Tom Konrad CFA
CVTech Group (CVT.TO, CVTPF.PK) operates in two of my favorite clean energy sectors: electricity transmission and distribution and efficient vehicles. Here is a look at the company’s fundamentals.
In “The Strongest Strong Grid Stocks” of my 2010: The Year of the Strong Grid? series, I took a quick look at CVTech Group‘s financial ratios, and decided not to look deeper because they had considerably more debt in comparison to income than the other electricity transmission (“strong grid”) stocks I covered in that article. I came across CVTech again while looking at companies involved in vehicle efficiency for my Peak Oil Investments series. CVTech came up as a vehicle efficiency stock because it has a division that designs, engineers, and manufactures Continuously Variable Transmissions (CVT). CVT has the potential to increase vehicle efficiency by 6%, according to independent consultancy Robert Baird & Co, so I decided CVTech deserved a second look.
CVTech’s Energy division accounts for about 88% of revenues, or 84% of the company’s EBITDA. The vast majority of this division is focused on construction and maintenance of electrical utility transmission and distribution (T&D) in Quebec and the Northeastern United States. According to Judy Chang of the Brattle Group, speaking at the Yale Climate and Energy Institute’s Annual Conference in April, the Northeast states will need to invest $10 billion in electricity transmission by 2020 in order to meet their existing renewable energy mandates. According to a CVTech investor presentation [pdf], Quebec will need to invest more than C$14 billion to upgrade power transmission between 2009 and 2018. With 2009 Energy division revenues at $140 million, the division could grow rapidly even if it only captures a small fraction of regional T&D spending.
A typical large transmission construction and service contract for the Energy division is a $40M regional “construction, maintenance, of an overhead distribution network” for Hydro-Quebec, with two 1-year renewal options. A less typical project that caught my eye was installing pole-attached solar panels for PSE&G in New Jersey. I’ve been following this project since it was announced because I think it makes a lot more sense for the electric grid to have a large number of small, distributed solar panels than large solar installations. Distributed solar panels are not subject to large, quick fluctuations in output from cloud transients, yet the mass production and installation of the individual panels for a single owner should allow PSE&G to capture some of the economies of scale that is usually associated with large solar farms. Because of these advantages, I expect to see more, similar projects in the future, and CVTech’s prior experience may give the company an advantage in bidding for them.
The vehicle division specializes in the design and manufacture of CVT systems for small vehicles such as snowmobiles, ATVs and Golf Carts. Because CVTech’s CVTs use belts, they do not work well for high-torque applications such as trucks. They have about 10% of the worldwide market for CVTs in vehicles that use them, but the trend to smaller cars may work to their advantage. In January, they were selected to supply the automatic transmission option for the Tata Nano, giving them excellent growth prospects.
At a $24 trailing P/E ratio and a 1.7% dividend yield, CVTech does not seem like a good value proposition. However, earnings were depressed by the economic climate in 2009: the P/E ratio would have been below 8 if 2008 earnings were used instead of 2009. Spending on T&D in the Northeastern US and Quebec needs to not only rebound but grow to keep up with unmet needs, and CVTech should be in a good position to capture some of that growth. The company also has good potential for a boost from the Vehicle division. I think the company is well valued at C$1.20, but I plan to delay my own buying because I expect a general market decline has the potential to bring it to a much better valuation sometime this year.
Late Note (5/14/10): CVTech reported first quarter 2010 earnings after this article was written but before publication. Income was up $0.02 a share, bringing 12 month trailing EPS to $0.07, making the company look slightly more attractive than discussed above. Top line revenue increased greatly because of a recent acquisition and the severe storms in the Northeast US in Q1 2010.
|Earnings per Share||2009||C$0.05|
|Earnings per Share||2008||C$0.17|
|P/E (trailing 12 month)||5/5/2010 price, 2009 earnings||24.0|
|Cash per share||12/31/09||C$0.08|
|Book Value per Share||12/31/09||C$2.24|
|Net Debt per Share||12/31/09||C$1.19|
|% Revenues from Electricity(Vehicle) division||2009||88% (12%)|
|EBITDA from Electricity(Vehicle) division||2009||84% (16%)|
DISCLOSURE: No position.
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