« January 2010 | Main | March 2010 »



February 28, 2010

2010: The Year of the Strong Grid? Part V: Hubbell Inc.

Tom Konrad, CFA

Hubbell Inc. (HUB-B) is a strong grid stock that also has strong financials, signaled by a recent dividend increase.

I came across Hubbell Inc. (HUB-B) when researching General Cable (BGC) for my recent article on the company.  Just one more example of when you start researching a sector, (in this case electrical transmission and distribution, or "strong grid") you never know what new companies you may find.

Hubbell is a diversified electrical supplier, serving electric utility, residential, commercial, and industrial markets worldwide.  About a quarter (26%) of its revenue comes from the "Power Systems" segment, which is roughly what I am focusing on in this series on the "Strong Grid."  I previously rejected EMCORE Group (EME) because it only has about 20% of its revenues from the strong grid, so the reader might reasonably ask, "What's so much better about Hubbell?"

The main advantage is that Hubbell's other divisions have exposure to the Smart Grid, and Energy Efficient lighting, which means that my best guess of the company's overall exposure to my favorite clean energy sectors is somewhere around 50%.  Emcore also had some exposure to these sectors (it is a diversified mechanical and electrical construction group), but probably not so much.

The Dividend Increase

And then there's the dividend increase.  As a value-oriented investor, I love dividends.  I'm especially fond of companies that keep increasing their dividends.  Dividends signal that management is confident about the solidity of their revenues going forward, and they are also a valuable source of return in the low-growth (or even no-growth) environment I'm expecting to prevail in coming years.  The new quarterly dividend payment of $0.36 per share (vs. $0.35 previously) equates to a 3% dividend yield at $48 per share.  Three percent is not much by historical standards, but it's pretty good in current markets.

The company's growth strategy is also one of acquisitions.  With companies still finding it difficult to raise funds, companies like Hubbell that can fund acquisitions directly from their balance sheet are in a good position to scoop up bargains, and the company's long experience with such acquisitions gives us some assurance that they will be able to integrate the acquired companies successfully. 

Share Structure
Both Hubbell class A (HUB-A) and class B (HUB-B) shares are traded on the NYSE, with B shares having much higher volume, and class A shares trading at a slight discount to B shares.  Class A shares have 20 times the voting rights of class B shares, but only have about 1/100 of the trading volume.  A long term, small investor would probably be better off holding A shares to take advantage of the discount (and the voting rights) but larger investors and traders will gravitate towards the B shares.

Valuation
On the other hand, despite the solid balance sheet and cash flow, the company is trading at too high a Price/Earnings ratio (15) for me to consider buying in what I expect to be a down market in 2010.  But if the market decline I expect materializes, that high-ish P/E will give Hubbell some room to fall.  If a market decline brings Hubbell into the mid-to-low 30's, I'll have my finger on the "buy" button.

Selected data as of 2-21-2010:
Stock Price (HUB-B/HUB-A)
$47.48/$46.67
P/E (trailing 12 month, HUB-B/HUB-A)
15.17/14.91
Cash per share
$4.41
Months to pay off net debt from cash flow
7 months
Current Ratio
2.2
Dividend yield (HUB-B/HUB-A)
3.03%/3.08%
Revenues from "Strong Grid"
26%
Revenues from Clean Energy and supporting sectors
roughly 50%
3 month average volume (HUB-B/HUB-A)
214,000 / 2,100

DISCLOSURE: Long BGC.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 26, 2010

Grid-Based Energy Storage; A $200 Billion Opportunity

John Petersen

Yesterday a reader sent me a copy of an exhaustive new study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was commissioned by the DOE's Energy Storage Systems Program and prepared by Jim Eyer and Garth Corey. I've been following the work in progress on this report since last summer and have eagerly awaited an opportunity to shift away from the overhyped electric vehicle market and focus instead on a far larger market where cost, performance and substantive business merit will be the only drivers. It looks like my time has finally come. For technology aficionados that want a detailed understanding of what the various grid-based storage applications are, the entire report (232 pages including appendices) is a must read. Over the next few weeks I'll try to extract some high-level technical and market data and translate that information into a form that will be useful to energy storage investors.

The Eyer-Corey Report identifies 17 discrete grid-based energy storage applications, discusses the performance requirements of each application and assesses the 10-year economic potential for each application. The Report also includes a great summary that condenses a couple hundred pages of detail into a single table.

Eyer Grid Overview.png
From an investor's perspective, the problem with the summary table is that it focuses on the needs of utilities instead of economic opportunities for storage device manufacturers. As a result the summary table uses a range of discharge durations, a range of power capacities and a range of economic benefits per kW of nameplate power capacity. Since investors typically think in terms of megawatt-hours of potential demand and economic benefit per kilowatt hour of storage, we have to take the Eyer-Corey calculations a couple steps further to arrive at a simple translation that fits an investor's perspective.

In an effort to translate the summary table data into terms investors will understand, I've calculated an average discharge duration and an average economic benefit for each grid-scale application identified in the Report. I've then used those averages to calculate potential demand in MWH, economic benefit per kWh and revenue opportunity to manufacturers. I've also reordered the data based on declining economic benefit per kWh to highlight the inverse relationship between economic benefit per kWh and potential demand in MWH. If you're interested in more detail, I've posted a copy of my Excel spreadsheet here. I've discussed this methodology with Mr. Eyer and feel comfortable that my potential demand, economic benefit per kWh and revenue opportunity calculations are at least in the ballpark. Since we're dealing with averages of values that covered a wide range to start with, my numbers are best characterized as rough estimates, but they're certainly good enough for a first pass. The summary results of my calculations are set forth below.

Eyer Translation.png

The color coding in the table represents my attempt to segregate economic benefit per kWh into cool technologies like flywheels, supercapacitors and lithium ion batteries, which are highlighted in blue, and cheap technologies like flow batteries, lead-acid batteries, compressed air and pumped hydro, which are highlighted in yellow.

Last summer I wrote about energy storage on the smart grid and said that in terms of potential demand, the market would be 99.45% Cheap and 0.55% Cool. Depending on how you want to classify the voltage support line that I've highlighted in orange, my estimate was either spot-on accurate or off by a half-point. Now that I can refer to a reasonable third-party estimate of storage system values, it's clear that revenue opportunities in smart grid storage will be about 90% cheap, 8% cool and 2% in-between. Any way you cut it, the substantial bulk of the revenue opportunity for energy storage on the smart grid will flow to companies that manufacture objectively cheap storage solutions. There will be meaningful niche markets in the $1 billion to $6 billion range for cool technologies like flywheels, supercapacitors and lithium ion batteries, but those niche markets will pale in comparison to the immense opportunities for cheap energy storage technologies.

The following table provides summary information on the pure play energy storage companies I track that are actively working on storage applications for the smart grid. To keep things as simple as possible I've used the same color coding to segregate their planned product offerings into objectively cool technologies and objectively cheap technologies.

2.26.10 Companies.png

For several years the market has been enthralled with gee-whiz energy storage technologies and references to potential markets that represent billions of dollars in potential for highly specialized niche applications like frequency regulation. In the process, investors have lost perspective on the question of how the niche applications fit into the overall market. This dynamic has led to inflated expectations for companies that are developing cool emerging technologies and unrecognized value in companies that manufacture the cheap established technologies that will do the yeoman's share of the heavy lifting for the smart grid. Unless I'm way off the mark, that dynamic will shift very rapidly as outsized revenue gains begin accruing to manufacturers of cheap solutions.

When I started writing this blog I believed energy storage would become a major investment trend over the next few years because cost efficient storage systems can reduce waste while enhancing the reliability of most alternative energy technologies. Since then, the fundamental market drivers have developed faster than I imagined and what I initially described as a rising tide is rapidly becoming a full-blown investment tsunami. While rising tides lift all boats, the critical points for investors to remember are:
  • Percentage gains in the stock market are largely dependent on entry price and it's easier to bag a double or triple in a cheap stock than it is to get the same result in an expensive stock;
  • While it's all well and good to look a decade down the road and dream of a brighter future, America has pressing energy storage needs that require solutions today;
  • In America we get up in the morning, we go to work and we solve our problems using the tools that we have in our toolbox, however we remain ready to embrace new tools as they are developed, perfected and proven; and
  • Successful investing requires diligent monitoring to adjust portfolio positions to a rapidly changing market and technical landscape, and emerging technologies that are not ready for prime time, but will be someday.
Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a large long position in its stock. He also has small long positions in Enersys (ENS), Exide (XIDE), C&D Technologies (CHP) and ZBB Energy (ZBB).

February 24, 2010

Why I Don't Expect A Lithium-Ion Battery Glut

John Petersen

It's no secret that I think plug-in electric vehicles are unconscionable waste and pollution masquerading as conservation. To support my opinions, I've published an easy to follow Excel spreadsheet that shows why plug-ins are 5x to 6x less effective than HEVs when it comes to reducing national gasoline consumption and 9x to 12x less effective than HEVs when it comes to reducing national CO2 emissions. To date, the only challenges to my analysis have come from die-hard EV fanatics who seem to believe battery factories grow on trees and raw material supply chains sprout like flowers in an alpine meadow.

In early February, Joann Muller of Forbes warned of a coming Electric Car Battery Glut based on published estimates that global lithium-ion battery manufacturing capacity would reach 36 million kWh by 2016. Just this week, Roland Berger Strategy Consultants released a study that forecasts a lithium-ion battery supply bubble between 2015 and 2017 and predicts an industry-wide consolidation where "only six to eight global battery manufacturers will survive in the next five to seven years."

Despite my abiding disdain for plug-ins and my high regard for Forbes and Roland Berger, I don't buy the theory that excess manufacturing capacity will be a major problem for two simple reasons. First, I believe the Roland Berger forecast of global demand for 1.6 million HEVs in 2015 is far too low given the history of the HEV market and Toyota's (TM) plans to increase its production capacity to 1 million HEVs per year by 2011. Second, the Roland Berger analysis does not consider large format lithium-ion battery demand outside the automotive sector, which is where I expect the exponential growth to occur.

The first hybrid electric vehicles were introduced in 1999 and through 2007 the annual sales growth was spectacular. While the following graph of US HEV sales from hybridcars.com shows that unit volumes fell off a cliff in 2008 and 2009, the decline is easily attributed to two independent but identifiable factors; the economic collapse of 2008 and the growing hype over plug-in vehicles that caused many likely HEV buyers to delay new car purchase decisions.

HEV Growth.png
Now that the roll-out dates for the GM Volt and the Nissan Leaf are only months away, two years of plug-in hype is about to hit an economic brick wall when potential buyers begin making relatively simple total cost of ownership calculations like this one.


