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July 22, 2013

What I Learned During Last Week’s Visit With ePower

John Petersen

Last week I spent a couple days with ePower Engine Systems working my way through a variety of business and technical due diligence issues. As always happens with new clients, it was a full immersion course in how ePower’s technology works, what the documented performance of the current tractor is, and how that performance is expected to change as ePower:
  • transitions from a four cylinder engine designed for stationary use to an EPA compliant six cylinder engine designed for the trucking industry;
  • automates a new charge control system that will opportunistically charge the batteries in a more fuel efficient manner;
  • evaluates the potential economic and performance advantages of using a rare earth permanent magnet generator instead of a conventional AC generator; and
  • evaluates the potential economic and performance advantages of using a rare earth permanent magnet drive motor instead of a conventional AC induction motor.
ePower’s original development work was done using a 197 hp John Deere diesel engine and a Marathon generator with a rated capacity of 115 kW that can be over-rated to 128 kW for brief intervals. In all but the most extreme conditions, the ePower tractor is designed to minimize generator over-rating by using an array of 56 PbC batteries from Axion Power International (AXPW.OB) for acceleration and hill climbing boost.

Since the current John Deere engine was designed for stationary use with a generator, it is not EPA compliant and its horsepower rating does not account for parasitic engine loads like power steering, air conditioning, airbrake compressor and other accessory and hotel loads. As a result, the maximum sustained generator output of the current tractor is about 93 kW.

ePower recently bought an EPA compliant 240 hp on-road Cummins diesel engine that was salvaged from a wrecked truck. Unlike the John Deere engine, the Cummins engine is rated on net useful horsepower at the flywheel after parasitic loads. It’s 32 pounds lighter than the John Deere engine and has an advertised fuel consumption of 6.8 gallons per hour at 1,800 RPM. With the Cummins engine, ePower believes they’ll be able to run their existing generator at full capacity without difficulty.

Over the last several months ePower has been conducting fuel economy testing of their current tractor in the Cincinnati region. The topography is best characterized as gently rolling hills with grades of 1% to 3% and typical altitude changes of up to 300 feet. The fuel economy tests were conducted according to SAE J1321 protocols using multiple trips over several 40 to 46.5 mile routes with city, suburban and highway profiles. Data was recorded at average speeds of 55 and 59 mph and any results that deviated from the average by more than 5% were excluded.

The blue bars in following graph show the documented fuel economy of the ePower tractor with a variety of loads ranging from empty to fully loaded. The red blocks at the end of the current fuel economy bars represent ePower’s estimates of the incremental fuel savings that should be realizable with (1) the six cylinder Cummins engine upgrade, (2) automation of the charge control circuitry, and (3) integration of a rare earth permanent magnet generator.

For purposes of comparison, the graph also includes a single line for the national industry average across all weight classes and the goals of the DOE’s Supertruck program.

ePower mpg.png

Since ePower’s ongoing work is by nature a research and development project, there can be no assurances that the planned tractor upgrades can be completed over the next several months or that the third generation tractor will meet current performance expectations.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock. Author has recently accepted an engagement to serve as legal counsel for ePower Engine Systems in connection with certain business planning and corporate finance activities.

July 05, 2013

New Flyer Consolidates Leading Position in Transit Bus and Parts Markets

Tom Konrad CFA

On June 21st, leading North American heavy-duty transit bus manufacturer New Flyer Industries (TSX:NFI, OTC:NFYEF) announced the acquisition of its third largest competitor, North American Bus Industries [NABI] from private equity firm Cerberus Capital.

The following Monday, New Flyer management held a call to discuss the acquisition with analysts.   Here are the highlights.

Cost and Financing: The C$84 million cost to New Flyer consists almost entirely of the assumption and discharge of NABI’s existing debt.  This will be funded with C$64 million by issuing to the world’s second largest bus maker Marcopolo S.A. for C$10.50 a share (above the current market price) under the strategic investment agreement announced in January.  An additional C$20 million will be funded using New Flyer’s term loan facility, which has been expanded to reflect the merged company’s larger size.

Effect on Revenues: The combined company’s trailing 12 month (TTM) were C$1,222 million, an increase of 37% over New Flyer’s alone.

Effect on EBITDA: The combined company’s TTM EBITDA would be C$81 million, a 35% increase over New Flyer’s alone.  The transaction should also increase EBITDA and earnings per share.

Leverage: The mostly equity financing should increase New Flyer’s financial strength, lowering its debt-to equity ratio from 2.8x to 2.2x.


Effect on Competition and Regulatory Scrutiny: Although the transaction will reduce the major players in the North American transit bus market to only three, management took pains to emphasize that the market will remain competitive.  The transaction will not face scrutiny from US competition authorities because all the proceeds were for the satisfaction of NABI’s outstanding debt.

