J. Taylor's Gold, Energy, & Tech Stocks

Energy & Tech Stocks newsletter as of December 23, 2009. Our weekly telephone Hotline messages are normally recorded after the close of business as early as Friday night or as late as Saturday afternoons unless otherwise notified.

As always, all monetary quotes mentioned in this Hotline message are in U.S. dollars unless otherwise noted. The opinions expressed in this message are those of Jay Taylor only and they do not necessarily represent the opinions of Taylor Hard Money Advisors, Inc., the publisher of J Taylor’s Gold, Energy & Tech Stocks. The management of THMA may, from time to time, buy and sell shares of the companies recommended in J Taylor’s Gold, Energy & Tech Stocks newsletter and in this Hotline message. No statement or expression of any opinion contained either in this Hotline or in J Taylor’s Gold, Energy & Tech Stocks newsletter constitutes an offer to buy or sell the securities mentioned herein. __________________________________
Acro Energy Technologies Corp.
Website: www.acroenergy.com Business: Sales and installation of solar electricity generating systems, mostly for the residential
markets. The company’s focus is mostly in California.
Traded TSX: ART Shares Outstanding: 27,469,156 Fully Diluted: 30,689,156 Recent Price: C$0.23 Progress

Rating: A

I spoke with Marty Spake, the chief financial officer of Acro Energy Technologies Corp. (Acro) on Friday, December 18, 2009. Marty gave me an overview of the company and its prospects going forward, and they are indeed very bright, primarily because of funding that is now available to homeowners that was not available in the past. Until recently, a lack of funding for residential installation of solar systems, which average around $40,000 per home, was especially problematic, given the disappearance of equity from homes against which homeowners could borrow

A second reason the solar business is booming now is because solar panel costs have come down by approximately 50% over the past few years, from $4 per watt to $2/watt. That has significantly reduced installation costs. Still another positive for solar energy going forward has been some favorable tax legislation for homeowners who install solar systems. On top of that, there are some state tax incentives that help make these systems very economic for homeowners.

But the real breakthrough for this business has come from funding provided by a company named Sun Run. This is a private electric utility company. Sun Run funds the solar installation, and, in exchange, homeowners buy their electricity from Sun Run. The economics of Sun Run are enhanced by tax breaks given to partnership investors similar to those enjoyed in the oil and gas exploration business.

From the point of view of a homeowner in California, there is no reason not to buy a solar unit, because with the funding of Sun Run, he saves approximately 10%, or $15, per month on his electric utility bill without needing to invest any money. Of course, there may be an opportunity cost for the homeowner if he were able to fund the solar installation himself. But with most people unable to fund the installation, opportunity cost is not a consideration.

Profit Outlook
Management is providing the following guidance with respect to future earnings for Acro. These numbers are based solely on organic growth. The year 2010 projections are based on earnings growth operating entirely in existing locations. The 2011 projections assume some expansion of existing companies in the California Bay Area.

With current shares outstanding totaling 27,469,156, we are looking at possible earnings of $0.06 in 2010 and $0.14 in 2011. Operating cash flows (EBITDA) would sum up to $0.12 in 2010 and $0.24 in 2011. With the solar business very fragmented and with a large number of smaller operators, management is optimistic about the prospects of building the company through acquisitions, as it has done during the past year with three solar integrator companies. All three of these acquisitions are cash flow positive and have provided (or in the case of the third deal still to be closed will provide) positive cash flows to Acro.
Management has targeted future acquisitions that may or may not come to fruition. However, on the basis of those potential acquisitions, management has provided the following possible upside projections for the company:

The profit and EBITDA numbers are nearly double those of the strictly organic growth model. Of course, from a shareholders point of view, shareholder dilution shouldn’t be too onerous, as only about a third of the acquisition cost is expected to be with equity. Another third is expected to be funded from internal cash flow and the other third from vendor financing notes. Clearly a higher share price would be advantageous in terms of limiting future dilution. And without any knowledge at this stage as to how much the company might need to spend for its targeted acquisitions, it’s difficult to say what the numbers above will mean on a per share basis. However, if the company is simply able to execute its business plan from existing organic growth, anything it can add in terms of per-share cash-flow growth from acquisitions would be a plus.

