Thank You, Thank You, The Spreadsheet over the Chart

Ever so often, Wall Street declares a blue light special.

Macro issues such as the credit crisis and the global economy cause money to move out of equities and a falling tide drops all boats.

Then it becomes a battle of the chart vs. the spreadsheet.  Let me explain.

When the chart looks bad (as many do right now) the perception of the current price incorrectly impacts peoples perception of the value of the company. The spreadsheet shows us that a company is undervalued, but the chart says stay away -- which do you trust?

A.  The spreadsheet.

As i write this ENOC is:

1)  Growing Revenue at a 100% clip, likely to slow to a 75% clip next year (our number)

2) Completely based on annuity (vs. new sales) revenues. Excellent forward visibility for those that have the right spreadsheet

3) Publicly committed to being cash positive in the second half of the year (we think they hit that or do better)

4) Likely to do over 100M this year (we think they do that or better)

5) Gaining in marketshare --rapidly becoming the industry leader

6) Well set in early stage investments for "encore" product offerings (Beyond Demand Response into Energy Procurement and Energy Efficiency)

7) Unmercifully whipsawed by the stock traders using this as an oil proxy (which it is not)

8) Priced at 200M while having over 50M in cash 

In terms of price action, the dynamic seems pretty clear (to us). Momentum players piled in on the way up to 25, the 'over bailed' on the way down to 10.

Chart readers and Ouija boards defined the price movement, but we see something better in the spreadsheet.

When the chart and the spreadsheet disagree, trust the chart for the 5 to 15 day day view, trust the spreadsheet if you are an investor. Our spreadsheet has an awful lot of green colored cells.

Didn't think it would get this low. Thanks that it did!

Q2: More evidence of the investment thesis

Q2: Revenues up 97%, Expenses up 53%. What's not to like.

PJM revenues started kicking in. The market cheered the raising of the revenue guidance and the stock took off to 18 again as the momentum players had a little fun. But then the momo's cashed out and the stock traded back down below 15.

Why? Probably because the company also raised expense guidance towards the high end of the range and said that the incremental revenue would end up being profit neutral.

Wall Street mistaken view: You (ENOC) are still too spend happy

Our View: Whippee -- zero cost investment in a great business!

What's the difference: Until you can calculate the NPV of a new customer or MegaWatt under contact you can't really tell if it is a good idea or a bad idea to invest incremental revenues or let them fall to the bottom line. The company can calculate that. Wall Street either can't, isn't, or is freaked by young guys spending money -- but this isn't that gig -- these guys know what they're doing.

Our thesis: Inflection point has moved out to about 160M- 170M level but returns after inflection point are near software levels. Marketshare matters as the industry is developing. The market is misunderstanding the near term pickup in PJM prices which ENOC will use to get to profitability faster. Q3 will be a positive surprise. Then the market will fret over seasonality. Volatility will continue with momentum players whipsawing this thing. By Q3 2009 it will all be understood and appreciated and the company will be worth 600M. (that's our view).

Traders vs. Investors

We've tried to think through who's buying right now and who's selling and we believe the traders are in control of the recent price action. Here's why.

1) Sharp up moves followed by slow declines have been the recent pattern, and there is a lot of juice in the options.

2) We believe momentum players and qunats have bid the stock up and then tried to slowly unwind their positions or are having stop losses trigger if they bought at the wrong part of the up cycle.

3) Option traders that have covered calls (note the high open interest in the Sept 15 calls) may be selling the underlying when it drops below 15 and putting in a program trade to unwind the call if the stock rises. This would be done to lock in an existing profit in the trade and get the benefit of the cash from selling the underlying.

4) Investors have no real news to alter their risk/reward views. The last quarter's earnings inspired some aggressive investors to come in, but it's clear that the September quarter will really be the pivotal one (full quarter of PJM revenues, should be cash positive, etc). So the brave investors have already taken a position, and are in a wait and see mode before increasing that position. Other investors may be waiting for the June (but probably the September quarter) to sound the all clear signal.

Net net: if you believe in the business model, and are comfortable with the risks that the utilities could exert undue influence over the regulators over time (which we are) then now is a great time to nibble at the dips. Profit from the transfer of stock from short term tranders to long term investors.