The combined entity has approximately 42% of the new transit bus market and 34% of the aftermarket parts market.

Synergies: New Flyer does not plan layoffs, and emphasizes that the acquisition will be accretive to earnings without any cost reduction.  NABI has just been through a multi-year reorganization which removed significant inefficiencies, such as the construction of bus chassis in Hungary for shipment to the US, and the discontinuation of single-customer bus models.

That said, New Flyer expects significant improvements in the efficiency in the combined aftermarket parts operations of New Flyer, NABI, and Orion (acquired earlier this year.)  This will arise mostly from access to the proprietary parts databases of both Orion and NABI, which should allow all three to carry smaller inventories and meet customer needs more effectively.

New Flyer also anticipates the the larger aftermarket parts and service division will be able to provide more attractive service options for customers, and this may improve the competitiveness of it bids for new bus orders.

New Flyer will also not have two Low Floor Transit bus models (NABI’s LFW and its own Excelsior) with different cost structures, which it will be able to fine tune to be competitive with different types of customers.  Although these two bus models can be direct competitors, it sounds to me like the LFW had the advantage in smaller, lower frills bids, although management took pains to deny that NABI’s advantage arose simply because it is “cheaper” to manufacture buses in Alabama than at New Flyer’s facilities in  Winnipeg, Manitoba and St. Cloud Minnesota.

The merger will expand New Flyer’s offerings with  a specialized Bus Rapid Transit (BRT)model stainless steel bus frames.   The BRT model is appealing to certain customers wanting a more unique or custom look.

New Flyer previously only offered industry standard carbon steel buses.   Stainless steel may be preferred by some customers over carbon steel because of longer life and lower maintenance, especially in cold and humid climates with significant salt exposure.    This PDF for more about the relative advantages of stainless steel also claims that stainles steel has the potential to significantly reduce bus weight and manufacturing costs.

Conclusion

Management says “It’s an understatement to say we’re excited by this.”  I think investors should be excited, too.  I added slightly to my already large position Friday evening, right after the deal was announced.  NABI is already a profitable bus business acquired at a price which should increase New Flyer’s earnings per share and allows the company to be competitive when bidding for both new bus and service contracts wit ha broadened and strengthened offering.

The potential synergies from controlling more than a third of the higher margin aftermarket parts and service business are particularly exciting, and I expect New Flyer will see both significant price reductions and growing market share is this counter cyclical segment of the transit bus market.

Disclosure: Long NFI

This article was first published on the author's Forbes blog on June 24th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 13, 2013

Another Chance To Buy Power REIT On The Cheap

Tom Konrad CFA

PW logo

An earlier version of this article appeared on the author's Forbes blog on June 3rd.

An article about Power REIT (NYSE:PW) that came out on Seeking Alpha on May 30th has sent some investors running for the hills. 

The article has since been removed from Seeking Alpha.  According to PW's CEO, David Lesser,  Seeking Alpha’s editorial staff concluded that it had reached unsupported and erroneous conclusions after discussions with him and Ryan Griffin, the article’s author.  Ryan Griffin told me that he did not have time to respond to the information Lesser sent Seeking Alpha challenging his conclusions.  He was confident that, when he has time to respond, the article will be reinstated.  However, he also told me that his goal was to get the article to be reinstated by "Monday or Tuesday" (6/10 or 6/11) and that had not happened.

Even if the article is reinstated, I disagree with its conclusions, and I doubt the opportunity to buy this speculative Rail/Renewable Energy REIT in the $9 range will last long.  The stock is very illiquid, so even a few investors bailing or buying can send the stock for great swings. 

Here, I’m going to try to address the main points of the article, without going into details.  

The core of Griffin’s argument was that investors are not considering the risks inherent in the civil action brought by Norfolk Southern Corp (NYSE:NSC) and Wheeling and Lake Erie Railroad (WLE) against Power REIT to prevent the latter from foreclosing on the lease of 112 miles of track it owns, and which are leased to NSC and subleased to WLE.

I am probably the main person Griffin is referring to here, since I wrote in December how the lawsuit would be good for Power REIT even if they lose the case.  The reason for a “lose” being good is that, even in a loss, Power REIT will be able to write off $16 million or more in the form of debt from NSC and WLE that they are trying to collect, and this will allow them to distribute future dividends to shareholders in the form of tax-free return of capital for decades to come.

I also believe that in a “loss” WLE and PW will be liable for Power REIT’s legal expenses, because of a clause in the lease saying that the lessee is responsible of any legal expenses incurred to protect its interests in the the leased property.  Griffin thinks this is not so clear.