Conventional
Prius-class
Volt-class

ICE
HEV
PHEV
Sticker price
$18,000
$22,500
$40,000
Tax credits


-$7,500
220 Volt outlet
             
             
  $2,500
Amount financed
$18,000
$22,500
$35,000




Monthly payment
$307
$384
$597
   (60 months at 7%)



Monthly gasoline
$105
$63
$21
   ($3 per gallon)



Monthly electricity


$20
   ($0.10 per kWh)
         
                   
Monthly cost of ownership
$412
$447
$638

The big beneficiary of this exercise will be the Prius-class HEV, particularly if the buyer uses an assumed gasoline price in the $5 to $6 range. No matter how you fiddle with the numbers, PHEVs will come in a distant third for any buyer who thinks the green in his wallet is more important than the green in his cocktail party conversation. Jerry Flint of Forbes recently predicted that Nissan's Electric Car Will Flop. I'll go Jerry one better and predict that every car with a plug will face a similar fate.

While the idea of plug-in cars is just plain balderdash, there is another developing transportation trend that holds immense potential for lithium-ion battery manufacturers. That trend is e-bikes and e-scooters, which are rapidly becoming the vehicle of choice throughout Asia and the developing world. To put things in perspective, Pike Research is forecasting global sales of 80 million electric two-wheeled vehicles in 2016. When you consider that the average e-bike needs about 500 wh of batteries, it's pretty easy to see how an 80-million unit E2W market could make a huge dent in a 36 million kWh battery market. It's not a market that most companies and investors are focusing on, but it's a market that stands a very good chance of sopping up any excess supplies of large-format lithium-ion batteries.

Currently, the only thing standing in the way of lithium-ion dominance of the E2W market is price. While roughly 85% of e-bikes currently use lead-acid batteries because they're cheaper, the E2W market is ripe for the picking by lithium-ion batteries because size and weight truly are mission critical constraints for a 50-pound vehicle that runs on a combination of battery and muscle power. In its report on the coming battery glut, Roland Berger forecast that the price of automotive grade high energy lithium-ion battery cells would fall from the current level of $650 per kWh to $400 per kWh in 2015 and $275 per kWh in 2020. Consumer products grade cells should be cheaper. As lithium-ion battery supplies increase and reasonable economies of scale are realized, there's little question in my mind that they will become the battery of choice for the E2W market.

Currently, the only company I track that focuses on the E2W market is Advanced Battery Technologies, Inc. (ABAT). They've been making e-bike batteries for years and decided to vertically integrate last year when they bought Wuxi Angell Autocycle, a Chinese e-bike manufacturer. In my view, it was a much smarter purchase than Ener1's (HEV) stake in Th!nk Global or A123 Systems' (AONE) stake in Fisker Motors. I haven't changed my view that the lead-acid sector is more attractively priced than the lithium-ion sector, but if I had to invest in lithium-ion, ABAT would be at the top of my list because its profit history is exemplary and its business strategy just makes sense in a world where six billion people are trying to earn a small piece of the lifestyle 500 million of us have and take for granted.

Disclosure: None.

February 23, 2010

Pure Technologies: Making Water Systems More Efficient

Tom Konrad, CFA

A reader caught my attention with his description of Pure Technologies (PUR.V, PPEHF.PK), a company that can find leaks in water systems without shutting down the system.  Since I was intrigued, I thought my readers might be as well.  Here's what he has to say.  I've asked him to monitor the comments if you have follow-up questions of your own.

Tom Konrad:
Tell us a little about yourself and your involvement in environmental investing.

Sam Healey: I invest largely in the cleantech sector. I look for companies solving problems that already exist, rather than companies attempting to create new markets.  I'm particularly focused on energy technologies and conservation.  I see a lot of money going into new systems when the cheaper and more effective use of those same dollars would be to improve the existing systems.   

TK: You contacted me regarding a water leak detection company that I found interesting.  Which is it, and why do you think that company would be interesting to my readers?

SH: The company is Pure Technologies out of Calgary, it trades on the TSX venture exchange under the ticker PUR.V or by extension as PPEHF on the pink sheets.  It is a closely held business at this time, run essentially by two brothers, Peter Paulson who heads the R&D and is the CEO, and his brother James who is the chairman and face of the company.  They have never sold a share, but have offered some of their holdings as part of the green shoe associated with the secondary offering just completed

Pure Technologies has its roots in the structure monitoring businesses, primarily bridges and large buildings.  The technology enables them to see weakness in the structures before they fail, thus avoiding disaster.  They still participate in this market to the tune of 20-25% of their current revenue.  However, their technology is also capable of monitoring the water infrastructure systems, .  That is the direction they are now heading.  They address the market in two ways.  The first is through product sales. The main product they sell is a leak detecting system called the smart ball which they can send through water pipes without taking the pipes out of service.  In 2009 they made an acquisition of a new robotic technology that will let them bring a similar service to the waste water market. 

The other part of the business is the inspecting, consulting and monitoring business, which generates the majority of their recurring revenue is.  With their technology, which they call Soundprint AFO and P-Wave electromagnetics, they lay fiber cable into a pipe which can take a snap shot of the pipe to find weak spots (P wave) or can continually monitor the integrity of the pipe (Soundprint AFO) so that weak sections can be identified and breaks can be prevented before they occur.  Current World Bank estimates are that 45MM cubic meters of water are lost a day through leaks, and they estimate the total cost to water utilities by water loss at more than 14 Billion dollars.  So I would say these products meet a large addressable and identifiable market.

TK: Why do they have such strong revenue visibility, and what revenue growth do you expect?

SH: They have the advantage that one product ends up creating a market for the other product.  Smart ball serves as a wonderful introduction for the monitoring business.  Smart ball demonstrations projects almost always result in orders.  The fact that the Smart ball can do its work without taking the pipe out of service makes it very attractive.  Most water systems have leaks, and finding them without discontinuing service is very attractive.  Smart ball then provides the introduction of the Pure team and its P wave products and monitoring business.  Often these products are sold into large multi year projects that have large recurring revenues, leading to a high level of visibility for annual revenue.  Despite seasonality and lumpiness on a quarterly basis, annually I believe they feel confident in their projections.  As far as revenue growth, I forecast 30 MM in 2009, 40 MM in 2010 and north of 50 in 2011.  I'm hopeful that the recurring revenue portion will increase as a share of total revenue over that same period.

TK: What's their profitability?

SH: Pure has reported profits for the last two years and 2009 will be no exception.  I estimate the potential of 3MM in EBIT (in US dollars, they report in C$'s) in 2009 increasing to an optimistic number of 6MM in 2010.  Current share count in about 33MM increasing to 40 MM with the recent secondary offering, so you can do the math.  However these numbers are subject to exchange rate (forex) adjustments because they report in Canadian dollars which will hurt them in 2009.  In 2009 the forex adjustment will be over a negative number of over 1 MM which will hurt the final reported EPS  However, the 2009 forex loss will essentially result in reversing a 2008 forex gain.  The revenue level is not high enough to justify an aggressive hedging program, especially considering that their revenues are global and so many currencies would be involved.  Because I generally focus on the business and its development rather than forex effects I prefer to look at the EBIT per share which effectively smooths out forex adjustments rather than the lumpy EPS.  By this metric the company is executing very well, a trend I expect to continue. 

TK: How is the company funding its operations? 

SH: For the last several years they have funded themselves with cash flow from operations, however in order to continue to expand their reach globally and add a few tuck in acquisitions they have announced and are in the process of closing (on February 23rd) a secondary offering for C$30MM. 

This is a perfect example of "raising money for the right reasons", they are producing cash flow already, and the proceeds from the offering will be directed at further geographical expansion and tuck in acquisitions.   Associated with this transaction may be a move to a bigger exchange in Canada.  They meet all of the listing requirement presently but have not made the move.  One of the issues with the stock is that it is very illiquid.  To the extent that moving to bigger exchange in Canada resulted in a larger daily trading volume, I would consider it a positive for investors and potential investors.  Moving would allow them to potentially be included in some of the water indexes.  At this point I am not aware of any potential listing on a US exchange.

TK: Do you have a price target for the company?

SH: For now I would say $7.00 US but this is very much a moving target.  I think the 7$ is reasonable for the projects they have solid viability on right now.  For example, in 2009 the recurring revenue piece of the business will be in the 3.5MM range.  The project they have in Libya will net 5 MM recurring revenue in 2011 by itself.  As each of the current projects ramps up they achieve higher levels of profitability 7 dollars seems about right.  However, with the recent robotics acquisition enabling them to move into waste water systems monitoring and the expansion into South America and East Asia just beginning, I am hopeful that I will find myself raising the target before we get to it.  That will depend entirely on execution going forward.

TK: How competitive is the leak detecting space?  Are there any competitors with similar products?

SH: Leak detection is a competitive space in the sense that it is a major problem for all water and wastewater systems.  However I am unaware of anybody that has the technology to address these problems without taking the lines out of service.  I am also not aware of anyone competing in the pipe monitoring business with a comparable technology.

TK: How dependent is Pure Technologies on a growing economy?

SH: I would say it isn't.  In the emerging markets the growth is such that need for water and leak detections system is massive and Pure has gained considerable traction in emerging markets.  Pure's customers are generally utilities or governments, so they are not dependent on consumer spending.  Moving into the realm of speculation, I'd guess that difficulties in the ability of utilities and municipalities to float bonds for spending on water system projects could potentially hurt business.  That said, I expect 2009 revenue to be double 2007 revenue, despite the interim lack of economic growth.

TK: Do you own shares of the company in your fund or your own account?

SH: I own shares of the company in my fund.

TK: Thanks for sharing your research.  Water and energy are intimately linked, but I hesitate to spread myself into more areas than I already have.

SH: It's been a pleasure.

DISCLOSURE: None, but I'm considering buying.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 22, 2010

Beijing Cramps Foreign Offshore Wind Developers, Giving Boost to Domestic Firms

Bill Paul

As it scrambles to develop an offshore wind power industry that potentially may generate as much as 200 gigawatts of electricity, China has decided to hamstring all would-be foreign developers, which should provide a big lift to certain Chinese companies.

As reported last week by Environmental Finance magazine in its online edition, Beijing has effectively shut out international operators with new regulations requiring any foreign offshore developer to enter into a joint venture with a Chinese company under which the foreign firm must be a minority partner. “In reality, most of the international developers cannot, or are not willing to, do a joint venture with (a) Chinese partner,” Environmental Finance quoted the policy director of the Global Wind Energy Council as saying.

The wind council official called the new regulations “shocking,” but for investors they may be inviting.

With China expected to rapidly ramp up offshore wind generation, certain Chinese wind power companies could see their underlying valuations rise the more Beijing’s new offshore policy becomes apparent.

One in particular is China Longyuan (Symbol CGYG.OB), which just went public in December. Another possible beneficiary is Xinjiang Goldwind, which trades locally under the symbol 002202. Goldwind has announced plans to ramp up production of offshore turbine machines.

