H.C. Wainwright Starts Energy Focus At Buy, Notes Strong LED Growth Potential

In a report published Thursday, HC Wainwright analyst Carter Driscoll initiated coverage of Energy Focus Inc (NASDAQ: EFOI) with a Buy rating and $11 price target. The analyst believes that the company has almost completed its strategic turnaround and is well positioned for strong growth going forward.

"Over the past two years, the company undertook a strategic turnaround that involved: (1) bringing in new management; (2) divesting legacy pool LED business in 2013; (3) completing debt conversion, reverse stock split and NASDAQ uplist in 2014; (4) closing its Nashville-based Solutions segment in 3Q14; and (5) investing in new LED technologies, new verticals and geographic markets," Driscoll reported.

These initiatives have been successful in driving profitability for Energy Focus in 1Q15, for the first time in 10 years. The company has also developed proprietary technology for the U.S. Navy, in the form of Intellitube, which is a disruptive tubular LED lamp. This technology helps lower the cost of retrofits as well as installation time.

According to the HC Wainwright report, "We believe the company will be able to use its technology to continue to expand within the Navy and to other government entities that are just beginning to retrofit their traditional lighting sources with LEDs."

Going forward, Energy Focus' strategy is to sustain profitability by further penetrating the government/military markets, as well as expanding with certain industrial/commercial segments, using its targeted retrofit LED solutions.

"Rather than vertically integrate or try to supply hundreds of lighting SKUs as some competitors do, EFOI wants to dominate a few verticals, limiting the need for huge working capital and limiting exposure to pricing pressure. We believe that military bases and hospitals could be the next verticals the company penetrates," Driscoll added.

Given that retrofit LED solutions offers a large market opportunity that is still in its nascent stage, the analyst believes that there is a very large target addressable market for the company. In addition, the stock valuation is attractive at present.