Wedbush Securities downgraded its rating on shares of Echelon Corp. (NASDAQ: ELON) to neutral from outperform and lowered its price target to $7 from $16, as Duke contract loss lowering visibility.
We downgrade shares of Echelon based on the cancellation of the Duke Edge Control Nodes (ECN) contract, providing firm evidence that, outside of Ohio, Duke plans no further near-term implementation of Echelon Smart Meters, said Craig Irwin, an analyst at Wedbush Securities.
Echelon announced that Duke cancelled the $14.5 million contract for ECN that was announced in Sept 2010. Echelon's management stated that while Duke completed successful product trials, the utility has no near-term plans for a wide-scale Smart Meter rollout, so it will not need the ECN product.
Contacts at Duke previously indicated the utility planned to implement the Echelon Smart Meters across its entire service territory, and Irwin expected units to be installed first in Indiana and Kentucky, and later in the Carolinas. He believes now it is prudent to consider the Duke project on long-term hold, eliminating the upside growth potential for Echelon.
Echelon reported third quarter revenue/GAAP earnings of $43.8 million/$0.02 per share versus Wedbush's revenue estimate of $44.0 million and loss estimate of $0.06. The consensus estimate revenue of $43.8 million and loss of $0.06 per share while the revenue guidance stood at $42.5 million to $44.5 million and the loss guidance at $0.05 to $0.08 per share.
Irwin said the company's earnings benefited about $0.03 per share on the reversal of about $1 million of prior stock compensation. Adjusted EPS was $0.04, above his break-even estimate and loss guidance of $0.03 to $0.00.
The company guided fourth quarter revenue guidance of $39 million to $41 million and loss of $0.04 to $0.07 per share, compared to Irwin's revenue estimate of $43.9 million and loss of $0.06 per share. The consensus estimates revenue of $39.1 million and loss of $0.11 per share.
The brokerage widened its 2011 fourth quarter loss per share estimate for Echelon to $0.13 from $0.06 and its 2012 loss estimate to $0.49 from $0.25. The brokerage lowered its fourth quarter revenue estimate to $41.0 million from $43.9 million, its 2011 estimate to $156.9 million from $160.1 million and its 2012 estimate to $165.5 million from $175 million.
Our target reflects a 1.9 times of price-to-revenue multiple (previously 4.0 times) on rolling forward 12-month estimates. We believe a 1.9 times forward 12-month revenue multiple is fair as this is at the low end of Echelon's historic range, reflecting lower growth visibility. A 1.9 times price-to-revenue multiple is also consistent with the long-term average Smart Grid peer trading multiple, said Irwin.
Echelon stock is trading down 15.15 percent at $6.05 on the NASDAQ Stock Market at 10:33 am EDT.