Con Ed's Favorable Terms

Con Edison announced expansion and extension of their existing Demand Response Program.

The new incentives take effect this summer. Size of the payment goes up and the minimum drops to a 50kw -- everyone in the pool! Now even smaller customers can make money while helping to avoid balckouts.

The monthly stipend stays.

All good for ENOC! I think the September or December quarter will really show the company moving past the inflection point. Then people will focus on the growth side of the story and not be spooked by the investment they are making in their future right now. This one just went public a bit early, and then saw the market open up more than they thought, and they had to invest for the opportunity.

Encouraging News from PJM Demand Side Response Symposium II

Notes from this weeks Demand Side
Response Symposium.

1) Demand Response is being pushed to become part of the capacity planning process. This may sound small but it's not. Today, when utilities do transmission capacity planning, they have not 'counted on' DR. However in the future they may very well do so. This means that DR has "grown up" in the utility's minds and more importantly, if they count on it instead of it being "upside" then they will continue to support it and demand for DR will go up over time.

2) Emergency DR pricing drops may be offset by short spiking LMP prices: As DR supply comes to the market in response to strong price signals, there is an 'over the horizon' concern that prices will ultimately drop. PJM has what the call the 'lost revenue' which is now going to be opened up to DR. I don't have all the specifics but will post them when I do, or please offer them in the comment section if you have them.

Net Net: PJM and FERC are interested in seeing price signals stay up so that more DR is brought to the market to help satisfy the long term planning needs for both peak generation and transmission capacity.

All this is BULLISH for ENOC.

Some progress is being made on a "NEW DR" program that we are ardent proponents of. FERC really seems to be on the ball. The 'industry inside' folks are smarter than people give them credit for. Stay tuned.

ENOC -- This may not be the inflection quarter

This quarter may not be inspiring for several reasons. If the market overreacts it may create an excellent opportunity to pick up more shares at what could be a long term bargain price.

Enernoc caused quite a stir with it's December '07 quarterly announcement. Earnings dissapointed and the stock dropped off a cliff. Revenue growth was impressive but overshadowed by the expense growth of company that has conviction about its future.

Now we look to the March quarter. A couple of things to keep in mind.

While revenues should be up nicely as part of the backlog started generating revenue, almost NONE of the PJM backlog will be generating revenue as the "Program Period" starts June 1st for the most popular PJM program.

This is despite the fact that ENOC has incurred (and I am almost sure fully expensed) the related sales and marketing costs

In addition, there was a large headcount ramp in Q4 '07. When headcount ramps, you often don't get the full effect of the expense growth until the following quarter.

Also, Enernoc's investments into energy procurement, while strategic, are unlikely to show up as a meaningful percentage of revenue for several quarters to come.

Q3 or Q4 should be the inflection quarter. The PJM revenues are significant, in part because the programs in PJM are quite juicy right now. Those revenues will participate for a full quarter in Q3. Enernoc has grown quickly, but smartly. Those investments in headcount and infrastructure should pay off later this year.

For those that are positive long term but uncertain in the short run a Covered Call strategy is worth looking at. Given the recent volatility there is plenty of value in the calls.

Play this one for the long term.

ENOC and CRM -- Deja Vu all over again?

ENOC and CRM -- déjà vu?

ENOC and CRM -- Two Birds of a Feather ?

By: Van Morris posted Feb 28, 2008, 8:09amEnernoc stock finished off its recent slide with a thump, driven by a conviction to invest for the opportunity.The sound byte was an earnings miss, which eclipsed a deeper story of fantastic growth and a ballooning backlog.

Lag times from sales expenses to revenue recognition are greatest in the congested PJM Region which currently has some of the juciest prices for capacity and energy.

So what do ENOC and CRM have in common? From an inside view, they can calculate the Net Present Value of a newly acquired customer, and they can track renewal rates.

I’m reminded of the multiple “you’re spending too much for growth” pullbacks that have occurred in Salesforce.com’s stock history – including the one that came within the first public year.

The risks are different, but the calculus is quite similar, and guide rational internal investment decisions.The company was on sale at a discount to their IPO price today.

Disclosure: I am now long the stock. Readers should know that our position could change without disclosure or updating this blog.