I think that, at the $10-$11 range PW was trading at, the benefits of a “loss” were fully priced in to a stock.  Those of us who still think PW is worth holding at those prices are indeed valuing the hope that PW will win on at least some of the points they have made against the lessees.  Before Griffin’s article, PW was actually gaining ground because some recent revelations about WLE selling oil and gas leases on PW’s land and not providing records to PW as required by the lease which seem to strengthen PW’s case.

Griffin also felt that the first solar deal was "uneconomic," citing a "70x multiple" and claimed that this deal could drive PW into bankruptcy.  His numbers don't seem to add up.

By my calculations, the deal would only be uneconomic under the bridge loan currently used to finance it if significant SG&A expenses are charged against it.  When the bridge loan is refinanced, I expect it to be modestly accretive to earnings.  Griffin's statement that the project had a "70x multiple" does not agree with my calculations at all: The $1.04 million purchase came with a $80,800 annual rent (with a 1% annual escalation.)  After accounting for the assumption of a 5%, $122,000 sewer financing which was taken on as part of the purchase price, I get a price to net revenue multiple of 12.25x.

I, like Griffin, don’t like PW’s CEO David Lesser loaning money to the company at 8.5% interest, which was the step-up rate on the bridge loan he used to finance the deal.  However, according to Lesser, the bridge loan has been revised to remove the step-up in interest rate (leaving the initial 5% interest rate), and PW has recently signed a term sheet to replace the loan with bank financing. I expect more details on this financing soon. Future solar deals should be larger, and bank financing easier to obtain when the legal mess is wound up.  Even if PW were paying 8.5% on the bridge loan after the first six months, there would still be a net profit (before SG&A expenses) of $26,794 in the first year on the $115,000 cash PW put into the deal.  In the second year, profit would fall to $6,700 because of the step up in interest in the bridge loan, slightly offset by the 1% annual rent increase, but future profit would trend upward even in the event PW is not able to obtain more attractive financing.  To me, it seems unlikely that PW will have to pay 8.5% to refinance the deal, and the difference from a lower interest rate would go directly to profit.

If the whole deal were to be financed at a 5% interest rate, PW's annual net profit would be $29,100, and this would increase in subsequent years.

I don't see how this deal, which looks marginally profitable even under an 8.5% bridge loan, could drive PW into bankruptcy, as Griffin claims.

Griffin made a number of other points which I consider less core to the argument, but I will attempt to respond to them briefly:

  • PW cut its dividend to $0.  Griffin thinks this is a bad thing, but I think it is a good thing.  I, and at least one other professional investor I have been in contact with, suggested the cut to Lesser.  We felt that as long as the lawsuit was using most of PW’s cash flow, PW should not be issuing stock and diluting current shareholders just to pay a dividend.
  • The civil case could last for years of appeals during which time PW will have to issue stock to pay legal bills.  While this is possible, and NSC can fund the lawsuit forever without even really noticing the cash flow drain, WLE does not have NSC’s financial strength.  The fear of having to pay PW’s legal bills as well as its own will be a strong incentive on WLE to settle, especially if the initial rulings are not in its favor.  If the initial ruling is in WLE and NSC’s favor (and a Summary Judgement could be handed down as soon as August or September,) PW will not drag things out.  The costs of the case are also likely to fall after the end of the discovery and expert witness phases, currently scheduled for the start of July.  See PW’s recent litigation update [PDF].
  • WLE can pay for the lawsuit longer than PW can, but can’t afford to pay if PW wins. These two statements seem to contradict each other, and NSC is on the hook for at least $7M of the settlement account, and possibly for the entire sum of any award, since NSC is the lessee, and WLE is only a sub-lessee.
  • Shareholder trying to remove Lesser in previous years.  Griffin seems unaware that while a shareholder group unsuccessfully challenged Lesser for control of the company in 2011 and 2012, there was no such attempt this year.   He did not mention that the lead shareholder of this group had a tiny holding of stock, and was trying to get WLE’s President on PW’s board – a clear and undisclosed conflict of interest.
  • Griffin says PW is suing WLE and NSC.  This is false: WLE and NSC brought the civil action against PW to prevent PW from foclosing on the lease.  This makes a difference since Griffin’s worst-case scenario revolves around PW having to pay their legal bill because it brought a lawsuit that might be found spurious.  But PW did not bring the lawsuit, and given WLE’s apparent multiple violations of the lease, PW’s claims and grounds for foreclosure seem far from spurious to me.

Conclusion

PW is a very illiquid stock that was driven down 25% by panic selling.  Although Griffin points to very real risks, his price target is laughable.  Lesser seems to agree with me, and he is putting his money where his mouth is.  He has been adding to his position all along, but has made much larger purchases since the Griffin article came out.