Still another potential beneficiary is Datang International Power (Symbol DIPGY). World wind-power leader Vestas of Norway (Symbol VWDRY) has called Datang an important wind development company.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of  EnergyTechStocks.com.

February 21, 2010

2010: The Year of the Strong Grid? Part IV: General Cable

Tom Konrad, CFA

General Cable (BGC) is a strong grid stock that's suddenly looking a lot cheaper.  Time to buy?

General Cable is not only one of my Ten Clean Energy Stocks for 2010, it was also holding it's own in my list of "strong grid" (that is, electricity transmission) stocks that have strong financials.  About 59% of the company's revenues come from what I would consider "strong grid" markets: their "electrical utility" and "electrical transmission" segments.  I published the most recent version of that list on February 11.  In both these articles I cautioned that I did not think it was yet time to start buying the companies I covered.  Rather, these were companies to buy after a price fall.

The same day I published my recent strong grid list, General Cable reported a net loss of $0.17 for the last quarter of 2009, and lowered guidance for Q1 2010.  Adjusted earnings were in line with what analysts were expecting, but the lowered guidance spooked shareholders.  The stock got whacked.  So is it time to buy?

BGC Chart 2-20-2010

I'm personally not all that concerned by a couple of quarters of lousy growth, but I want to know about anything that might hamper the company's long term viability, so I decided to dig a little deeper by reading the Q4 2009 earnings call transcript. Here are my take-aways:
  •  The company has been focusing on reducing operating costs this year, and has strongly improved cash flow from operations over previous years (a large part of the reason it's on my lists).
  • The US utility market was unexpectedly week in Q4 09 (this may have been due to the fact that many stimulus programs ended up delaying spending in the targeted areas).
  • The company is expanding internationally and using its greater financial strength to out-compete or buy up smaller competitors in a difficult economy.  They expect 2010 to be a "bottoming" year in terms of demand for their products.
  • The company does not expect to see any strength in North American utility markets for at least two quarters.
  • While the US has not yet begun to act to build needed electricity infrastructure, Europe (also currently weak) is well into the planning stage, and is likely to be a strong market over the next five years.
  • Rising commodity prices have hurt reported earnings because of their last-in-first-out (LIFO) accounting.  This means that BGC's earnings will appear relatively low when commodity prices are rising, and relatively high when commodity prices are falling in relationship to non-LIFO competitors.  The implication is that a good time to buy the stock would be near a commodity price peak.
  • The company has a strong presence in developing markets, where it continues to pursue growth opportunities.  However, they intentionally have very little of their business in China.
Most of General Cables markets lag the economic cycle.  Since we're only seeing glimmerings of an upturn, it will be a while before BGC's revenue an pricing power recover.  Furthermore, capacity utilization in the cable market is very low world-wide: even with an upturn in volumes, cable pricing is likely to remain very competitive for quite some time.  In the long term, this is good for General Cable, because it will squeeze weaker competitors out of the market, but in the short term, I would not be surprised to see some more disappointing quarters. 

I don't see any systematic problems to worry me.  While I believe that commodities are in a long-term uptrend, which will hurt reported profits because of LIFO, but it should have no net effect on real earnings.  The industry continue to shake out until the surviving players can pass on cost increases to customers.  General Cable is likely to be one of the survivors.

At $23.85, I think the stock has not yet hit its low for the year.  The valuation looks good, but there will probably be more earnings deterioration next quarter. The 1Q 2009 earnings were $1, and the company is providing guidance that they will only be $0.05 in 1Q 2010.  That will lower the "E" and raise the P/E ratio, which probably allow for a bit more downside movement in the stock price (P).

I currently guess that the best time to buy will be a month or two after the Q1 2010 conference call, possibly in June, but I will re-evaluate that guess after the next earnings call.  I still hold a small long position in the stock which is partially hedged with a covered call.   The call will expire this month, and I'm not planning to write another.  I could be wrong about where the stock bottoms.

Selected data as of 2-20-2010:
Stock Price
$23.85
P/E (trailing 12 month)
9.66
Cash per share
$8.70
Months to pay off net debt from cash flow
20 months
Current Ratio
2.06
Dividend yield
none
Revenues from "Strong Grid"
59%

DISCLOSURE: Long BGC.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 19, 2010

Why You Should Not Join a Portec Rail Products (PRPX) Class Action Lawsuit

Tom Konrad, CFA

Portec Rail Products (PRPX) agreed to be acquired by L. B. Foster Company (FSTR) on February 17. At least four law firms have started class action suits against the Portec board.  Here is why not to join any of them.

Portec Rail Products has been a longtime favorite of mine.  It's profitable, and delivers valuable services to the rail and rail transit industries.  This article goes into a lot more detail as to why I like Portec.  In large part because of the acquisition, Portec is the best performing of my Ten Clean Energy Stocks for 2010.  I will be sad if the merger goes through, because I will need to find a replacement in my portfolio, although the cash will soothe the hurt nicely.  L. B. Forster might be that replacement, but when I have a choice, I prefer microcap companies like Portec.

The lawsuits allege that Forster is not paying enough of a premium (4% over the closing price the day the deal was announced), and that the directors breached their fiduciary duty in not looking for other buyers: i.e. not shopping the company around more to get a higher price.  One analyst of my acquaintance thinks a more reasonable premium would have added another buck per share.

But when was the deal negotiated?  Almost certainly over the last month or more. 

PRPX 2-19-10
For most of January, Portec was trading around $10.50, and it started December at $9.  The purchase price of $11.71 per share is an 11.5% premium over $10.50: not great, but not horrible.  It's a 17% premium over $10 per share.

But no matter what you think of the price, there's no reason to join the lawsuit.  Every dollar going to a lawyer is money that comes, eventually, out of some investor's pocket.  You probably see an ad asking you to join one of the class action lawsuits next to this article: they're plastering them all over the internet.

If you don't like the price, you already have a perfectly viable option.  It's called democracy.  Don't tender your shares.  65% of shareholders must tender their shares for the merger to go through.  If clean energy supporters had 65% of the votes in the US Senate, we'd have climate change legislation by now.

Why has the stock risen so quickly in the last few weeks?  Perhaps rumors got out about the negotiations, and people with this inside information were (illegally) buying shares to make a quick buck.  Despite being illegal, that sort of thing happens all the time.  The trading pattern was particularly suspicious the day before the merger was announced . 

Those insiders are the people to send the lawyers after!

DISCLOSURE: Long PRPX.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 18, 2010

Energy Efficiency In The Automotive Sector

John Petersen

As a result of sweeping regulatory changes, the second decade of the new millennium is shaping up as a time of unprecedented progress in automotive fuel efficiency. In the EU, where small cars have been prevalent for decades, gasoline prices of $5 to $8 per gallon are the norm and consumers prize diesel engines, new regulations will require automakers to reduce tailpipe CO2 emissions to an average of 130 grams per kilometer (g/km) as follows:
  • For 65% of the fleet, by 2012;
  • For 75% of the fleet, by 2013;
  • For 85% of the fleet, by 2014; and
  • For 100% of the fleet, by 2015.
The penalties for non-compliance start at €5 per vehicle for the first g/km, and ramp up to €15 per vehicle for the second g/km, €25 per vehicle for the third g/km, and €95 per vehicle for each subsequent g/km. The EU's long-term target is 95 g/km by 2020. The following data comes from the European Federation for Transport and Environment and shows how automakers stacked up against the standards in 2008.


2008 Sales CO2 g/km
Fiat 1,131,005 138
PSA Peugeot-Citroen 1,794,593 139
Renault 1,253,371 143
Toyota 784,054 147
Hyundai 467,673 149
Ford 1,388,335 152
GM 1,366,069 153
Honda 245,395 154
BMW 784,736 154
Suzuki 229,074 156
Mazda 229,596 158
Volkswagen 2,870,570 159
Nissan 323,340 161
Daimler      760,925  175
Total 13,628,736 151

The bottom line is automakers must improve the efficiency of their European fleets by an average of 14% over the next few years or pay dearly for their failure to do so. This is a today issue, not a someday issue.

While the EU standards are aggressive, the challenges facing US automakers are even more daunting because they're starting from a less efficient baseline. The following chart comes from the EPA and shows the adjusted fuel economy for cars and light trucks sold in the US from 1975 through 2009.
Fuel Economy.png
Last September the EPA and the NHTSA published their proposed rules for Light Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards. While the rules have not been finalized, they leave no doubt that the pressure on US automakers to radically and immediately improve fuel economy will be immense. The following table summarizes the proposed fuel economy standards, in miles per gallon, for the next few years.


2011
2012
2013
2014
2015
2016
Passenger Cars 30.2 33.6 34.4 35.2 36.4 38.0
Light Trucks 24.1 25.0 25.6 26.2 27.1 28.3
Combined Cars & Trucks 27.3 29.8 30.6 31.4 32.6 34.1

Unlike the European rules, the proposed EPA and NHTSA rules will not let vehicle manufacturers pay fines in lieu of meeting emission standards. So once again, this is a today issue, not a someday issue. The following data comes from the Executive Summary Tables that accompany a recent EPA report on Light-Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel Economy Trends: 1975 Through 2009 and shows how the principal US automotive marketing groups stacked up against the proposed standard in 2009.


MPG
Honda 23.6
Hyundai-Kia 23.4
Toyota 23.2
Volkswagen 22.8
Nissan 21.6
BMW 21.6
General Motors 19.9
Ford 20.5
Chrysler 18.7
All 21.1

The bottom line is automakers may well be required to improve the efficiency of their US fleets by an average of 29% by 2012 and by a whopping 38% by 2016. Absent a tea party style revolt among new car buyers, I expect pickups, vans and SUVs to all but disappear from the marketplace. Even with smaller European type vehicles, the bulk of the work will have to be done with a combination of proven technologies that are fully developed and ready for widespread commercialization today, including:


Efficiency
Hybrid Electric Technologies Gain
Prius-class strong hybrids with idle elimination, electric-only launch, recuperative braking and acceleration boost. 40%
Insight-class mild hybrids with idle elimination, recuperative braking and acceleration boost. 20%
Engine Technologies
Direct Fuel Injection (with turbocharging or supercharging) delivers higher performance with lower fuel consumption. 11-13%
Integrated Starter/Generator Systems (e.g. stop-start systems) automatically turn the engine on/off when the vehicle is stopped to reduce fuel consumed during idling. 8%
Cylinder Deactivation saves fuel by deactivating cylinders when they are not needed. 7.5%
Turbochargers & Superchargers increase engine power, allowing manufacturers to downsize engines without sacrificing performance or to increase performance without lowering fuel economy. 7.5%
Variable Valve Timing & Lift improve engine efficiency by optimizing the flow of fuel & air into the engine for various engine speeds. 5%
Transmission Technologies
Automated Manual Transmissions combine the efficiency of manual transmissions with the convenience of automatics (gears shift automatically). 7%
Continuously Variable Transmissions have an infinite number of "gears", providing seamless acceleration and improved fuel economy. 6%

The foregoing list of energy efficiency technologies was assembled from data on the EPA's www.fueleconomy.gov website and is not exhaustive. With the exception of the VTEC variable cam and valve timing technology that Honda first introduced in the Acura NSX (far and away the finest car I've ever owned) I don't know who the leaders are. My sense is that almost everybody is working on their own variants for most of these technologies because the pressures are so great and the timing is so tight.