RISKS:
Although the economics of the energy business is improving, thanks to lower panel costs and rising electricity rates, the industry still receives considerable subsidies both from the state and federal governments. Acro operates in California, where there is a notorious fiscal problem. Even though that state is very pro-green in its politics, one wonders if subsidies for anything, no matter how politically favorable, can be sustained into the future. Fortunately, federal tax breaks alone render the solar business in California attractive for homeowners as long as funding is available from firms like Sun Run.
A change in tax law that would reduce federal tax advantages appears unlikely at this point in time, given the Obama Administration’s inclination toward pro-green legislation. However, even the federal government, with its endless printing-press money, has limitations. We note recent rumors of possible downgrading of U.S. sovereign debt ratings, as has in fact happened in England. Such an event would likely cause the dollar to decline, making imported solar panels more expensive. It would most likely also send interest rates higher, thus leading to bigger federal deficits and eventually the possibility of reducing favorable tax legislation from the
federal government too. We don’t mean to imply these events are imminent. However, we want investors to be aware of the potential ramifications of some very real financial problems faced by various states and the federal government itself, as it seeks to stimulate the economy with printing-press money.

MANAGEMENT
Harry Fleming: Chief Executive Officer & Director - Harry Fleming is the founder of Acro Energy Technologies Corp., which is headquartered in Houston, Texas Since becoming chief executive officer for Acro Energy, Fleming has served as a source of information on the future of solar energy for consumers as well as the consolidation of solar integrators for investors. He has been quoted in The Houston Business Journal, The Houston Chronicle, The San Francisco Business Times, and on The Business Makers and Corporate Strategies radio shows, among other news outlets.

Fleming has almost 30 years of legal and business experience. In 2001, after obtaining his Master of Business Administration from Boston College, Fleming transitioned from legal work into investing in emerging growth companies. Drawing upon his legal experience in corporate finance and securities law, Fleming has focused much of his career on emerging growth companies, mergers and acquisitions, strategic business planning and alliances, and investor relations. He also has extensive experience with consolidating companies in the waste management industry. He also acted as general counsel and chief financial officer for several companies with an emphasis on start-up and growth strategies. He earned a Juris Doctorate from the University of Houston Law Center in 1983. He is admitted to practice law in the State of Texas and the Commonwealth of Massachusetts. He also is admitted to practice before the U.S. Supreme Court.

Nat Kreamer: Interim President, Director - Nat Kreamer started Sun Run, the leading provider of residential solar power purchase agreements. Previously, he worked in power industry consulting at PricewaterhouseCoopers. Prior to PricewaterhouseCoopers, Kreamer was a member of the Emissions and Clean Technology Ventures groups at the Enron Corporation. Kreamer holds an MBA from Rice University and a BS from Northwestern University. He is a U.S. Navy Officer (Reserves), recipient of the Bronze Star Medal, and Afghanistan war veteran. Marty Spake : Chief Financial Officer - Marty was the vice president responsible for mergers and acquisitions, investor relations, and strategic planning at Chicago Bridge & Iron. Before CB&I, he was the director of structured finance, business development, and strategic investments for Compaq. Prior to Compaq, he worked in financial planning and analysis for Sun Microsystems. Marty has an MBA from the Stanford Graduate School of Business and a BS from the United States Military Academy, West Point. He served in the U.S. Army as an artillery officer and is airborne- and air-assault qualified.

The company has a number of other talents in the areas of law and marketing that appear solid and capable of enabling the company to execute its business plans.

SUMMARY AND CONCLUSION
Based on what we can see at the moment, Acro appears to be a very undervalued stock, assuming it is able to carry out its organic growth projections shown above. To the extent it can increase per-share earnings and cash flows through acquisition, the upside would appear to be even greater.
What is the upside for this company? Currently with the stock selling at C$0.26, and with 27.5 million shares outstanding, it has a market cap of approximately US$6.75 million. Its projected EBITDA of C$6.6 million, or about US$6.2 million, means the stock is currently selling at slightly over 1 times projected cash flow for 2011, from organic growth alone.

We think a modest multiple of 5 times could very easily be in order, which would take the stock upward to $1.25 per share. A much more aggressive multiple and per-share price could be assigned by the market, depending on how rapidly the company grows and depending on how much dilution.

We believe the management of this company is capable of executing its organic business plan and very possibly much more than that, given likely acquisitions. The bottom line is this. At least given the present scenario, homeowners have nothing to lose by signing up with Sun Run, because they reduce their electricity costs into the future without having to lay out any funding up front. In California, the average homeowner saves about 10%, or $15, on his monthly bill of about $150. When times are tough and a large number of folks in California are having a tough time making their mortgage payments, any additional cash flow will be greatly coveted. An aggressive marketing program should help Acro make its goals for 2010, and if that happens, we would expect this company’s shares should rise significantly next year.