By the way, Lesser is very accessible to investors.  As I said, I have very little time this week, but if you want more details, I suggest you contact him directly.  I’ve been trying to persuade him to make all the public filings in the civil case available on PW’s website.  He’s been helpful at emailing it to investors who do not have a PACER account (or don’t want to pay $1 a page.)  If readers inundate him with requests for documents, I bet he will get on this sooner rather than later.

Disclosure: Long PW.  I have added a little to my position recently in the around $8.42 for short term trading purposes, and may sell these shares at any time; I have GTC limit orders in place to do so.  My much larger long term stake remains intact. 


DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 21, 2013

Ameresco, New Flyer, PFB: Q1 Efficiency Earnings Highlights

Tom Konrad CFAAmeresco logo

Performance contractor Ameresco, Inc. (NYSE:AMRC) reported earnings on May 9th. Revenues were below analyst expectations, but Chairman, CEO, and President George Sakellaris put this down to timing issues, and stuck by his full year guidance. Strong growth in the firm’s backlog and awarded project’s seem to back up this relatively optimistic view.  From the earnings call transcript

[W]e are very confident about the improving market conditions in few of our regions, as well as continued growth in our all other offerings. These are expected to be the growth drivers for the near-term. We are also very confident about the medium to long-term pipeline development, as shown by the continued increase in awarded projects. Where we are cautiously optimistic near term, is the select areas where we continue to see softness in the awarded project conversion rates. The varying conversion rates at the local level lead us to believe that overall market conditions will improve gradually over time. We continue to believe, however, that energy efficiency represents a large growth opportunity over the long-term. We are excited about our own growth or potential within this market opportunity, given our leadership role, as well as our current pipeline development. As a result, we are very optimistic about the long-term fundamentals of our business.

Sakellaris’ comment re-affirm my view of the company, which I have been repeating all year.  At $7.50, this is a great opportunity to acquire one of the leading companies in the energy efficiency space.

new flyer logoLeading North American transit bus manufacturer New Flyer Corp (TSX:NFI, OTC:NFYEF) reported increased revenue on higher bus deliveries and the acquisition of Orion’s aftermarket parts business.  The company continues to grow its backlog rapidly, and demand for new buses looks likely to remain strong, despite a 5% cut in US federal funding for transit buses due to sequestration.   Bus ridership and state tax revenues (which also fund bus purchases) have been strong.

The company continues to look for attractive acquisition targets (such as Orion’s parts business), to be funded by the investemtn from Brazillian bus manufacturer Marcopolo announced in January.

New Flyer expects to maintain its current C$0.585 annual dividend.

PFB Corp logoGreen Building company PFB Corporation (TSX:PFB, OTC:PFBOF) also announced first quarter results.  Year over year, comparable revenues and earnings were slightly down from the first quarter last year.   In my opinion, this is most likely due to the much colder weather than in 2012, which would have slowed building conditions.  Going forward, I expect to see earnings growth for the rest of the year. The first quarter also included a previously announced sale and leaseback of four of PFB’s Canadian properties, resulting in a one-off after tax gain of C$6.2 million, or 92 cents a share.  The proceeds will be used to pay off all PFB’s debt and pay a special C$1 dividend, in addition to its regular C$0.06 quarterly dividend.

Management has good reason to return cash to shareholders when they can: the company is 70% owned by insiders.

Oh, yeah, and Tesla (NASD:TSLA) also announced very strong earnings.  Long time readers know I don’t follow “popular” stocks, but I’m happy to see good news for electric cars. The fairy dust from high profile stocks like Tesla tends to fall on all green stocks, and increase valuations across the board.

Disclosure: Long AMRC, PFB, NFI. 

This article was first published on the author's Forbes.com blog, Green Stocks on May 9th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 08, 2013

Will Electric Bicycles Get Americans to Start Pedaling?

by Marc Gunther.  First Published on Yale Environment 360

Electric bicycles are already popular in Europe and in China, which has more e-bikes than cars on its roads. Now, manufacturers are marketing e-bikes in the U.S., promoting them as a "green" alternative to driving.

Most Americans know about Tesla [NASD:TSLA], the Chevy Volt, and the Nissan Leaf. But what about Evelo, the eZip Trailz, and the Faraday Porteur?

The first three are, of course, electric cars. They benefit from a lot of media attention and generous government subsidies, including a $7,500 tax credit for buyers in the United States. The latter are electric bicycles, and they attract neither.

Yet Americans bought as many electric bicycles as they did electric cars last year. About 53,000 electric bicycles were sold, according to Dave Hurst, an analyst with Navigant Research who tracks the industry. Electric car sales came in at 52,835.

Globally, electric bicycles outsell electric cars by a wide margin. An estimated 29.3 million e-bicycles were sold in 2012, with perhaps 90 percent of those selling in China, which has more electric bikes than cars on its roads. E-bicycles are popular in Europe, too, selling about 380,000 a year in Germany and 175,000 in the Netherlands in 2012. By comparison, about 120,000 electric cars were sold worldwide.

