GEO Investing

GeoInvesting has uncovered what we believe to be another information arbitrage opportunity in Energy Focus Inc. (OOTC:EFOI). This time, it’s regarding clarity offered on the company’s conference call.

There was a lot of information on the call about growth and outlook that we weren’t able to discern due to a poor connection and corresponding automated transcripts that left out key words during points of the company’s guidance.  We took the time to reach out to the company’s investor relations firm, and we’ve obtained a clean copy of the company’s transcript for the call. This version of the transcript reveals, with particularity, several bullish statements regarding the company’s near term and future business prospects.

Information Arbitrage from Clean Transcript

The key takeaway from the clean transcript was that it appeared that the current level of sales and net income in Q1 was not an aberration. If you annualize the company’s first quarter, you arrive at sales of about $52 million and EPS of around $0.50 for the full year. Current analyst estimates were for $45 million in revenue on a loss of $0.10 for the full year. We believe we’re ahead of the analysts, who will have to revise their outlooks accordingly.

Here are a few key points made by management, which lend themselves to a bullish view of the company:

  • During the first quarter, we continued to witness broadening adoption of our LED lighting products in the Navy channel and our commercial sales, although still quite small, are now starting to build pipeline and sales momentum. While US Navy product sales grew from $1.5 million in 1Q 2014 to $10.8 million, commercial, non-Navy product sales also grew 87% from $1.2 million to $2.3 million a year ago. We expect volumes from the Navy channel to remain robust and the growth from the commercial sales to continue to accelerate for the rest of the year as early pipeline opportunities start to materialize.
  • We believe that, barring very large sales opportunities that might warrant one-time discounts, gross margin over 35%, which remains our long-term goal, is here to stay for the remainder of 2015.
  • At this point, based on our current backlog and visible order pipeline, we believe that our record first quarter 2015 results will not be a blip of strength, but yet another level of quarterly sales run rate we aim to break through. Meantime, we continue to focus on blazing the trails and setting an ever-higher standard of excellence in the lighting industry, and growing the business over the long-term along the way. And needless to say, we remain confident of reaching our long-term annual growth target of 50% for the remainder of 2015.
  • As James said in the press release, this quarter is the first quarter where we were profitable from operations since our restructuring in the second half of 2013. We have added costs to our business as we build out an infrastructure that will support our growth, and we will continue to add costs as necessary.

In light of these revelations, our take is that we think the stock could move higher once these statements are fully disseminated and understood by the market. While we’re still working through our full analysis of the company, including our price target, a 15x P/E on our annualized estimates gives us a $7.50 starting point for a target price.

A small caveat that we’d also like to point out is the fact that it appears the company may have been a part of a small promotional campaign in 2013. It looks as if the company is going to be able to build upon the revenue growth and maintain margin, but it’s unclear to us whether or not it’s going to be able to control SG&A.

You can find a link to the full, clear version of the transcript here.

To see this and another stock that we believe are poised to go up on arbitrage, please go here.  We released the full note to our Premium Members yesterday, and they are already reaping profits!

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