What a brutal six months it’s been for Ameresco. The stock has dropped 32.8% and now trades at $27.92, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Ameresco, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Ameresco Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why AMRC doesn't excite us and a stock we'd rather own.
1. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Ameresco, its EPS declined by 5.4% annually over the last five years while its revenue grew by 13.4%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Ameresco’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 28.7%, meaning it lit $28.68 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Ameresco burned through $407.4 million of cash over the last year, and its $1.95 billion of debt exceeds the $71.79 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Ameresco’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Ameresco until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Ameresco’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 24.3× forward P/E (or $27.92 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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