All of which raises a question: Can electric bicycles help solve big environmental problems? The industry — which is making a push to expand its sales in the U.S. — says e-bicycles will reduce greenhouse gas emissions, air pollution, and traffic congestion, while enabling Americans, two-third of whom are obese or overweight, to become more active. In Europe and China, most electric bicycles are sold to commuters, although it’s not clear whether they are replacing conventional bikes, mopeds, or cars.

E-bicycle makers eagerly market themselves as “green.” Dashboards on e-bicycles sold under the Polaris brand and made by a Miami-based company called EVantage include a “carbon footprint savings” function to calculate how many pounds of CO2 are saved by using the bicycle in place of a gasoline-powered car. Evelo, a Boston-based startup, recently launched a 30-day electric bike challenge, asking people to give up their car keys and blog about using their electric bikes. “We don’t want to wean people from bicycles,” says Boris Mordkovich, Evelo’s founder, who previously worked at car-sharing company RelayRides. “We want to wean people from cars.”

Yet if electric bikes end up replacing human-powered bikes, or if they are used only for exercise or fun, they could well add to pollution because they consume electricity, much of which comes from burning fossil fuels. Only if electric bicycles replace cars will their environmental benefits materialize — and that’s the goal, say bike makers.

“Traditionally, people don’t use bikes for transportation,” says Larry Pizzi, the president of Currie Technologies, a leading e-bicyle manufacturer based in Simi Valley, California and part of the international Accell Group (ACCEL.AS). “We’re trying to change a paradigm.” There are reasons to believe that the e-bicycle industry may be able to do just that.

Before explaining why, let’s make clear what we mean by an electric bicycle. These are not mopeds or motorcycles, but bicycles that can be pedaled with or without an assist from an electric motor. They’re sometimes called “pedelecs” or “pedal assist” bicycles because in Europe the boost from the motor only kicks in if you pedal; in the U.S., most e-bicycles also come equipped with a throttle to turn on the motor without any pedaling required. Riding an electric bike feels a bit like riding a conventional bike with a brisk wind at your back; the motor helps you go faster and climb hills, but it’s not the primary source of propulsion. Unlike mopeds or electric scooters, e-bicycles are typically permitted on bike paths, and they can’t travel faster than 20 mph.

Like electric cars, electric bicycles are manufactured by a mix of startup companies and established players, including Schwinn (part of Dorel Industries (DIIBF.PK), Trek (private), and Giant (9921.TW). Industry executives cite several reasons why e-bicycle sales are poised to take off in the U.S. Most important is the fact that more Americans than ever already bike to work, and that cities and towns are building infrastructure to accommodate them. According to the League of American Bicyclists, bike commuting grew by 47 percent nationally between 2000 and 2011, and it grew by 80 percent in communities designated as “bicycle friendly” by the league. Cities including New York, Chicago, Washington, and Los Angeles are building dedicated bike lanes, like those found in northern Europe, to make commuting safer and easier.

“It’s happening in every major city, and a lot of secondary cities around the country, and it’s causing people to think differently about getting around on two wheels,” says Pizzi. “If you don’t have safe infrastructure, people don’t feel as if biking is safe and secure.”

Electric bikes make commutes more inviting by easing worries about hills, headwinds, and fatigue. “They increase the distance that people can ride comfortably,” says Evelo’s Mordkovich. Commuters on e-bicycles are also less likely to arrive at the office dripping with sweat. “It seems like a small detail,” Mordkovich says, “but it’s a big deal to a lot of people.”

 
320px-Chinese_Buddhist_Monk_Electric_Bike[1].jpeg
Chinese Buddhist monk riding an electric bike. Photo by J.G. (Flickr user "clip works")
Baby boomers are an obvious market for electric bicycles. “We’re seeing an aging population, and a growing number of people getting back into cycling,” says Bill Moore, an Internet publisher who recently launched ePEDALER, an electric-assist bicycle retailer. Urbanization will be another driver of electric bike sales, Moore said, as will the obesity crisis, rising health care costs, and the desires of employers to encourage their workers to become more active.

Like electric cars, electric bikes are pricey. A basic e-bike can be had for as little as $499 on Amazon, but sturdy, well-designed models with better-quality batteries cost between $2,000 and $3,500. (Conventional bikes sell for an average of about $450 in speciality stores and about $100 in retailers like Walmart and Target where most bikes are sold.) Prices could come down as batteries and electric motors become more efficient, and economies of scale come into play. “The technology is getting better, rapidly,” says Dave Hurst of Navigant.