I regularly mock plug-in vehicles because even the EPA acknowledges that "electric cars and trucks are unlikely to be available in large volumes anytime soon," which is a polite way of saying they won't be more than vanity products for years and those that are produced will be horrendously inefficient at reducing national gasoline consumption and CO2 emissions. The more important issue is that manufacturing plug-ins will directly and adversely impact the auto industry's ability to meet rigorous short-term CO2 emission and CAFE standards that are either in place or will be shortly. It's all well and good to daydream about rescuing the princess, but if a dragon guards her you have to deal with first things first.

Batteries are critical enabling devices for three of the four most important fuel efficiency technologies. For the next several years, every vanity car with a plug that rolls off an assembly line will preclude the production of 10 to 20 affordable fuel efficient vehicles. The dynamic may change toward the end of the decade when current battery research may result in the a new generation of inexpensive, safe and abuse tolerant electric drive batteries, but over the next five years fleetwide efficiency will be the only thing that matters.

Ultimately efficiency will be the touchstone for all successful alternative energy investments. Those that deliver more work with lower natural resource inputs will be very successful. Those that deliver less work with higher natural resource inputs will fail. The laws of economic gravity will not tolerate another outcome. While the bulk of the market's attention will invariably focus on the gee whiz, the bulk of the money will be made in mundane applications and sectors that focus primarily on saving money and only secondarily on saving the planet.

Disclosure: No companies mentioned.

February 17, 2010

Investors: Concentrate on This Alternative Energy Sector and You Should Make a Lot of $$$$$

Bill Paul

For my money, energy efficiency (aka, the “fifth fuel”) is the best alternative energy sector for investors because it’s primarily about saving money, only secondarily about saving the planet.

The energy services industry reportedly has grown by more than 20% per year every year since 2004 and efficiency service providers now pull in an estimated $5.6 billion a year just on U.S. commercial buildings. Pike Research says there is a reservoir of untapped projects worth $400 billion. “There’s this huge untapped potential” for energy efficiency, a U.S. Environmental Protection Agency spokesperson was recently quoted as saying. Indeed, of the approximately 70 billion square feet of U.S. office space, only about one billion is believed to have undergone retrofits.

Although Washington can be as dull as a 40-watt light bulb, eventually DC is going to figure out that energy efficiency is the best way to create green jobs here in the U.S., unlike all those other green jobs – like making solar and wind components – that are going to China and Europe. When that finally happens, look for Goldman Sachs (Symbol GS), Morgan Stanley (Symbol MS) or some other big outfit to put out a report that wakes the world up to energy efficiency’s tremendous potential.

By then, investors should have already taken action. Like so much in energy, the bigger the company, the more likely it is to pull in big-buck contracts, so it may be worth laying a few bob on the leaders of the energy efficiency services industry, namely: Johnson Controls (Symbol JCI), United Technologies (Symbol UTX), IBM (Symbol IBM) and my personal favorite: Siemens (Symbol SI). (For more on Siemens, please see If I Could Own Only One Alternative Energy Stock, It Would Be . . ..)

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of  EnergyTechStocks.com.

February 16, 2010

A Tale of Two Battery Companies

John Petersen

The last few weeks have offered a fascinating object lesson for believers in Benjamin Graham's theory that "In the short run the market acts like a voting machine, but in the long run it acts like a weighing machine." Since January 4th I've watched in awe as Exide Technologies (XIDE) lost roughly 30% of its market value and Ener1 (HEV) lost closer to 40%. The difference is that Exide took a voting machine beat down because it lost a well-known but financially immaterial customer while Ener1 seems to be caught in the early stages of a weighing machine meltdown. I don't want to sound like either Pollyanna or a nattering nabob of negativism, but bargain hunters need to understand that some price declines create opportunity while others do not.

Exide is a global leader in the lead-acid battery business that just reported a nine-month loss of $52 million on sales of $2 billion. While the loss was in line with expectations, the stock declined by 30% on unanticipated news that Wal-Mart Stores (WMT) had decided to shift over to Johnson Controls (JCI) as a sole-source supplier of transportation batteries. The press reports invariably described Wal-Mart as a major customer of Exide's Transportation Americas group and painted a dire picture. During Exide's quarterly conference call, however, it became clear that Wal-Mart represented roughly 5.5% of Exide's total revenue and while the loss was inconvenient, it was far from devastating. While I expected the conference call to result in a fairly sharp rebound, it seems that the pen is mightier than the conference call and stock market voters still don't understand that the long-term impact will probably not be material.

Over the years I've known a lot of businessmen who signed supply contracts with Wal-Mart. Interestingly, they all told the same 'boat owner story' where the two most memorable days in their careers were the day they got the Wal-Mart contract and the day they lost it. Everything in between was low-margin misery accompanied by incredible working capital pressures. While Exide's management team was circumspect in their discussion of the Wal-Mart relationship, my sense is that they're not wasting any time crying over spilt milk and have simply re-focused their attention on developing new customers to maintain or improve capacity utilization rates. In any event, it's clear to me that the market has over-reacted to a relatively insignificant event and last Friday's closing price of $5.37 represents an attractive entry point. After all, it's not often that one can scoop up a company like Exide for 15% of sales while Johnson Controls and Enersys (ENS) trade for 64% and 69% of sales, respectively.

For as long as I've been writing this blog Ener1 has been my poster child for lithium-ion battery hype. Its market capitalization has always exceed tangible book value by a factor of 10x to 20x and the widely touted revenue growth that was just around the corner 20 months ago is still just around the corner. To date, the bulk of Ener1's reported revenues have come from its October 2008 purchase of Enertech, a Korean subsidiary that manufactures batteries for cell phones and consumer electronics. The following table summarizes Ener1's quarterly revenues and net losses for the last two years.


Q-1
Q-2
Q-3
Q-4

(000's)
(000's) (000's) (000's)
2009 Revenue
$8,192
$7,537
$8,117

2009 Net Loss
($7,308)
($12,861)
($15,837)






2008 Revenue
$97
$437
$39
$6,275
2008 Net Loss
($22,900)
($8,038)
($9,120)
($12,402)

The big problem with an inflated market price is that it's an impediment to future financing. Ener1 has not had a truly attractive balance sheet since Q-2 of 2008 when it reported $32 million of working capital and $35 million of net tangible assets. Over the next 15 months it accumulated $64 million of goodwill and intangible assets and by Q-3 of 2009, its working capital was a paltry $2.4 million. After penciling in disclosed fourth quarter financing and investment activity and likely fourth quarter losses, I figure Ener1 will finish the year with a small working capital deficit and net tangible assets of $50 to $60 million.

In late January, Ener1 entered into a $60 million open market stock sales agreement with Jefferies & Company that mirrored a $40 million open market stock offering it conducted over a four-month period in the summer of 2008. Unless the current offering is wildly successful over the next 45 days, it's easy to imagine some bare-knuckle discussions with the auditors over the wording of their next opinion letter. The more important issue, however, is that the open market stock sales agreement cannot reasonably be expected to provide enough working capital to offset future losses and provide an additional $60 million for capital expansion, which is an absolute requirement of the DOE grant Ener1 was awarded last August. Without an underwritten financing of at least $100 million, I don't see how Ener1 can provide matching funds for the DOE grant and cover its losses during the construction period. With an ugly year-end balance sheet and a market capitalization that represents 8x to 10x net tangible book value, I have a hard time imagining a happy outcome for investors who try to catch this falling knife.

Disclosure: Author owns a small long position in Exide.

February 15, 2010

Ten Green Energy Gambles for 2010: Update I

Tom Konrad, CFA

A quick update of last month's list of speculative puts, to reflect the new options symbols.

In January, I put together a list of nine puts and one small energy efficiency stock I expect to do well this year.  I normally only do updates on these every quarter, but because of the recent change option symbols, I thought I'd revisit my 10 Green Energy Gambles.  The links in the original article have stopped working; this new table shows the current list.

Here's the list: with updated option symbols.
Security Portfolio
Weight
Underlying 1/9/10* 2/11/10*
Gain
EWW Jan 2011 $30 Put 20% iShares Mexico (EWW)
$0.825 $1.00
21%
CHK Jan 2011 $17.5 Put 7% Chesapeake Energy (CHK)
$0.865 $1.225
41%
DAL Jan 2011 $7.5 Put 7% Delta Airlines (DAL)
$0.975 $0.925
-6%
AMR Jan 2011 $5 Put 7% AMR Corp (AMR)
$0.85 $0.68
-20%
LUV Jan 2011 $7.5 Put 7% Southwest (LUV)
$0.50 $0.35
-30%
CNX Jan 2011 $35 Put 7% Consol Energy (CNX)
$2.325 $3.20
37%
BTU Jan 2011 $30 Put 6% Peabody Energy (BTU)
$1.45 $2.12
46%
HOT Jan 2011 $25 Put 10% Starwood Hotels (HOT)
$1.725 $1.65
-5%
JBHT Jan 2011 $20 Put
10% JB Hunt (JBHT)
$0.65 $0.70
8%
Power Efficiency Corp 20%
$0.275 $0.275
-2%
Portfolio
100%



8.4%
Benchmark
DIA Jan 2011 75.000 put
80%
DIAMONDs (DIA)
$1.49
1.885
27%
Powershares Wilderhill Clean Energy (PBW)
20%

$11.74
$9.53
-19%
Benchmark
100%



17.4%
* Prices given are the midpoint between the bid and ask at the close on the given date.

After a little over a month, it's too early to draw any conclusions about the portfolio's performance.  I'm naturally happy that the portfolio is up, but disappointed with its performance relative to the benchmark.  On the other hand, I don't know any theory behind benchmarking options portfolios, let alone mixed option and stock portfolios. 

Anyway, it's nice that the portfolio is up for the month, so I shouldn't complain that I'm not meeting my self-imposed benchmark. 

For those of you keeping score at home, my long-only Ten Clean Energy Stocks for 2010 portfolio is down 5% since December 27, 2009, compared to a drop of 14% for PBW and a drop of 4% for the Russell 3000 index.  The simplified version of the portfolio, which substitutes the ETFs PTRP and GRID for six of the stocks is down 8%.


DISCLOSURE: Short EWW,DAL,AMR,LUV,CNX,BTU,HOT,JBHT,DIA.  Long PEFF.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 13, 2010

Down and Out in 2011: Headlines from Possible Futures

Tom Konrad, CFA

If you don't know what could go wrong in 2010, it could still hurt your portfolio.

