Ormat: A Bargain Green Stock?

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by Debra Fiakas CFA

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed several stocks trading below industry average multiples of forecasted earnings.
Tracking the geothermal power generators has frequently taken us to the door of Ormat Technologies, Inc. (ORA:  NYSE).  Ormat has two revenue segments:  power generation through geothermal generators and energy recovery and equipment sales to utility and industrial customers installing geothermal power plants.  The company owns and operates plants with 626 megawatts generating power and has supplied equipment around the world for another 1,200 megawatts.  The development pipeline is populated by thirty-five potential geothermal locations in the U.S., Southeast Asia, South America and New Zealand.

Last week during the company’s third quarter 2014 earnings conference call management spent quite a bit of time talking about two of its newest projects.  The company was recently awarded a $22.3 million contract to install its proprietary air-cooled energy converter at a natural gas compression station in Utah.  The station is part of the Kern River gas transmission system.  This will be the second recovered energy power generation facility on the pipeline.  The recovered energy plants reduces the use of energy content of the natural gas by about 30%.

Ormat also recently signed an agreement to design, construct and operation a 35 megawatt geothermal power project in Kenya.  Once completed Ormat will also arrange for financing and expects take advantage of guarantees from the African Development Bank.  Kenya Power and Lighting Company has agreed to buy all the power from the project.  This will be Ormat’s fifth power project in Kenya.

Investors have to pony up about twenty times projected earnings per share to take a long position in ORA.  That is a bit richer than the average PE multiple for the S&P 500, which is 16.7 times forward earnings for the group, but right on par with the forward earnings ratio for the Russell 2000 Index.  The geothermal segment of the power generation industry is trading at approximately 21.2 times trailing earnings.

On the surface the comparison of earnings multiples does not make ORA look like much of a bargain.  However, Ormat is set apart from the group.  ORA is among the most stable of the power generation stocks. True enough, utility companies are known for their stability in both earnings and stock performance.  However, it is rare to observe fast rates of growth and low beta measures of risk.  ORA offers both  –   a beta of 0.80 and forecasted earnings growth of 22%.  Thus ORA could trade at a multiple of 22.0 times earnings.  On a risk adjusted basis, ORA’s PE/Growth or PEG ratio is a compelling 0.73.

Furthermore, Ormat recovers some power of its own from its revenue in the form of operating cash flow.  In the most recently reported twelve months the company converted 43% of sales to operating cash flow.  Cash flows help support capital investments and a small dividend of $0.20 per share.  The forward dividend yield at the current price level is 0.7%.  Taking the dividend into consideration, provides a risk adjusted PE/Growth Plus Yield of 0.70

From a technical standpoint, ORA is neither overbought or oversold.  There is no strong trend higher or lower other than the short-term vacillations in the stock price.  Nonetheless, money appeared to have been flowing into the stock in the run up to the third quarter 2014 earnings announcement. Investors who want to take a long position in ORA might wait for the signs of upward momentum before committing capital or simply use the dividend payments as compensation for the time commitment.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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