Unlike drivers of electric cars who are plagued by “range anxiety,” electric bike owners don’t have to worry about running out of electricity: They can travel under their own power, assuming they’ve got the energy to pedal a bike that weighs 45 to 60 pounds. Batteries typically deliver 20 to 40 miles of assisted riding, and they can be recharged in a few hours in ordinary power outlets.

While some companies are emphasizing the practical benefits of electric bikes — they’re good for your health, good for the planet and a low-cost way to get from here to there – others focus on fun and style. They are targeting urban buyers in their 20s and 30s, without a lot of money to spend, for whom the allure of owning a car has diminished.

“We want our bike to be a sexy product, one that everyone will want,” says Daniel Del Aguila, a co-founder of Prodeco Technologies, which is about to open a new factory near Fort Lauderdale. By squeezing efficiencies out of its supply chain, Prodeco sells a number of models for $1,000 to $1,500 that, Del Aguila contends, compare favorably to bikes selling for $2,000 or more.

For the premium buyer, there’s the Faraday Porteur, the brainchild of Adam Vollmer, a mechanical engineer from Ideo, the famed design firm. First launched as a Kickstarter project last year, Faraday is now taking pre-orders for the Porteur, which is priced at $3,500. It weighs less than 40 pounds, features a leather saddle and bamboo fenders, and its Web site promises that it is “crazy fun.” Even more expensive is the $4,000 eFlowE3 Nitro from Currie, which was designed by a Swiss firm, Flow AG, and promises “fast, powerful and nimble handling.” And if you’ve really got money to burn, there’s a German e-bicycle called the Blacktrail BT-1 that claims a top speed of 65 mph and retails for $80,000. Think of it as the Tesla of electric bikes.

DISCLOSURE: None.

Marc Gunther is a contributing editor at FORTUNE magazine, a senior writer at Greenbiz.com and a blogger at www.marcgunther.com.


December 14, 2012

When Isn't a $68M Civil Action Material?

Tom Konrad CFA

300px-Fugel_David_gegen_Goliath303[1].jpg

David and Goliath (Photo credit: Wikipedia)

Last week, I investigated the Goliath vs. David civil action in which Norfolk Southern Corp. (NYSE:NSC) and Wheeling & Lake Erie Railroad (WLE) are attempting to prevent Power REIT (NYSE:PW) from foreclosing on the lease of the 112 miles of track owned by Power REIT and operated by WLE under a sublease with NSC.

As in Biblical times, Power REIT, in its role as David, looks likely to surprise the market with a legal victory.  I calculated that any victory could lead to payments ranging from $16 million to $70 million dollars or more, or $10 to $43 a share, which is truly enormous for a stock trading at $8 a share.  At the time, I had not seen NSC’s sublease agreement with WLE, but have since found it in an attachment to NSC’s and WLE’s legal complaint.  The lease led me to revise my estimate of NSC’s potential  liability to approximately $68 million, and WLE’s to $15.9 million (see below.)

As counter-intuitive as it sounds, even a legal defeat would still bring significant benefits to PW shareholders, leading to a win-win situation for PW shareholders.

But the case should also interest Norfolk Southern shareholders, because it raises significant questions about corporate disclosure.

Goliath Not Paying Attention

Even for a $18.5 billion Goliath like Norfolk Southern, the potential award amounts to real money.  With 316 million shares outstanding, $68 million is 21 cents a share.  That would be far from crippling for a company with $708 million in cash on its books and $402 million in income last quarter, but it’s certainly material.

That’s why I was shocked to find that the company’s 2011 annual report did not mention the action.   When I attempted to contact the parties, I was told by an NSC spokesman that ”We don’t generally comment on matters of litigation.”  WLE’s Director of Law & Government Relations referred me to their attorneys in the matter, who also said it is their policy not to comment on pending litigation.  I also contacted two of NSC’s leading stock analysts, only to find they were not familiar with the case.

I did get an email response from Michael Hostutler, NSC’s director of investor relations, who told me that the case “is not material to Norfolk Southern,” which is why it’s not in the annual report.  When I asked him on what basis the case was immaterial, he did not respond.

The omission of the case from NSC’s annual report is inconsistent with NSC’s apparent disclosure policy.

This policy seems to be to include legal proceedings in its annual report even when they are immaterial.  The report discusses two ”penalties in excess of $100,000″ and a class action against NSC and other class 1 railroads regarding fuel surcharges, despite the fact that the the report characterizes all three as  not having material effects on NSC’s “financial position, results of operations, or liquidity.”

Surely an action in which the potential award is in the millions of dollars bears mentioning if the policy is to discus any award in excess of $100 thousand.

