The Best Peak Oil Investments Meet the Smart Grid: Telvent GIT SA (TLVT)
I'm bullish on Smart Transportation, which is my term for applying information technology to make our transportation system more efficient. The majority of my list of Smart Transportation Stocks focus on GPS navigation. I've been a fan of GPS navigation ever since 2001, when I first experienced the relief using one while driving in an unfamiliar city. But I'm much less enthusiastic about GPS Navigation stocks: I feel the industry is too competitive, which is great for the consumer, but not so great for the shareholder.
Hence, I'm drawn to the three Smart Transportation stocks that apply IT to transportation infrastructure, enabling congestion-based tolling and the better timing of traffic lights. The three stocks I've found are AECOM Technology Corporation (ACM), Cubic Corporation (CUB), and Telvent Git S.A. (TLVT). AECOM provides technical and management services to governments, some of which is on Smart Transportation projects. Cubic develops and installs transportation fare collection systems and defense electronics, while Telvent provides IT services to a broad range of transportation and energy infrastructure markets.
Each of these companies gets less than a third of their revenues from Smart Transportation. But in the case of Telvent, the other two-thirds is also interesting: applying IT to electric and natural gas infrastructure. In other words, the Smart Grid, and smarter pipelines. The company also has smaller segments applying information technology to agricultural supply chains and environmental services.
Telvent's Energy segment accounted for 33.5% of revenues in Q1 2010, mostly in North America (this segment is headquartered in Houston), but also from the EU and Latin America. They provide enterprise-level information management and automation control to companies with large pipeline networks. They also provide the information management services electric utilities need to manage and use the information flowing from Smart Grid projects.
The value of applying information technology to energy systems lies in the reduction of waste: better information and controls can let a company move more gas through the same pipeline network, and also detect leaks more quickly. The Smart Grid is about creating a two-way flow of information on top of the electric grid; Telvent's role is to help utilities take this information and use it to better match energy production and load, and also detect system instability sooner, reducing wear on utility assets and potentially preventing blackouts.
Telvent's global Transportation segment accounted for 24.8% of revenues in Q1 2010. This segment struggled in 2009 but is beginning to show signs of recovery. SmartMobility™ platform is a collection of information services from automated enforcement such as the traffic signals that take pictures of cars running red lights to traffic signal optimization and toll and fare collection. These are offered a la carte, or as an integrated solution, and help municipalities and other regions manage their road, rail, and maritime transportation systems more effectively. In short, they help governments make most of the Smart Transportation improvements I mentioned in my recent article.
Telvent's agriculture business is the result of a recent acquisition, and operates solely in North America, and accounted for 12.0% of revenues in Q1 2010. The segment helps participants in all parts of the grain and livestock complex with weather information, an agricultural products trading platform and real-time pricing information. Although I'm not bullish about the earnings prospects of biofuels businesses, I think the growing size of the biofuels industry will put increasing strains on other agricultural businesses, and both will require more and more up-to-date pricing and supply chain information. If I'm right, this trend will be a boon for Telvent's agriculture business. Tevent is also realizing some synergies from the acquisition my incorporating the real time weather data from the agricultural segment into their SmartMobility™ transportation offering.
The Environment segment focuses on water system management, monitoring of weather and air quality, and hazardous material containment. It accounts for 8.6% of revenues and is growing quickly.
At 21.1% of revenue, the Global Efficiency segment is a cross-disciplinary IT consultancy offering to help clients use resources more effectively. Key markets include insurance, health care, finance, government services, and telecommunications. This segment is struggling against increased competition in Spain, but sees strong potential growth in Brazil.
At a recent price of $18, Telvent has a trailing P/E of a little over 13, and pays no dividend. Although it trades at only 65% over book value, operating cash flow ($33M) is low compared to net debt ($471M) and it has a low current ratio of around 1. The company recently refinanced its debt, increasing the maturity and stretching out the payment schedule, which means that debt is not an immediate problem, and if the company can achieve decent growth over the next few years, they should be able to handle it easily.
Although I could not be much more enthusiastic about the business, the high debt to cash flow means that I'll be watching and waiting for much cheaper valuations before I'm ready to buy TLVT stock.
DISCLOSURE: No position.
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.
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