By Lisa Thompson
A perfect storm of opportunity could hit Revolution Lighting (NASDAQ:RVLT) in 2017 as a number of incentives converge at the company. Top of the list is the acceleration of LED spending as customers realize that LED usage is an undisputed way to save money. Secondly, prices are stabilizing and possibly even increasing right now in the industry, gating risk. Third, product development at Revolution and customer acceptance has pushed sales of higher margin products and fixtures. Fourth, 60 newly hired sales agents should begin contribute to sales success starting in Q2 2017. Fifth, company products have now been 100% approved by the Navy and the company expects to start bidding on contracts in the next few months. And finally sixth, a new administration focusing on “Buy American” should create increased opportunities for Revolution who has just complete an expensive and long process to prove compliance with the Buy America Act (BAA). The company has zero revenues built into company expectations for 2017 for the last two items providing considerable upside to estimates if these two programs gain traction for Revolution. These company controlled actions, combined with a more positive business environment from deregulation and potential government infrastructure programs could result in an exceptionally successful year for Revolution.
Given the revenue growth we expect this year, combined with margin improvement, we believe the stock is undervalued with a PE of only 11.5 times estimated 2017 non-GAAP EPS. Additionally, the company is well-position to reap the benefit of any increased government spending in infrastructure as well as a military modernization and build up as LED lights are an important part of any retrofit or renovation project of facilities or military vessels. Investors looking for a play in these two expected government spending programs might find Revolution Lighting particularly of interest.
- Revolution Lighting Technology is a pure play in the LED lighting products and services space, selling to the commercial, and industrial and government sectors.
- Revolution is exhibiting operating leverage that is beginning to deliver accelerating earnings. With its current structure it believes it can bring upwards of 26-28% of every dollar in revenue over $100 million to the bottom line. This means the company could go from $0.29 per share in earnings this past year to $0.50 in 2017 and $0.75 in 2018.
- Replacing incandescent and fluorescent lighting with LED fixtures and/or lamps typically produces measurably significant payback for customers. The industry is now at a point where LED prices are so low that significant savings are possible and deal sizes and opportunities are growing and easier to close. The payback period is lowered as utility and state incentives further reduce overall project costs.
- Unlike competitors, it has no legacy fluorescent lighting sales to cannibalize. The company growth reflects LED sales and installations alone. The company does not compete in the consumer market or direct to consumers, where extensive competition exists.
- The company is a consolidation play in an extremely fragmented market. It has brought together product companies, distributors, and turnkey solution providers who cross-pollinate and complement each other.
- Revolution has two opportunities that could provide big upsides to sales near term that are not in estimates. These are: successful penetration of the Navy and/or other military or government agencies, and sales based on the Buy America Act. The company just reached compliance for both programs and has not yet bid any projects based on them.
- Given expected earnings growth over 50% for the next two years, we believe RVLT common stock deserves at least a 25 PE multiple and could be worth $12.50 when looking at 2017 estimated earnings of $0.50 per share.
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