The Nature of the Liability

Paragraph 2 of NSC’s 1990 sublease agreement with WLE states,

The Sublessee [WLE] hereby expressly assumes during the term of the Agreement all of the duties, obligations, liabilities and commitments of NW [NSC] as lessee under the Lease except the balance in the account due Lessor [PW] because of dispositions of property under Section 9 or the Lease, hereafter the “Settlement Account,” on the Closing Date… The balance of the Settlement Account on the Closing Date is $7,466,951.42, for which NW will remain solely responsible.

If NSC’s potential liability were limited to $7,466,951.42, I would agree that this would not have a material impact on the company.  That amount is likely already carried on NSC’s books as a long term liability.  Even if the court decides that it is due immediately, the small size of the settlement account relative to NSC’s cash flow should render it immaterial.

However, PW’s counterclaim in the case seeks payment not only of the settlement account, but of back interest at the Applicable Federal Rate (AFR.)  Because NSC’s portion of the settlement account began accruing in 1967, and more than two decades have passed since then, my estimate of the total interest on that $7,466,951.22 is approximately $60.6 million, for a total of $68 million.  (WLE’s portion would be approximately $8.4 million principal and $5.9 million interest, for a total of $15.9 million.)  Note that my interest calculations are approximate, since the AFR changes monthly, and I only put in one interest rate each year in my spreadsheet.  Further, I don’t have data for the AFR before 1990, so I approximated with the long term treasury rate less one percent.  You can access my spreadsheet to test your own assumptions here.

The approximately $60.6 million in back interest is almost certainly not already on NSC’s books, and so it would be a new liability.  If the court were to award back interest on the settlement account, it would reduce NSC’s earnings by about 19 cents a share in the quarter which it was awarded, most likely sometime in 2013.

Conclusion: Class Action Lawsuits May Follow Stinging Pebbles

Goliath probably thought David’s sling was immaterial, but in the end it proved decisive.  While there is no chance that a relative pebble like an award of even $68 million will take down Norfolk Southern, it would have a material impact on NSC’s books.  If it did, the shareholder lawsuits that follow losses stemming from undisclosed risks would then sting a lot more than pebbles.

It’s admirable that NSC management discusses legal actions involving awards over $100 thousand.  My guess as to why they are not talking about this one is that top NSC management is simply unaware of the potential award of back interest on the settlement account.  My guess is that this lack of awareness arose because WLE is taking the lead in the case, not because of some cover-up on the part of NSC’s management.  But if this slipped by them, their inattention a little worrying in and of itself.

It will be interesting to see what legal disclosures appear in NSC’s 2012 Annual Report, now that my articles and questions to Mr. Hostutler should have brought this pebble to their attention.

Disclosure: Long PW

This article was first published on the author's Forbes.com blog, Green Stocks on December 4th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 14, 2012

Where Electric Vehicles Make Sense

Tom Konrad CFA

Electric Transit Buses Coming to North America

 
electric Bus.png
Quayside electric bus in Newcastle. Photo credit: LHOON

On June first, New Flyer Industries (TSX:NFI, OTC:NFYEF) unveiled its first all-electric bus prototype.

New Flyer is far from the first manufacturer to launch an electric bus.   

The first deployment of electric buses on a commercial route was at the end of 2010 in Seoul, using buses developed by Hyundai and Hankuk Fiber. Wikipedia lists twenty manufacturers of electric buses worldwide.  Even in North America, Balqon Corporation (OTC:BLQN), a maker of heavy-duty electric vehicles,  launched their own 14-passenger electric bus a little over a month ago.

Yet so far, no major major manufacturer of heavy duty transit buses in North America has a battery-electric bus in commercial production.

The other major North American manufacturers of heavy duty transit buses are NovaBus, Gillig, and North American Bus Industries (NABI).  Orion was a fifth player until earlier this year, when Daimler, its parent, announced Orion would be wound down.

Here is what the other transit bus manufacturers are doing on the all-electric front:

  • New Flyer is developing its bus in partnership with the Manitoba government, Mitsubishi Heavy Industries, and a local utility and college.  They plan two years of operational testing before launching a commercial version.
  • In May, Nova Bus announced a partnership with Quebec to develop two electric buses over three years, a full size transit bus as well as a microbus like the one recently launched by Balqon.
  • Gillig and NABI have not yet made any announcements of electric bus development.

Assuming (a rather big assumption) that development proceeds on schedule, New Flyer’s more aggressive timeline should lead it to introduce the first full size, production model all-electric bus built to North American standards.   These standards are important because the market for transit buses is very regional.  New Flyer itself had a graphic demonstration of just how regional the world bus market is when it failed to find international buyers for a large number of used transit buses last year.  It ended up selling them all much closer to home.