In Nassim Taleb's Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, he describes an exercise at one of his early jobs.  In order to become aware of risks they otherwise might have overlooked, they were to assume that they would lose all the money under their management in the coming year, and they work backwards to figure out how that might have happened.

This struck me as an excellent idea, which investors such as myself who are focused on the risks of Peak Oil and Climate Change should should find doubly useful. As we saw in 2008 and 1999, it's not the risks you are focusing on that are most likely to bite you. In 1999, the big scare was Y2K, but we should have been more worried about dot-com valuations. In 2008, I was most worried about peak oil, and while I was aware of the overpricing in the housing market (I'd been warning people about it for years,) I had not realized how the mortgage-backed securities and credit default swap markets could turn a housing bubble into a financial crisis. In my defense, I was up to my eyeballs in studying for the Level III CFA® exam, but that is more of a reason than an excuse. Life, and financial markets have their own agenda, and you can't expect them to wait on you when you are exceptionally busy.

In short, if I had taken the time to go through this exercise in February 2008, I probably could have saved myself a good deal of money. I don't have patience for investors and analysts who say “No one could have known what was going to happen” in any financial crisis. It's our job to know about future risks, or, at the very least, to know that there are risks out there that we don't know about, and take precautions. How do you take precautions against unknown risks? By asking what could happen to devalue the securities in your portfolio, and buying insurance (or put options) against these contingencies.

How I lost all my money in 2010

My own portfolio is currently aligned through a combination of hedging and speculative puts so that I should make money from a market decline.  I'm also holding a large percentage of my assets in FDIC insured bank accounts. Hence, talking about what might make me go broke in 2010 will not be useful to most readers.

The most dangerous possibility would be a massive speculative stock market boom resulting from falling oil prices and increased supply. I currently have an overall short position in the market.  So far my gains in individual companies and sectors have offset my losses due to the rising stock market.  Those sector bets would probably turn against me if energy prices were to fall significantly.  I have some long calls which protect me somewhat from this eventuality, but probably not enough for every eventuality.  My losses could be compounded buy my temptation to follow a strategy of "selling on the bumps" (as opposed to buying on the dips) if I did not think that the oil price drops would be long term.

The lesson for me from this exercise is to watch the drivers of a continued boom in the stock market, and to restrain myself from taking an even more bearish position than I already have as the stock market rises, especially if that rise is fueled by low oil prices driven by increases in oil production. 

As a result of this exercise, I bought several calls on SPY with a strike price of $150 expiring in December 2012.  These calls will effectively reduce my bearish position as the stock market rises, without any further action on my part.  I can't imagine the S&P 500 surpassing 1500 by the end of 2012.  Nevertheless, if that inconceivable event occurs, my losses should be manageable. In the markets, as well as life, the inconceivable does happen.  The inconceivable only only appears plausible (and occasionally inevitable) in retrospect. 

I did not do anything to protect myself against long term low prices for oil arising from new sources of supply, that's too inconceivable even for me.  While stock markets can go up on a wave of optimism that has nothing to do with the underlying reality.  Crude oil, however, is a real asset.  The price might fall if demand were to collapse, but I can only see that happening if the collapse in oil demand resulted from a collapse in the real economy.  An economic collapse would lead to a stock market collapse, which would help my portfolio.  Crude prices might also fall from a surge in supply.  Where would such a supply surge come from?  I'll watch for it, but I probably won't believe it even if it happens.  There's no need to buy insurance against the sun coming up in the West.

How you lost all your money in 2010

For those of you with more conventional portfolios, I will write a series of possible newspaper headlines that bode ill for some of the alternative energy sectors my readers care about. If you are invested in these sectors, you should ask yourself if you think such headlines are possible. If so, what have you done to protect yourself against this sort of event?

Spray-on Photovoltaic (PV) Paint Commercialized: Solar Stocks Plummet!

Solar bulls often point out that solar is the only renewable resource that can provide power at the terawatt level that is needed to run society. True, but that does not mean that today's solar technologies are the ones we'll be using to exploit it. If we develop a photovoltaic paint that can be applied by a house painter for pennies per square foot, what would happen to even low cost crystalline PV companies such as Suntech Power (STP), or even thin-film sellers such as First Solar (FSLR)?

In other words, the great hope for solar energy, a new technology that allows PV to be sprayed on like paint at pennies per watt, could easily spell the end of the current crop of solar companies. I personally don't expect to see such a technology emerge in the next decade, but many solar investors talk as if they do... yet they invest as if the future of solar is gradual, incremental improvements in cost.

Danish Blackout Causes Governments to Withdraw Wind Subsidies

Wind power is cost competitive with fossil fuel generation on a per-kWh basis. The problem has always been that current electric grids were not designed to accommodate variable power supplies. Our current state of understanding is that better power dispatch over broader regions should be sufficient to allow wind integration up to somewhere between 20% and 30% penetration. Denmark has already passed the 20% number. This high penetration is working well because they have strong interconnections with Germany and Norway. Germany provides a large additional market when wind supply exceeds local demand, and dispatchable hydropower and pumped storage in Norway help to counter the variability of Danish wind.

What if our wind integration models are more rose-tinted than we think. Wind skeptics already claim that wind power actually adds to carbon emissions because it makes natural gas turbines work harder to compensate for the variability. I think that claim is untrue, except in very special circumstances, but I also know that the models are imperfect.

So what if there is a Danish Wind Emergency, causing a blackout of large portions of the European grid for several days, and it turns out the culprit really is wind? I think it is a pretty safe bet that many governments would quickly start to re-evaluate any support they currently give wind, and perhaps even require more integration studies before allowing more to be built. Wind stocks would almost certainly plummet.

EEStor Unveils Long-Awaited EESU, 10x Faster and 1/10th the Cost of Lithium Ion Batteries:

John Petersen says: “EV's Make Sense.”

My readers often chide me for calling electricity storage “expensive” in comparison to long distance transmission and demand response technologies for grid-based storage. But my cautious approach towards electricity storage is nothing compared to John Petersen's skepticism of the viability of using expensive batteries for electric vehicles. While we both think that the battery market is likely to expand greatly, we don't see electric cars as becoming mainstream anytime in the next couple decades simply because of the extreme high cost of battery packs on a per kWh basis. Like solar, a break-through technology, such as the one that secretive EEStor is working on (with endless delays) could change all that. ZENN Motor (ZNNMF.PK) seems to think so.

If EEStor does deliver a faster, cheaper, lighter, more durable way to store electricity at a fraction of the cost, it won't be good for current battery stocks, especially if the new technology can be produced quickly and in large quantities.

French Nuclear Accident Covers Paris With Radioactive Plume!

If you're expecting a Nuclear Renaissance, you might get one, or you might not. But it's not hard to imagine things getting a lot worse for Nuclear power. If a major Western city had to be abandoned because of a nuclear accident, I don't think that the nuclear industry could recover from the widespread panic for a generation. Even newer, safer nuclear technologies would be tarred with the same brush; no one would want anything to do with anything nuclear, let alone own any nuclear company stocks.

Further Thoughts

What is your favorite Alternative Energy sector? If I did not write a disastrous headline for it above, it's not because such a disaster is not possible, there are a lot more such headlines where these came from, and many more I have not thought of. Furthermore, it does not take a disastrous headline like the ones above to hurt clean energy as a whole. Clean energy companies typically are younger and usually have not yet achieved profitability. Such companies are less well equipped to deal with financial crises than profitable companies.

Are your investments “Alternative” or just “Alter-Naïve”?

DISCLOSURE: Short SPY.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 11, 2010

2010: The Year of the Strong Grid? Part III

Two Strong Grid Stocks in Hiding

Tom Konrad, CFA

A look at two transmission (or "Strong Grid") stocks I missed previously: EMCORE Group and AZZ Incorporated.

In part I of this series, I made the case that 2010 might be the year that transmission stocks caught investors' attention, as smart grid stocks did in 2009.  In part II, I looked at the transmission stocks in our Electric Grid stock list, and compared their financial strength. 

My initial screen, based on Current ratio, Cash on Hand, Debt, Cash from Operations, P/E ratio, and dividend yeild allowed me to narrow the list down to Valmont Industries (VMI), Jinpan International (JST), General Cable (BGC), MasTec (MTZ), and Wesco International (WCC) as stocks worth further research.  I'm not buying any of these now, because I believe the market as a whole nosedive at any time.  It could also keep trending up for a while, but, on the whole, the possible upside gains do not seem sufficient compensation for the downside risks.

EMCORE Group

I particularly liked Valmont, because it has a high current ratio, no significant debt, and pays a small dividend.  A reader suggested that if I liked Valmont, I'd like EMCORE Group (EME) even better.  So how does it compare?  Valmont has a 2.6x current ratio, can pay off its debt instantly with cash, has 12.2 trailing P/E ratio (Q4 09), and pays a 0.8% dividend.  Emcore's current ratio is 1.45x, which is on the low (i.e. poor) end for the stocks in the group, could instantly pay off its debt, has an 11.7 trailing P/E (Q4 09), and does not pay a dividend.   (Note that I used Q3 09 numbers in Part II; these were what was available at the time of writing.)

EMCORE's weaker current ratio and lack of a dividend don't make it more attractive than Valmont.  A little more digging also turned up another problem with EMCORE: electric transmission seems to be only a small fraction of their overall business.  This general mechanical and electicial construction group seems to get less than 20% of its revenues from transmission, quite possibly much less.  Further, as a construction firm, the best of the five companies above to compare it to would be MazTec, which is also a contractor, as opposed to an industry supplier like Valmont.  MasTec also is not a pure play, and probably only gets about 1/3 of its revenue from electrcical transmission work, but MazTec sees transmission as key to the company's future growth.  If it weren't for the lack of transmission focus, EMCORE would compare favorably to MasTec, which has an only slightly higher current ratio (1.6x), would need a couple of years to pay off its debt using internally generated cash, has a slightly higher trailing P/E (13.3), and also does not pay a dividend.

In short, EMCORE Group probably is not a very good way to invest in the Strong Grid.

AZZ Incorporated

I'd run across AZZ Incorporated (AZZ) before, but had neglected to add it to the Electric Grid stock list, and didn't think of it when I was compiling the "Strongest Strong Grid Stocks."  This time, I came across it on StockGumShoe, where Travis Johnson investigates the paid stock newsletter teases.  If that sounds familiar, it's because we republished an article of his here in January.  Motley Fool's Hidden Gems has apparently been teasing a stock which will save us from the implosion of the electric grid, and Travis makes a good case that it's AZZ

One othe the things I like about Travis's work is that he also goes into a good deal of depth looking into the same sorts of indicators I find interesting about companies after he ferrets them out.  He has this to say about AZZ:

This one actually looks pretty appealing to me, as long as you’re not too impatient — they’ve got a price/sales ratio of under 1, but still manage to run a double digit profit margin, which is fairly unusual (though that margin might shrink), and they do appear to have a pretty strong national business with their large number of manufacturing and galvanizing plants, so they’re not completely stuck riding the regional trends if one of their areas sinks further into this recession.

