The past six months have been a windfall for Ameresco’s shareholders. The company’s stock price has jumped 287%, setting a new 52-week high of $39.10 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Ameresco, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is Ameresco Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons why AMRC doesn't excite us and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.
Ameresco has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16.5% gross margin over the last five years. That means Ameresco paid its suppliers a lot of money ($83.45 for every $100 in revenue) to run its business. 
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
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 30.5%, meaning it lit $30.48 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 $412.2 million of cash over the last year, and its $1.89 billion of debt exceeds the $81.63 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. Following the recent surge, the stock trades at 34.7× forward P/E (or $39.10 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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