Host With the Most

Shares of Host America (CAFE) skyrocketed 104% to a 52-week high of $6.35 after the tiny Hamden, Conn., company cut a deal to test its energy-saving fluorescent lighting technology in 10 Wal-Mart Stores (WMT) locations in the Southwest. While financial terms weren't disclosed, speculators banked on the hope that the trial agreement could lead to Host America installing its LightMasterPlus systems in all of Wal-Mart's 3,725 domestic stores.

"The point of this is to figure out a template for a large number of stores," says Bill Relyea, an analyst at New York investment bank H.C. Wainwright & Co. "There would be no reason to do just 10." (Relyea owns shares of Host America; H.C. Wainwright & Co. has an investment-banking relationship with the company.)

David Murphy, Host America's chief financial officer, agrees.

"If it works for 10 stores, it will work for 1,000 stores," says Murphy. "Our intention is to work with America's largest retailer, and upon a successful test site roll out the product to the entire company."

Wal-Mart confirmed the tests without elaborating on the potential of the deal.

"We test a variety of energy-saving technology throughout our stores, and Host America's is one of many being tested," says Wal-Mart spokeswoman Tara Stewart.

But Host America has the inside track on an expanded contract. In February, it acquired RS Services, a company that has been providing Wal-Mart with electrical controls and power components for 10 years through a "preferred vendor agreement." In May, RS Services was hired as a subcontractor to install electrical controls in approximately 400 Wal-Mart stores in the South and western U.S. That deal is valued between $6.0 million and $7.5 million and should be completed by October.

LightMasterPlus is a hardware/software communication device that regulates the amount of electricity used in fluorescent lighting systems to avoid wasting energy. Less than a year old and with a patent pending, and already Host America has serious numbers to back up its claims. In an independent test of the system in Oklahoma City in November, LightMasterPlus was found to average a 22% energy savings when installed on certain fluorescent lighting systems. Separate testing by the Department of Energy in Oak Ridge, Tenn., found that not only did the product save 15% to 30% on fluorescent lighting usage, but it also reduced temperatures in the ballast, extending life expectancy.

As of yet, there is no long-term contract and CFO Murphy declined to disclose the pricing being discussed. He did say that a typical LightMasterPlus system for a 100,000-square-foot retail store costs about $35,000. In May, Host America installed its LightMasterPlus controller into a 60,000-square-foot assembly plant in Salado, Texas, for about $45,000. This job is expected to save the plant 150,000 to 200,000 kilowatt hours per year.

This is a welcome development for Host America, which hasn't posted a quarterly profit in almost two years. For most of its 19-year history, the company was primarily in the food-management business providing services for corporations, schools, Meals on Wheels and Head Start programs. But while the food business has grown to annual sales of about $25 million from $5 million six years ago, the company saw that flattening out and decided two years ago to get into what it considered a growth business: energy conservation.

For its fiscal third quarter ended March 31, the company posted a net loss of $2.1 million, or 47 cents a share, compared with a loss of $611,592, or 15 cents, in the same period last year. Revenues surged 33% to $8.2 million. The company blamed the large loss on the sale of its employee screening unit SelectForce.

Murphy, the finance chief, says most of the losses for the past two years are from investments in starting the energy business, including research and product development. That seems to be paying off. Most of the revenue growth in the March quarter, says Murphy, came from RS Services, which now makes up about 25% of the company's total sales.

"The price of oil is going up and the U.S. hasn't built a new energy transmission station in almost 30 years," says Murphy. "When you take a look at the capacity of the energy plants, they are at capacity now and the demand for electricity keeps growing. And lighting is the biggest electrical expense for the typical corporation. We feel the timing couldn't be better for a product that can save 22% in energy usage. We should have a better view of the timetables for the surveys in a week."

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"Wal-Mart doesn't want to make a big mistake, and this is an early sign that it will go forward with major installations," says Relyea of H.C. Wainwright. "I think this will have a major impact on Host America. A lot of other retailers have been waiting around for someone else to move first on this product. The product is in some supermarket chains, but most companies that would buy it were waiting for someone else to do the homework. And now they will say, 'If it's good enough for Wal-Mart, it's good enough for us." This is the kind of thing that validates the whole idea for other retailers, and investors seized on this as validation of the concept. We think there is still upside left in the stock. We have a one-year target of $9.50."