IPO Return, Treasury Risk

13 04 2010

If there’s one thing that most people painfully realized over the past couple years, it’s that there is risk in putting your money in anything in hopes of earning a return on investment.  Riding a company into bankruptcy is an obvious one.  I’ve done that several times by investing in fast-growing start-ups, initial public offerings (IPO) and stock options.  Invest $3,000 for 100 shares of common stock and a few years later the company emerges from bankruptcy (isn’t that a cute phrase – it sounds like a daffodil blooming in spring but it’s more like rummaging for your charred silverware after your house burned to the ground) … anyway that investment may “emerge” at 10 shares worth $6 apiece, or if they liquidate you get a check for 36 cents.

If you avoid Bernie Madoff funds, you can greatly reduce your risk by buying mutual funds, which more or less track the entire stock market.  Corporate bonds might be next.  In the case of bankruptcy, provided the government doesn’t take over the company, you are first in line to get your money back.  Next might be U.S. government bonds but I wouldn’t go near them now as their value moves in the opposite direction of interest rates.  Just take a look where interest rates are now compared to historic numbers and do the math.  You CAN lose a lot of money in bonds.  Then there are money market funds that invest in super safe short term treasuries, but right now you earn about nickel a month per $1,000 invested.  Finally, there’s cash in the bank, which earns even less or zero but at least the first $100,000 is insured by the feds (the minimum was increased to something but I don’t care).

Commercial and industrial facility owners can invest in energy efficiency.  Lighting would be the bonds of energy efficiency, with the exception that you’re virtually guaranteed a return on investment as long as you can do 5th grade math to ensure you aren’t being ripped off.  Beyond that, the vast majority of energy efficiency projects carry the full gamut of risk from guaranteed savings (which isn’t free) and just buying a new piece of expensive equipment or system that may not save you a dime or could even increase your energy costs.

The big money is in custom measures and the risk varies depending who is identifying the opportunities and who, if anyone, is calculating savings.  If you browse our website you will find we identify measures and quantify savings all the time.  For many large projects we take a two phase approach to the analysis.  Phase 1 is to identify opportunities and guesstimate cost and savings to within plus or minus 40%, which means a project guesstimated to have a 2 year payback may actually have a payback from less than a year to more than 4.5 years, with the most likely being 2 years.

Phase 2 is a detailed analysis, sometimes with quotes from contractors, and energy analysis based on specific equipment performance characteristics, construction documents, and metered data.  After Phase 2, the guesstimates are sharpened to within plus or minus 10%, perhaps.  Now that 2 year payback would range from 1.6 years to 2.4 years, with the most likely being 2 years.

So energy analysis can take your project from a completely unknown return on investment to something that is close to guaranteed, and if you want, that can be added too.  The cost of hiring a firm that knows what they’re doing, delivering both quantity and accuracy of cost and savings estimates, is considered by end-users to be anything from reasonable to outrageously expensive.  Owners with smaller facilities and especially government ones tend to be at the latter portion of that range.  Large industrials may be closer to the front.

But the kicker is, utilities that run efficiency programs often pay for a good share or all of the energy analysis, sometimes even both phases of analysis described above.  But yet, end users may baulk.  We recently completed phase 2 analyses that largely demonstrated our phase 1 estimates were pretty good and some representatives of customers were scoffing that phase 2 was a waste of money.  Well look at the “uncertainty analysis” above and tell me, would you use “free money” from the utility to shore up your investment certainty before you invest a dime to implement anything, OR NOT?

As my colleague says, “It’s a no BRAINER!  Gee willikers!”

As an investment, an energy efficiency project may pay for itself four or five times or even more over its lifetime.  Peter Lynch who ran the Fidelity Magellan fund during the 80s would call doubling your investment a one bagger; tripling, a two bagger and so on.  This makes energy efficiency a likely two bagger and in many cases a four bagger.  It’s a home run with the risk of a money market fund.

Why doesn’t everyone get on this ride?  There are many reasons; some good ones and some utterly stupid ones.

written by Jeffrey L. Ihnen, P.E., LEED AP

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