The forward estimates by analysts are for very strong growth in the next several years, which gives them a price/earnings/growth (PEG) ratio of .59, which usually indicates a screaming value — but I’d be cautious about those future growth estimates.  [There's much more here.]

I find it appealing too, especially after reading what he has to say about the balance sheet and insider trades.  It still seems to have room to fall, though, but this one definitely deserves to be added to the other five "Strongest Strong Grid Stocks" listed in part two.  These are the ones  I'll be looking to add to my protfolio (assuming they're still strong) when the current euphoria turns into fear again.

Here they are (using Q4 09 data.  Price data as of 2/10/10.)  Note that most of the P/E's have dropped partly due to higher earnings in Q4 09 than Q4 08, and partly due to price declines in the last month.

Company Current Ratio T (see part II)
P/E (trailing) Yield
AZZ Incorporated (AZZ) 4.06x
instantly
9.35
3.4%
General Cable (BGC) 2.1x instantly 11.34
0
Jinpan International (JST) 2.3x instantly
12.77 0.6%
MasTec (MTZ) 1.7x 2 years 13.35 0
Valmont Industries (VMI) 2.6x instantly 12.2 0.8%

DISCLOSURE: Long BGC.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 09, 2010

Cleantech Economics 101: Higher Fossil Fuel Prices; More Cleantech

David Gold

With all the complexities of cleantech policy and technologies, there is only one simple thing needed for an explosion of competitive clean technologies – increased price of fossil fuels.

The amount of R&D expenditures that will need to be invested in clean technology in order for it to hurdle the bar into competitiveness is much greater with low fossil fuel prices. And, the lower those prices, the less appetite the private sector has for making such investments. This leaves a much-increased burden on the back of government through grants and subsidies– a back that is close to being broken from debt. While clean technology development is absolutely necessary, technology development takes time and, often, a long time. And technology development is fraught with uncertainty…nobody ever knows a priori whether such efforts will be successful and how long they will take. Believe me…every venture fund in the world would love to be able to know that! But they don’t. However, virtually every venture fund and researcher will tell you that significant advances usually take much more time and more money than expected. In an environment of relatively low fossil fuel prices with high price volatility, grants and subsidies for an amount of time and at a level that will make any permanent and meaningful difference are simply unsustainable. So, for all the focus on “cleantech stimulus” the most important thing that government can do is to affect change in the cost of the fossil fuel alternatives.

If we had higher fossil fuel prices or even just clearer visibility and certainty about future increases, the free market would make dramatic increases in investment in clean technology. When the free market sees an opportunity to make a profit, it moves extremely fast. Government actions that put in motion increases in the cost of fossil fuel alternatives, even if those increases are phased in over many years, can have an enormous impact on the money invested by the private sector in alternatives (and a corresponding decrease in need for government subsidies and grants). This, in turn, will further accelerate technology advances, leading to a more rapid convergence of the time when various technologies can competitively reach the mass market.

Given the reality that fossil fuels are a finite resource, it is a fait accompli that eventually alternative energy and energy efficiency technologies will become so compelling that they will dominate the market. But the future of fossil fuel prices in the relatively near term (e.g., the next decade or two) is far from certain as both general economic conditions and new discoveries such as those in Venezuela’s Orinoco Belt play a roll. If we didn’t care about global warming, national security or economic security, there would be little need to do anything but let the market take its course. Unfortunately, irrespective of your personal policy hot button, most of us would agree that we do not have the luxury of the amount of time that this transition would likely take on its own.

The government has a role to ensure that externalities that are important to the public are accounted for in the market. But the government cannot subsidize our way there nor simply mandate that the market use a specific technology. Should it be surprising that the U.S. government “mandated” that 100 million gallons of cellulosic ethanol be produced this year and the EPA estimates that only 6.5 million will be produced? The government sank $150M into Range Fuels’ cellulosic ethanol plant expecting it to produce over 10 million gallons, but Range will only produce about 2.5 million gallons this year. How silly is it to try to “mandate” use of biofuels – did we not learn anything from the economic demise of the Soviet Union about government controlled economies? If oil had remained at over $100/barrel since 2008, I would suggest to you that biofuels production would be much higher this year without any government mandate.

The government does need to take action and do so in a way that does not crush our economy. There are important societal externalities associated with continued use of fossil fuels that are not accurately reflected in the price of the commodities in the market. Cap and trade is the right debate to be having… albeit likely the wrong solution. More on that in my next post.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (www.accessvp.com). This article was first published on his blog, www.greengoldblog.com.

February 08, 2010

Smart Grid’s Expected 250% 5-Yr Growth Rate is Great News for Cisco, IBM, Accenture, EnerNOC

Bill Paul

Lux Research forecast last week that the global smart grid market will grow some 250% over the next five years, reaching nearly $16 billion by 2015 compared with today’s $4.5 billion. Interestingly, Lux further forecast that only a few select firms will take full advantage of this looming largesse.

It’s understandable why the payoff won’t be widely shared. As regulated entities (on the transmission and distribution side), electric utilities have an obligation (specifically, the time-honored “obligation to serve”) that effectively requires that they be conservative when partnering with IT firms that can provide the money-saving, blackout-avoiding technologies which are at the heart of the smart grid. In other words, big is better.

This is why most of the more than $11 billion of new smart-grid-related revenue that Lux expects to be generated over the next five years will be pocketed by the IT beasts that already are pocketing the yeoman’s share of the $4.5 billion currently being spent.

For at least one firm – demand response leader EnerNOC (ENOC) — the potential payoff is life-changing, and only further adds to my purely personal suspicion that EnerNOC is going to be acquired at some point by a much larger firm.

Two logical buyers of EnerNOC would be Accenture (ACN) and IBM (IBM). The two are jockeying for leadership in the rapidly-developing smart-grid analysis and services market, which Lux Research believes is “poised for explosive growth” led by demand response applications.

Still another IT behemoth in line to gobble up billions of new smart-grid revenue is Cisco Systems (CSCO). Think of Cisco as the smart grid’s Mr. Goodwrench. Whether it’s routers, switches or other equipment, Cisco’s goal is to provide the IT components that utilities (with the help of consultants led by Accenture and IBM) will fashion into a system that automates the power industry from end to end – from generation to transmission to distribution to consumption.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

February 07, 2010

Canada's Top Ten Cleantech Firms

Tom Konrad, CFA

Given the small size of its economy and rather lackluster approach to climate change, Canada has many of the Cleantech stocks with the best prospects.  Canadian listed firms come from a broad range of sustainable sectors, and a lack of attention from United States investors means that many trade at very attractive valuations.  Corporate Knights' has picked ten of the best.

I'm often surprised at how many of my favorite green stocks are listed in Canada.  This year, two of my Ten Clean Energy Stocks for 2010 are Canadian listed.  The same was true for my 2008 list, while my 2009 list contained three stocks from Canadian exchanges.  I mostly stick to companies that are traded on North American exchanges, so it's not surprising that more Canadian-listed companies appear than, say, companies listed in Britain (only one over three years.)  It's also surprising that there are so many Canadian listed firms, given that Canada's economy is only about one tenth the size of the United States' economy.  Canada's largest exchange, the TSX, has 3841 companies with a combined market capitalization of about $1.4 trillion, compared to 3615 $10.8 trillion for the NYSE and 2249 at $2.8 trillion for the NASDAQ.

The number of stocks on Canadian exchanges is key to the number of great Cleantech stocks listed there.  While Canada's relative market capitalization parallels the relative size of the economy, the number of Canadian listed stocks is about 2/3 of the number of stocks listed in the United States.  Small companies often find that listing on the TSX is faster and easier, and often comes with less burdensome reporting rules than a NASDAQ listing [powerpoint pdf.]  This means that American Cleantech investors interested in the many new companies going public find ourselves with relatively few options on US exchanges, while a bumper crop of Cleantech IPOs heads towards Canada.

However, the less burdensome listing requirements for Toronto listed firms are a two-edged sword: investors looking at these companies not only have to sift through more of them, but they need to be more careful with the ones they choose to consider in more detail.  Many investors decide the extra work is not worth the bother, and stick to the relatively few US listed firms.  Their reluctance is good for those of us willing to venture across the Northern border and do our homework: a smaller pool of investors means we can often buy these companies at much better valuations.

Sorting the Wheat from the Chaff

With many more Cleantech stocks to choose from, it helps to narrow down your focus on a few companies before doing the many hours of due diligence that should accompany any stock market investment.  I often start with companies that are part of third party indexes.  Beyond that, I tend to focus on a few Cleantech sectors such as Energy Efficiency Stocks, Clean Transportation Stocks, and Electric Grid stocks which get less attention than more popular sectors such as solar.  

Companies in indexes have garnered enough shareholder attention that there will decent liquidity.  This can be surprisingly important, even for a small investor.  I became interested in a TSX-traded energy efficiency firm over the holidays, did hours of due diligence, and even wrote an article.  The stock typically trades 1,000 to 2,000 shares a day, and I have only been able to buy 1700 shares at what I consider to be an attractive price.  I'm waiting to publish the article until I've made my purchase.  Given that the stock has risen since I bought it, I may never get the chance to buy more at the prices that prevailed when I did my research.  Researching higher-liquidity stocks means that you can get in when you want without greatly moving the market.

The Cleantech 10TM

Corporate Knights calls itself "The Canadian Magazine for Responsible Business," and they publish (in collaboration with The Cleantech Group) an annual list of ten "technology-driven growth companies that have big impacts on resource efficiency and the environment—not simply those re-branding themselves as ‘green.’"  By starting with a list like this one, I know I'm only looking at companies with businesses I would like to own.  What I don't know is if the stocks are good values, if they strong financially, or if management has the skills necessary to have them succeed against the competition.  These latter three questions are the ones I try to answer during due diligence.   In 2009, their list outperformed the TSX/S&P Composite by 38%.

They published the most recent Cleantech 10TM list in October 2009. With one replacement because of the buyout of Canadian Hydro Developers, here is their list, along with a few of my observations about each company.  The first ticker is the Canadian ticker (in Canadian dollars,) and the second ticker is the US ticker, denominated in US$.

1. Westport Innovations (WPT.TO, WPRT)

Vancouver-based Westport trades on the NASDAQ as well as the Toronto Stock Exchange.  This means the company may be less interesting to investors looking for less-noticed stocks.  The company's alternative engines and drive trains will probably do well if oil prices continue to rise.  Although the company can fund about two year's worth of operating cash losses from the balance sheet, I prefer profitable companies which are actively paying down their debt.

