Over the last six months, Ameresco’s shares have sunk to $25.63, producing a disappointing 12.5% loss - a stark contrast to the S&P 500’s 9% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Ameresco, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Ameresco Not Exciting?
Even though the stock has become cheaper, we’re cautious about Ameresco. Here are three reasons you should be careful with AMRC, plus one 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 12% annually over the last five years while its revenue grew by 13.1%. This tells us the company became less profitable on a per-share basis as it expanded.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 27.7%, meaning it lit $27.68 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 $326.5 million of cash over the last year, and its $2.05 billion of debt exceeds the $104 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 isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 24.5× forward P/E (or $25.63 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. Let us point you toward the most dominant software business in the world.
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