Ormat Technologies: Shame About the Price
Tom Konrad CFA
|Ormat Heat exchanger
at GKW Landau. Geothermal water evaporates the carrier
medium. Preheater and the evaporator. The steam line above
connects to the turbine.
Photo by Claus Ableiter via Wikimedia Commons
Investors loved it: ORA was up 8% on the day to $20.69, and are up 14% at $21.85 as I write.
I’m a big fan of geothermal power, and would love to own Ormat at the right price. They have a great business with strong technology and fairly reliable cash flow.
Yet I have not owned Ormat stock since 2006. The company is simply too expensive, quite likely because it is the only geothermal company large and liquid enough to be owned by institutional investors.
Although Ormat trades near book value ($19.99/share), it’s in a very capital intensive business with thin profit margins. Profits have recently been depressed by the low natural gas price, against which some of the electricity it sells is priced. Because of this and some problems at the firm’s North Brawley plants, Ormat showed a profit of only $0.40 in 2011.
Going forward, analysts expect a $0.58 profit in 2012, and $0.76 in 2013. That’s nice earnings growth, but it’s not driven by revenues, it’s driven by cost control. Revenue is expected to grow only 13 percent in 2012, and only 5% in 2013. Given the geothermal industry’s capital intensity and Ormat’s large size, it would be crazy to expect long term growth of more than 10% going forward.
For a company with moderate growth prospects like Ormat, the current price of $21.85 puts the forward P/E at 38. That’s two to three times too expensive for my taste. I also have trouble getting excited the fact that they recently doubled their quarterly dividend to $0.04. “Double” sounds great, but a 0.7% dividend yield leaves me wanting a few more doubles.