2. RuggedCom (RCM.TO, RUGGF.PK)

I took a close look at Smart Grid company Ruggedcom in November, and I concluded that, although I liked the business and had a generally good feeling about management, I felt it was overvalued at US$16.60.  Since it's currently trading around $20, I'm in no hurry to buy.

3. WaterFurnace Renewable Energy (WFI.TO, WFIFF.PK)

Waterfunace is a long-time favorite of mine, having appeared in both my own top stock lists in 2009 and 2010.  In fact, I first learned about the Cleantech 10 list because it showed up in a news story about Waterfunace.  

The Fort Wayne-based company manufactures a broad range of geothermal heat pumps, a clean energy technology that not only saves energy compared to other forms of heating and cooling a building, but also shifts electricity use to seasons during which wind based power is plentiful.

The company also provided me with some extra confirmation that US based investors tend to ignore Toronto listed companies: A contributing writer for the Motley Fool called me to ask about the company in January, after a relative had recommended one of their heat pumps for his home.  He was researching it for his own portfolio, and when I asked him if he was likely to write about it, he said that he probably wouldn't.  The Motley Fool pays him to write articles that are likely to be popular, and, he said, that companies without US tickers don't interest many of their readers.

4. Magma Energy Corp. (MXY.TO, MGMXF.PK)

Vancouver based Magma Energy Corp went public in July last year, with the intention of buying up interests in geothermal electricity projects.  Geothermal is one of my favorite renewable energy sectors, since the electricity it produces is competitive with wind, but the power is much more reliable, but I have not yet taken the time to analyze Magma and decide if it's a good value.

5. 5N Plus (VNP.TO, FPLSF.PK)

Montreal based 5N Plus provides purified metals, and is probably most interesting to investors because it supplies pure metals used in the Solar photovoltaic panels.

6. Carmanah Technologies Corp. (CMH.TO, CMHXF.PK)

Victoria based Carmanah manufactures LED lighting with integrated solar panels and batteries which allow for use in remote locations without a grid connection.  Not having to lay wires for a grid connection means that Carmanah's products are often the most cost effective lighting solution, despite the high cost of both the batteries and solar.  I owned the stock from late 2005 until I sold it in September 2008 in response to the financial crisis, because I did not think that the company had the financial muscle to weather the storm.  

The company last traded at $0.80, still below the $0.95 at which I sold despite almost doubling since March 2009, but I have not looked at the company again to see if they have done what I consider to be sufficient work repairing their balance sheet and cash flows.

7. NEO Material Technologies (NEM.TO, NEMFF.PK)

Toronto based NEO Material Technologies is one of the companies that made this whole exercise of going through the list worth doing.  I was not previously aware of this manufacturer of rare-earth and Zirconium based magnets, which are used in high-performance electric motors (Recall John Petersen's recent Storm Warning about the availability of rare earths for hybrid and electric vehicles.) Despite worries about rare earth supply, if NEO Materials is able to pass higher supply costs on to its customers, the company could be very profitable.  Will it?  Finding out is where the work comes in.

8. Stantec (STN.TO, STN)

Also new to me is Edmonton based Stantec, a design firm geared towards sustainability.  Stantec is worth further research because energy efficiency is more often about design than about products.  In other words, design firms can often do more to reduce energy use than can be accomplished by simply slotting more efficient products into the same systems.  

9. Hemisphere GPS (HEM.TO, HEMGF.PK)

Calgary based Hemisphere GPS manufactures GPS equipment for farming equipment which allows farmers to better gauge the amount of fertilizer or pesticide applied to a specific part of the field to the needs of the crop there.  This more efficient use of resources not only improves the economics for the farmer, but is less wasteful and polluting to the environment.

10. Innergex Renewable Energy Inc. (INE.TO, INGXF.PK)

Innergex is a developer and operator of hydroelectric and wind projects, with the majority being hydroelectric.  This makes the company an interesting play because the economics of upgrading old hydroelectric plants are far better than even building new coal plants, while new hydropower projects have economics that are comparable with the best other renewables, wind and geothermal.  Like most of these, I have not looked at Innergex's valuation, but I consider it worth a look.

 

The Cleantech 10 List from Corporate Knights on Vimeo.

Next Steps

NEO Materials, Stantec, Magma, and Innergex all are interesting enough to me that I may do further research.  With interesting prospects like these, my next step is to start monitoring the news for these companies, and perhaps do a preliminary valuation based on simple metrics such as P/E, cash on hand, current ratio, and cash flow from operations.  If the stock price falls to a point where the valuation looks good, and the news does not account for the change, it will be time to do the real work of reading through annual and quarterly reports.

DISCLOSURE: The author and/or his clients own WFI. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 04, 2010

DOE Reports That Lithium-ion Batteries Are Still Not Ready For Prime Time

John Petersen

Last month the DOE released the 2009 Annual Progress Report for its Energy Storage Research and Development Vehicle Technologies Program. Like the 2008 Annual Progress Report I discussed in a February 2009 article titled DOE Reports That Lithium-ion Batteries Are Not Ready For Prime Time, this new report is a relatively upbeat assessment of lithium-ion battery research and development that once again provides a stark reality check for investors in energy storage stocks. In Section III of the Report, which focuses primarily on meat and potatoes issues like R&D objectives, technical barriers, technical targets and recent accomplishments; the DOE summarized the objectives and technical barriers as follows:

Objectives
  • By 2010, develop an electric drive train energy storage device with a 15-year life at 300 Wh with a discharge power of 25 kW for 18 seconds and a cost of $20/kw.
  • By 2014, develop a PHEV battery that enables a 40 mile all-electric range and costs $3,400.
Technical Barriers
  • Cost – The current cost of Li-based batteries (the most promising chemistry) is approximately a factor of three-five too high on a kWh basis for PHEVs and approximately a factor of two too high on a kW basis for HEVs. The main cost drivers being addressed are the high costs of raw materials and materials processing, cell and module packaging, and manufacturing.
  • Performance – The performance advancements required include the need for much higher energy densities to meet the volume and weight requirements, especially for the 40 mile PHEV system, and to reduce the number of cells in the battery (thus reducing system cost).
  • Abuse Tolerance – Many Li batteries are not intrinsically tolerant to abusive conditions such as a short circuit (including an internal short circuit), overcharge, over-discharge, crush, or exposure to fire and/or other high temperature environments. The use of Li chemistry in the larger (PHEV) batteries increases the urgency to address these issues.
  • Life – The ability to attain a 15-year life with 300,000 HEV cycles or 5,000 EV cycles is unproven and is anticipated to be difficult.
The recent accomplishments section includes about 85 pages of discussion on 25 pending research, development, analysis and testing projects that are nowhere near complete. It's clear from the Report that the DOE is coordinating a massively complex and expensive drive to improve lithium-ion batteries to a point where they will be cost-effective in transportation applications. It's equally clear that the effort has a long-way to go before anybody will be able to accurately assess the likelihood that all or any of the pending R&D projects will result in innovations that can survive the often-difficult transition from the laboratory bench to the factory floor. The R&D is critically important, but favorable results are not guaranteed, costs are likely to exceed budgets by a wide margin and timing is anybody's guess. The only certainties are it won't be soon and it won't be cheap.

When I started writing this blog, my central thesis was that energy storage is the beating heart of cleantech and is destined to become a major investment theme that will endure for decades. Storage is an essential enabling technology for wind and solar power, an efficient smart grid and emerging transportation applications. It's also a difficult industry that's constrained by laws of chemistry, requires massive volumes of commodity raw materials and can only be described as capital intensive heavy manufacturing. That means we can reasonably expect steady incremental progress over a the long-term, but the game changing 'Moore's Law' type advances we've come to expect from information and communications technology are simply not going to happen in energy storage. To borrow a concept from John Mauldin, my favorite Seeking Alpha contributor, energy storage is a 'muddle through' industry that will progress in baby steps that take years, instead of quantum leaps that happen overnight.

When you cut through the happy talk and issue advocacy, energy storage is all about minimizing waste and making inherently variable energy sources more reliable. If waste is cheaper than storage, waste will be the rational choice for over 95% of the population who believe the green in their wallet is more important than the green in their cocktail party conversation. Given the nature of the industry, the law of economic gravity will prevail and the cheapest solution that can do the work will earn the lion's share of the market. The future of energy storage is bright, but it's going to be a long hard slog through the swamp and I can comfortably guarantee that we'll never see teenagers on Sunset Boulevard popping the hood to show off and compare their battery packs.

One of the most difficult parts of blogging on the energy storage sector is explaining that when it comes to investing, entry price and timing are the only things that matter. My favorite example is one everybody knows. I've been a Macintosh user since 1988 and had countless arguments over the years about the technical superiority and ease of use of the Mac OS. The contrary argument, of course, was that products from Apple (AAPL) were too expensive compared to budget priced products that used Microsoft's (MSFT) operating system. Over the last few years Apple products have surged to the forefront as they pared prices to more competitive levels and continued their tradition of technical excellence. The following chart from Yahoo! Finance shows the 25 year comparative stock market performance of the two companies.

MSFT v AAPL.png

As a computer user, I've always insisted on owning Apple. As an investor, the better path would have been to own Microsoft for the first 19 years and then shift to Apple for the last six.

In the long-term, I expect every company that brings a cost-effective energy storage product to market to have more business than it can handle. For the next five to ten years, I expect the biggest gains to accrue in companies like Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP), ZBB Energy (ZBB), and Axion Power (AXPW.OB) that make objectively cheap products today to satisfy immediate needs. When and if advanced battery developers like A123 Systems (AONE), Ener1 (HEV), Altair Nanotechnologies (ALTI) and Valence Technologies (VLNC) succeed in their individual and collective efforts to make objectively expensive products affordable, portfolio adjustments to reflect the new realities will be essential. But if Apple vs. Microsoft teaches anything, it's that cheap beats cool until cool becomes cheap. Promises don't matter. Price tags do.

Last year I said that I'm a simple-minded creature and believe that little things like costs and benefits matter. When the brand new annual progress report from the DOE concludes that:
  • Lithium-ion batteries will not be cost-effective in HEVs unless somebody finds a way to slash costs by 50%; and
  • Lithium-ion batteries will not be cost-effective in PHEVs unless somebody finds a way to slash costs by 67% to 80%;
I believe them. When I combine the DOE's conclusions with a recent opinion from the National Research Council that the DOE's price objectives "beyond 2012 are extremely aggressive and are unlikely to be reached by the target date or even for a significant time beyond" cruel reality seems obvious: lithium-ion batteries are still not ready for prime time and the plug-in vehicle frenzy is leading investors and the public down a garden path that can only end in disaster like most technology du jour schemes that are conceived in the halls of government and then sold to the public as the next big thing, including:

25 years ago
Methanol
15 years ago
Electric Vehicles
10 years ago
HEVs and Electric Vehicles
5 years ago
Hydrogen Fuel Cells
3 years ago
Ethanol and Biofuels
Today
PHEVs and Electric Vehicles
2012
Here Be Dragons

Will Rogers said, "There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves." Albert Einstein reportedly defined insanity as doing the same thing over and over again and expecting different results. When will investors learn that technical hype originating from government with a chorus of support from heavily subsidized companies rarely works out well?

