Energy Focus (EFOI) is a leading developer of sustainable LED lighting and lighting control technologies as well as UVC Disinfector solutions. The Solon, Ohio-based company has a proven track record of quality, reliability, and success in delivering healthy lighting for mission-critical facilities, such as the U.S. Navy, National Institutes of Health, and several other leading healthcare and educational institutions.

The company's shares have gained 42.2% in price over the past month, due primarily to its two new product launches. These products help protect consumers from COVID-19. Disinfectors nUVo Tower UVC air and nUVo Traveler are the two new products designed to destroy up to 99.9% of airborne pathogens in rooms 1,000 cubic feet in size.

However, the stock has declined 21.3% in price over the past year and 23.2% over the past nine months. EFOI's inability to generate sufficient cash flows to fulfill its operational needs and its weak profitability have made investors question its prospects.

Here is what could influence EFOI's performance in the coming months:

External Financing

This month, EFOI announced that it had agreed to securities purchase agreements with certain institutional investors for the sale of 1,278,413 shares of the company's common stock and warrants in combinations of one share and one warrant for a combined purchase price of $3.52. in a private placement. The company intends to use the offering’s proceeds for general corporate purposes, with up to 50% of the proceeds used to decrease the balance of an outstanding promissory note. However, using equity financing as a funding source reflects the company's inability to generate sufficient cash flows for its operating needs. In addition, this results in dilution  existing shareholders and should be viewed as an alarming signal.

Inadequate Financials

EFOI's operating loss increased 78.9% year-over-year to $1.81 million for the third quarter, ended September 30, 2021. Its net loss came in at $1.14 million, while its loss per share amounted to $0.22 over this period. In addition, the company's adjusted EBITDA was negative $1.69 million.

Weak Profitability

EFOI's 26.3% trailing-12-months gross profit margin is 11.1% lower than the 29.6% industry average. Also, its ROC, net income margin and ROA are negative 57.6%, 46.3%, and 39.6%, respectively. Furthermore, its trailing-12-months cash from operations stood at a negative $9.29 million compared to the $215.28 million industry average.

POWR Ratings Reflect Uncertainty

EFOI has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. EFOI has an F grade for Stability and a D for Quality. The stock's 2.32 beta is consistent with its Stability grade. In addition, the company's poor financials and weak profitability are in sync with its Quality grade.

Among  69 stocks in the B-rated Home Improvements & Goods industry, EFOI is ranked #63.

Beyond what I have stated above, one can view EFOI ratings for Growth, Value, Momentum, and Sentiment here.

Bottom Line

Robust sales growth and sustainable product offerings have contributed to EFOI's solid price momentum lately. However, the company's weak financials and negative profit margins could add uncertainties to the stock's near-term prospects. Thus, we think EFOI is best avoided now.

How Does Energy Focus Inc. (EFOI) Stack Up Against its Peers?

While EFOI has an overall D rating, one might want to consider its industry peers, Acuity Brands Inc. (AYI), Duluth Holdings Inc. (DLTH), and Masonite International Corporation (DOOR), having an overall A (Strong Buy) rating.

EFOI shares fell $0.06 (-1.81%) in premarket trading Friday. Year-to-date, EFOI has declined -17.87%, versus a 25.98% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

More...