid.
The AlphaGo-Lee Sedol matchup was an intense contest between human and artificial intelligence. But it also contained several moves made by both man and machine that were outlandish, brilliant, creative, foolish, and even beautiful. Deconstructing the gameplay helps explain why AlphaGo’s achievement is even more notable than it may seem on the surface and points to a fascinating future for AI.