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its stock. He also owns small long positions in Exide Technologies (XIDE), C&D Technologies (CHP) and ZBB Energy (ZBB).

February 03, 2010

Electric Cars, The Insanity Escalates

John Petersen

On January 28th the DOE announced the closing of a $1.4 billion ATVM loan to Nissan North America, a unit of Nissan Motors (NSANY), for the purpose of retooling a factory in Smyrna, Tennessee to produce the Leaf, a zero emission electric car that will be released later this year. Nissan will use the loan proceeds to create "up to 1,300 American jobs" at a cost of about $1.3 million each and the 200,000 Leafs it hopes to produce and sell each year will "conserve up to 65.4 million gallons" of gas, a whopping 327 gallons per car per year. Secretary Chu said, "This is an investment in our clean energy future. It will bring the United States closer to reducing our dependence on foreign oil and help lower carbon pollution." I don't know whether to laugh or cry.

With due respect to Nissan and its PR team, no electric car can honestly claim zero emissions because unless they're sold in a bundle with a wind turbine or solar panel, the best any electric car can do is take distributed CO2 emissions from the roads and centralize them in a coal or gas fired power plant. Even under the most optimistic of renewable energy scenarios, American EVs will be plugging into a lump of coal for decades. I'm the first to point out that the Leaf will be responsible for a little less than half the CO2 a comparably sized car with an internal combustion engine would produce, but calling the Leaf 'zero emission' has all the intellectual integrity of a no-peeing section in the public swimming pool.

Nissan's alliance with France's Renault (RNSDF.PK) makes it a major player in the global automotive industry with combined sales of roughly 6 million vehicles in 2009. While Nissan and Renault both make marketable products, neither company has a sterling reputation as an automotive trendsetter, particularly when it comes to electric drive technologies. Nissan was fighting for survival while Toyota (TM) was developing its highly successful Hybrid Synergy Drive. As a result, the best Nissan could do was license the synergy drive from Toyota for use in the Altima. As recently as 2006, Renault was snubbing HEV technology in favor of fuel-efficient diesel engines. Now it seems that they've both found religion and want to leap-frog a decade of real-world electric drive experience by introducing an audacious, expensive and unproven electric car that will be underwritten by taxpayers and sold to customers (a/k/a lab-rats) as part of the grandest science fair project in history.

The best part is, Nissan wins no matter what happens. If the Leaf is a successful product, Nissan will have a taken a clear lead in the field with taxpayer money. If the Leaf is a failure, Nissan will be able to look regulators and EV advocates in the eye and say, "we spent billions to throw your stupid EV party and nobody came." No wonder Nissan CEO Carlos Ghosn is happy. Heck, even P.T. Barnum and W.C. Fields would have been proud.

To date Nissan's pricing plans for the Leaf have been cloaked in mystery, resulting in a plethora of conflicting press reports. Most seem to agree that Nissan will copy the 'batteries not included' section from Mattel's (MAT) business plan and lease the batteries to consumers under a separate contract. This strategy has the dual benefit of concealing the true cost of the Leaf while deflecting customer backlash from battery pack failures or service life issues.

I hate going back to unpleasant realities, but the Smyrna plant will need roughly 4.8 million kWh of lithium-ion batteries per year to build 200,000 Leafs. If Nissan-Renault had taken the time and spent the money to develop a competitive HEV technology of their own, those same batteries would be enough to upgrade more than half of their global auto production to HEVs and save 500 million gallons of gasoline per year in the process.

Last October a White House advisor called it 'calculator abuse' when ABC News had the temerity to suggest that stimulus jobs cost taxpayers an average of $160,000 each. I would love to hear a cogent explanation of how it makes sense to:
  • Put taxpayers on the hook to the tune of $1 million for each new job created in Smyrna;
  • Save 64.5 million gallons of gas with a small fleet of Leafs instead of saving 500 million gallons of gas by upgrading half of Nissan-Renault's global production to HEVs; and
  • Reduce total CO2 emissions by 335,000 tons with a small fleet of Leafs instead of reducing CO2 emissions by 5 million tons with a larger and more affordable fleet of HEVs.
As things presently stand, I have to wonder whether the inmates aren't running the asylum.

Disclosure: None

February 02, 2010

2010: The Year of the Strong Grid? Part II

The Strongest Strong Grid Stocks

Tom Konrad, CFA

A comparison of the financial strength of transmission (or "Strong Grid") companies.

In Part I of this article I made the case that transmission stocks, or "Strong Grid" might be a clean energy sector that takes off in 2010, as Smart Grid stocks and Battery stocks did in 2009.  If the sector does take off, the rising tide will probably float all boats, but if it doesn't, it will probably be better to be in the strongest such companies, because, as in 2009, the harsh financial climate will probably mean that the strongest companies do best.

Metrics

For a first look at financial strength, I like to look at the following metrics as a first screen:

  • Current Ratio: the ratio of current assets to current liabilities - the higher the better
  • If Cash Flow from Operations (CFO) is positive, then T = (Total Liabilities (L) - Cash)/ CFO - the time it will take to pay off debt using internal cash flows and cash on hand.   I consider anything less than a few years good.
  • Price/Earnings ratio.  In a mature industry such as transmission suppliers, I like to see positive earnings and a P/E ratio below the average for the market, but not so low that it indicates trouble elsewhere. 
  • The dividend yield (Y) - I like companies that pay a dividend, since I believe it shows management's confidence in the company's long term profitability.  

Most of these numbers can be calculated directly from the company's "Key Statistics" page on Yahoo! Finance, although I had to calculate them myself using the most recent financial statements for the over the counter and foreign listed companies.  Most statistics are from Q3 2009 financial statements.

Transmission Builders and Suppliers

Company Current Ratio T P/E (trailing) Yield
ABB Group (ABB) 1.7 instantly 16.7 2.3%
American Superconductor (AMSC) 2.8 instantly N/A 0
Composite Technology Corp (CPTC.OB)  0.6 N/A N/A 0
CVTech Group (CVT.TO) 1.5x 7 years 24 0
General Cable (BGC) 2.1x instantly 12.3 0
Jinpan International (JST) 2.3x 6 months 10.6 0.6%
MasTec (MTZ) 1.7x 2 years 13.9 0
MYR Group (MYRG) 1.6x instantly 16.7 0
Pike Electric (PIKE) 2.3x 1 year 27 0
Quanta Services (PWR) 3.6x instantly 19 0
Resin Systems (RSSYF.PK)

I could not find current financial statements.

Siemens (SI) 1.2x 13 years 10 2.6%
Valmont Industries (VMI) 2.6x instantly 12.8 0.8%
Wesco International (WCC) 2.2x 2 years 9.2 0

In general, the companies in this industry show a good deal of financial strength.  The only ones in my list that I would eliminate from consideration on these measures are:

  • Composite Technology and Siemens, because of relatively weak current ratios. I also recently wrote about some other worries I have about Composite.
  • CVTech and Siemens because too much debt will constrain their flexibility.
  • ABB, MYR, Pike, and Quanta because they are too expensive from the standpoint of price to earnings.  

The other financial strength measures are more important for negative earnings companies such as American Superconductor and Composite Technology.  Since AMSC appears strong, other valuation measures should be considered to determine if it's overpriced before making a decision to purchase.

I won't eliminate a stock from consideration because of a lack of dividend, but I think Valmont and Jinpan are worth another look because they do pay dividends, and their financial statements are both quite strong by my favorite measures.  General Cable, MasTec, and Wesco also look solid and seem reasonably priced.  These are the five I'd be buying currently, if I were not waiting for a general market decline before buying anything.

Stocks in My Top Ten List

The P/E ratio is why MasTec was included in my Ten Clean Energy Stocks for 2010: I wanted a domestic electric transmission contractor, but did not like the price of most of the others. I included General Cable as an equipment supplier with an attractive valuation and rock- solid financials.  If I were to pick a new supplier today, it would probably be Valmont rather than General Cable, but that is only because Valmont has fallen 12% compared to a 2% fall for General Cable in the month since I created the list, making Valmont relatively more attractive.

DISCLOSURE: Long BGC, PWR, WCC.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 01, 2010

Why Investors Should Pay Attention to Portfolio 21’s Top 10 Green Companies

Bill Paul

Not every investor wants to be a green investor, but every investor – institutional and individual alike – should be prepared to take advantage of a company’s greenness.

According to a recent study sponsored by Environmental Leader, an online publisher, consumers are willing to spend more on products and services that they consider to be environmentally-friendly. That’s why 82% of respondents said they plan to use more green messaging in their marketing.

But how can an investor tell a genuinely green firm from the phony ones that practice “greenwashing?” One place to look is Portfolio 21.

As we note on EnergyTechStocks.com, Portfolio 21 is a well-established mutual fund that looks for environmentally-friendly business practices by companies in a variety of industries. The fund’s shares are up over 37% from a year ago and the other day it announced its list of “Top 10 Green Companies.” While greenness certainly isn’t the only factor that goes into a company’s share price, the following 10 firms have products and services that figure to have a little extra going for them.

Autodesk (Symbol ADSK) made the list because, according to Portfolio 21, the company makes software that supports sustainable building practices. East Japan Railway (Symbol EJPRY) made the list because rail transportation is inherently more energy efficient than trucking, and because the company keeps reducing its own energy consumption.

Henkel (Symbol HENKY) was recognized for its wide range of bio-based detergents and adhesives. Itron (Symbol ITRI), meanwhile, was cited because its core business is metering and software that serve to reduce energy consumption.

Brazil’s Natura Cosmeticos (Symbol NUACF) was recognized for its sustainable use of natural resources. Similarly, Potlatch (Symbol PCH) was recognized for its sustainable forestry practices.

Red Electrica (Symbol RDEIY), Spain’s leading power transmission company, was cited for its role in facilitating Spain’s rapidly-growing alternative power generation business. Japanese consumer products giant Sharp (Symbol SHCAY) made the list for manufacturing products that incorporate energy and resource efficiency and recyclability.

Belgium’s Umicore (Symbol UMI) was recognized for being the world’s leading recycler of precious metals, while Denmark’s Vestas (Symbol VWDRY) was recognized not just for being a wind power manufacturer but for its own sustainable manufacturing practices.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.


« January 2010 | Main | March 2010 »

Site Sponsors





Oil and Gas



Search This Site


Share Us






Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner


Subscribe by RSS Feed



Certifications and Site Mentions


New York Times

Wall Street Journal





USA Today

Forbes

The Scientist

USA Today

Seeking Alpha Certified

Twitter Updates