Genie Energy Stock: Possible Value Play But Not A Compelling One (NYSE:GNE)

Investment Thesis

Genie Energy Ltd. (NYSE:GNE) has a cyclical business model that is generating revenue with a fluctuating trend over the last decade. In the long run, investors are not expected to benefit significantly in terms of stock appreciation.

According to Finviz, GNE is under the utility sector, which is perceived to be defensive. Defensive stocks are expected to offer more rewarding dividends to their shareholders. Unfortunately, when compared to peers, GNE is lagging behind its peers in terms of dividend yields.

While GNE neither fares well as a growth nor a defensive stock, the silver lining is that GNE is significantly undervalued compared to its peers. This makes it a possible value play for value investors.

Business Overview

According to the company’s annual report:

Genie purchases electricity and natural gas on the wholesale markets and resells these commodities to GRE’s REPs’ customers. The positive difference between the net sales price of electricity and natural gas sold to its customers and the cost of their electricity and natural gas supplies and related costs are the REP businesses’ gross profits.

GNE is a reseller (as opposed to a producer) of energy from the wholesale market to retailer consumers. Hence, it is relatively asset-light compared to energy producers that need to own and maintain plants and equipment for energy production.

The company comprises 2 main businesses: Genie Retail Energy (“GRE”) and Genie Renewables.

• GRE is responsible for providing ‘traditional, fossil-fueled electricity and/or natural gas to residential and small business customers. Its customers include the US states of Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Texas, Rhode Island, and Washington, D.C. From the revenue breakdown, we can observe the lion’s share of revenue comes from the provision of electricity. Revenue from Natural Gas is relatively insignificant.

• Genie Renewables, as the name suggests, is responsible for providing ‘renewable’ sources of energy, which are primarily solar energy solutions. Such solutions also include energy brokerage and advisory services. From the revenue reported in the latest annual report, it is still a very small percentage (About 4.7%) compared to its GRE segment.

Income Statement:

From the income statement compiled by Seeking Alpha, we can observe that GNE’s top-line long-term revenue trend over the last decade is largely stagnant. Compared to 2013’s revenue of $279.9M, the current revenue of $304 is just an increment of about $25. This translates to about a 9% increase over the last 9 years or just 1% per year.

In spite of its stagnant revenue trend, its bottom-line operating income appears to be increasing consistently, especially over the last 3 years.

This implies GNE’s profits are mostly derived from cost-cutting measures rather than organic growth. The recent increase in bottom-line operating income is largely due to lower operating costs, primarily “customer acquisition expenses”. We can understand this from the annual report:

like other retail providers, we suspended our face-to-face customer acquisition programs in March 2020 as public health measures were implemented to combat COVID-19, resulting in a decrease in gross meter acquisitions and a slight reduction in the U.S. domestic meters served. The reduction in gross meter acquisitions decreased our customer acquisition expenses in 2021.

The company’s selling expense consists primarily of sales commissions paid to independent agents and marketing costs, which are the primary costs associated with the acquisition of customers. With fewer sales activities as a result of the pandemic, revenue growth over the last 3 years stagnated, but the reduction in selling expenses is even larger, leading to an overall higher operating income.

Quantitatively, total revenue decreased by only a marginal 1-digit percentage value, but the reduction in overall operating expense is in the double digits from 2021 to 2022.

Overall, the recent good bottom line results were due to cost cutting, not growth of the business. Hence, in my opinion, this growth is not expected to be long-lasting.

Balance Sheet:

Looking at the balance sheet, the company has an unusual increase in the cash balance, which we understand was due to the sale of 2 of its businesses, ‘Lumo Sweden’ and ‘Orbit Energy’:

This sale in assets is expected to be non-recurring and therefore, we expect this improvement in cash balance to be also short-lived.

We look at the balance sheet compiled by Seeking Alpha over the last decade to get more insights:

Overall:

• The company’s most liquid assets of ‘Total Cash & ST Investments’ has been decreasing since 2013 and only go bumped up in the last 2 years due to the sale of some business operations as mentioned earlier. While it is good for the company to accumulate more cash on its balance sheet, this extra cash was not due to increased sales or improvement in its business model. Hence, the recent increase in cash balance is likely to be short-lived.
• In spite of this decreasing cash balance, if we look at the trend of its current ratio, the company still has a healthy amount of cash-generating assets that consistently outstripped its current liabilities, giving it a positive working capital since 2013.
• In the last 2 years, the company has had relatively low debt. From the table, I consider a Debt/EBITDA ratio lower than 30% to be ‘low’ (highlighted in green). If we observe this ratio, it is lower than 30% in most years. Currently, this ratio sits at 2.37%. This means the company can easily pay off its debt within the same financial year using the ‘cash profit’ generated by the company’s operations, without having to dip into its cash balance.

Overall, the company’s balance sheet is considered healthy.

Cash Flow

We infer from the cash flow figures compiled by Seeking Alpha:

The operating cash flow was irregular from 2013 to 2017, toggling between positive and negative territories. Since, 2018, it has turned positive and consistently remains so until now. This positive cash flow from 2018 is largely aligned with its net income since 2018, which also turned positive in the same year 2018.

GNE has spent very little on capital expenditure (“CAPEX”). According to the annual report, this is an inherent characteristic of all “retail energy providers” (or REPs) in general:

REPs generally have no significant fixed assets and low levels of capital expenditure

Due to the extremely low CAPEX, the cash generated by operations is able to largely trickle down to its free cash flow (“FCF”). On average, the GNE’s FCF has increased by 58% since 2018, which is a very stellar rate.

However, as discussed earlier, the profit from GNE is largely due to cost-cutting measures and not organic growth as a result of a superior business model. Hence, I have reservations about whether the current rate of increase in FCF is sustainable.

Cyclical Business Model

GNE has a cyclical business model. The cyclical nature of the business was explicitly described by the management during the latest earnings call:

Apparently, over the last decade, this cyclical growth has led to a fluctuating top-line revenue.

Due to its cyclical business model, GNE is not suitable for investors looking for growth stocks for long-term investment.

Dividends

If GNE is not a good growth stock, is it a good dividend stock? Let’s compare the dividends with its peers to find out. According to Morningstar, GNE competes with the following 2 companies:

• Consolidated Edison, Inc. (ED)
• Duke Energy Corp (DUK)

We compare the dividend compiled by Seeking Alpha:

From all timeframes, GNE is clearly lagging behind its competitors in terms of rewarding shareholders with dividends.

Valuation

If GNE is neither a good growth nor dividend stock to invest in, can it be a good value play for investors? We compare the valuation ratios compiled by Seeking Alpha:

At one glance, we can observe that with the exception of P/B, all other valuation ratios of GNE performed better than its competitors.

This makes GNE a possible value play for investors looking to make a short-term profit by buying low and selling when the company becomes fair or overvalued again (in contrast to a buy-and-hold strategy).

Conclusion

In terms of growth, the recent stellar gains made in bottom-line profits are the results of cost-cutting measures and non-recurring sales of some of the company’s assets. These recent gains are not expected to be sustainable in the long run.

As a defensive company in the utility sector, GNE does not offer a dividend yield that is superior to its peers.

However, as a reseller (not producer) of energy from wholesalers, GNE does have the advantage of incurring low CAPEX since it does not need to own energy plants and equipment used for the production of energy. The company is also significantly undervalued compared to its peers.

Overall, GNE stock is only suitable for value investors hoping to make a short to medium-term profit when the company becomes overvalued again.