Fish or Cut Bait: Echelon connects with
investors
By Paul R. La Monica
Redherring.com, October 09, 2000
When I first asked readers to start sending me picks for the Fish
or Cut Bait Reader Index a few months ago, I received numerous
emails recommending the widely held large-cap techs, prominent
companies like Cisco Systems (Nasdaq: CSCO), JDS Uniphase
(Nasdaq: JDSU), and EMC (NYSE: EMC).
But one stock kept coming up that threw me for a bit of a loop.
Several readers enthusiastically endorsed a company called
Echelon (Nasdaq: ELON), a relatively small company that makes
control networking devices. Before these emails, I had never
heard about the company, so at first I was skeptical of including
the company in the FOCB Reader Index. Echelon has scant
analyst coverage and very little institutional support, as mutual
funds own just 1 percent of the stock according to fund research
firm Morningstar.
Nonetheless, the fact that so many readers recommended the
stock piqued my interest, so I did some research on the company
and eventually decided to put it in the Index. Why? Well, for one,
this isn't some pre-revenue (isn't that the silliest venture capital
term?) startup that has nothing more than an idea going for it.
The company has been around since 1988 and was founded by
former Apple Computer (Nasdaq: AAPL) chairman Mike Markkula.
Echelon had revenue of about $40 million last year thanks to a
product called LonWorks that allows everyday devices to
communicate with each other and also can be monitored over the
Internet.
THE BILL JOY PROPHECY
Right now, Echelon's primary business is networking building
devices such as elevators and heating and lighting systems. It's
not all that boring though. LonWorks is also used to control the
lavish water fountain show at the Bellagio casino in Las Vegas.
(Trust me, you haven't truly lived until you've seen cascading
towers of water choreographed to Aaron Copland's Appalachian
Spring and All Night Long by Lionel Richie.)
But what is really intriguing about this company is the vast
potential to apply LonWorks to the home. Sun Microsystems
(Nasdaq: SUNW) cofounder Bill Joy has shared his vision about a
world where all electrical devices will be connected to each other,
and Echelon stands to be a big beneficiary from this trend. As a
matter of fact, Sun and Cisco both announced last November that
they would work with Echelon to develop a standard for networking
everyday devices.
"It's becoming more and more obvious that Bill Joy is right, and
devices are going to be connected to each other and the
Internet," says Ken Oshman, Echelon's CEO. According to figures
from research group IDC, the market for Internet appliances in
the home will grow to $17.8 billion by 2004.
Mr. Oshman says that about 20 percent of the company's revenue
comes from home networking but that he expects this business to
be the fastest growing segment. In June, Echelon's home
networking aspirations received a big boost when Italian utility
Enel (NYSE: EN) announced that it would begin installing digital
electricity meters with LonWorks in them in about 27 million
homes over the next three years. Mr. Oshman says the deal could
potentially generate about $300 million in revenue for Echelon,
and, more importantly, it opens up the possibility that makers of
appliances could come to Echelon for LonWorks devices so that
they can be connected to the electricity meters.
So why is the stock so thinly followed? Brett Miller, an analyst with
A.G. Edwards, says part of the problem is that although Echelon is
a networking company it isn't involved in the more glamorous
area of data networking. Mr. Oshman may call his company "the
Cisco of everyday devices," but Wall Street seems to have found it
tough to get too excited about a company whose major customers
are manufacturing companies like Honeywell (NYSE: HON) and
Johnson Controls (NYSE: JCI). "These aren't sexy companies," Mr.
Miller says.
LOOKING AT LONWORLD
But as the home networking market grows, Echelon may find itself
as a more trendy investment. Mr. Miller says there are two
catalysts on the near-term horizon that could have an impact on
the stock. On October 18 and 19, Echelon will host its annual
LonWorld conference in Orlando, Florida, and he expects several
product announcements to come from this event. The company is
also set to report third-quarter earnings on October 23. The
consensus estimate is for Echelon to break even for the quarter.
And in January, the International Consumer Electronics Show could
yield some positive buzz about the company as home networking
is listed as one of five technologies to watch according to the CES
conference Web site.
From a financial standpoint, the company looks solid. Echelon has
no debt. Gross margins were 63 percent in the second quarter,
and the company is continuing to invest a sizable portion of
revenue into research and development, approximately 23
percent. Echelon is expected to break even this year and earn 22
cents a share next year.
It's tough to call the stock cheap however, trading at about 120
times 2001 earnings estimates. Still, Echelon is much more of a
bargain now than it was earlier in the year, when it got caught up
in the frenzied environment for tech stocks. At about $27 a share,
Echelon is 76 percent off the 52-week high of $111.44 the stock
hit in March. That was certainly a ridiculous price for the stock,
especially because analysts weren't even expecting the company
to be profitable. It was the big Enel contract in June that caused
analysts to revise their forecasts.
Investors need to keep in mind, though, that the stock will
probably continue to be very volatile. I would not suggest that the
faint of heart buy Echelon. But there aren't too many companies
that are really primed to take major advantage of this market.
"Echelon is a dominant player in a market opportunity that is just
starting," says John Todd, an analyst with Thomas Weisel
Partners.
It stands to reason that the best long-term investments in home
networking will not be the companies that make all the cool
Internet-connected appliances, but rather those networking
companies like Echelon, in the same way that companies like
Cisco and Juniper Networks (Nasdaq: JNPR) are the biggest
benefactors of the explosion in data networking. |