Electric Drive and Mass Transit

I believe buses are a much better use for EV technology than cars, because buses are generally used much more intensively.  Intensive use allows for quicker recovery of the capital invested in expensive batteries.  Transit buses also have predictable routes, meaning that range anxiety is not an issue, and there is potential to charge the bus while it is on route.   Genoa and Turin have a system already in place to wirelessly quick-charge electric buses while they stop to pick up passengers.  On route charging could also be accomplished with traditional trolley bus overhead wires even while the bus is in motion.  Predictable routes and fleet ownership also make transit buses a good fit for battery swapping.

Since transit agencies are often owned by city governments, they may also be able to incorporate some of the non-financial benefits of electric drive in their investment decisions.  While an individual Leaf owner will see little benefit from improved city air quality, a city government may see a move to electric buses as a way to meet air quality goals.  Similarly, they may see benefits from reduced urban noise pollution, and increased ridership from the smoother ride that results from electric drive and regenerative braking, when compared to traditional buses.

Incidentally, I think New Flyer stock is quite attractive at the current price below $7.  I added to my position on Friday, even before  I heard of the electric bus announcement.

Disclosure: Long NFYEF

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 03, 2012

Buying Opportunity at Renewable Energy REIT, Courtesy of Disgruntled Shareholder

Tom Konrad CFA

Power REIT (AMEX:PW) aims to be the first renewable energy infrastructure Real Estate Investment Trust (REIT).

The Renewable Energy REIT

pwlogo5[1].jpg Renewable energy advocates have been calling for a change in the tax laws to allow renewable energy within the REIT structure.  A REIT is allowed to pass profits directly through to investors.  These profits are not subject to double-taxation like most corporate profits.  Owning shares of a renewable REIT would be much like owning a slice of a wind or solar farm.  This would open up the renewable energy investment opportunity to everyone, not just corporations and homeowners with with a roof suitable for solar.

The catch is that REITs are limited to certain types of real estate based assets, and without a new ruling from the IRS, wind and solar farms are out.  Which is why renewable advocates have been calling for just such a ruling.

Power REIT CEO David Lesser has beaten them to the punch.

Lesser was an investment banker at Merrill Lynch, where he helped create a large number of REITs to provide more equity to over-indebted real estate property.  That experience allowed him to see what the renewable advocates did not: there is a place in the existing REIT structure for renewable energy.   It’s possible to strip out the real estate assets from a wind or solar farm, and put them into the REIT.  Renewable energy developers are already familiar with complex ownership structures (thanks to our tax laws), so stripping out real estate assets should not be a big leap.

Power REIT

In order to implement his vision, Lesser and his team began buying the shares of what was then known as the Pittsburgh & West Virginia Railroad, an infrastructure REIT holding 112 miles of main line railroad real estate that is triple-net leased to Norfolk Southern Railroad (NYSE:NSC) for 99 years.  The renamed PW still holds the railroad asset, and has no debt.

Based on the income from the railroad lease, PW pays a $0.40 annual dividend, for a 5.5% yield at the current stock price of $7.24.  Lesser believes he can invest in renewable energy assets at yields in the 8.5% to 9% range.  These will be financed with debt at around 6.5% and potentially additional equity.  Any such transaction would bring an immediate increase in income per share.

Acquisitions have an added advantage of increased scale.  Power REIT needs to grow in order to better manage the expenses of being public.  Income from the existing railroad asset is insufficient to support these expenses.

One other potential upside lies in the railroad asset itself.  PW has initiated litigation with Norfolk Southern, which management believes has failed to pay all its contractual obligations under the lease.  The risks involved in this suit are limited to litigation costs, while the potential gains could be quite large for the microcap REIT.

Proxy Battle

The one hitch in Lesser’s plan was that he did not expect the actions of a disgruntled Pittsburgh & West Virginia shareholder, Paul Dorsey.  Dorsey owns 1,000 shares (0.06%) of PW stock, but feels that he is entitled to a board seat because he had been coming to board meetings for the last decade.  When Lesser (who is the largest shareholder, at 3%   almost 10%) turned him down because he lacked relevant experience, Dorsey decided to take matters into his own hands.

Dorsey has run proxy battles in both 2011 and this year, seeking to replace the entire PW board with a slate led by himself and his brother.  While he has no chance of winning due to lack of a business plan, experience, and backing by large shareholders, he has managed to scare smaller shareholders with a series of ad hominem attacks on Mr. Lesser in SEC filings.  The company maintains that these filings lack basis in fact.  I perused one of them myself, and feel that, even if all the allegations were true, Lesser would be better qualified than Dorsey to run the company.  (The allegations are mostly about poor performance of REITs under Lesser’s watch, but they at least claim that Lesser has extensive experience with running REITs.  The period of poor performance is cherry-picked to coincide  with a period of poor performance of REITs as an asset class and ignores dividend payments, which are significant.)

Buying Opportunity

Nevertheless, leading up to PW’s annual meeting tomorrow, small shareholders (who do not have the time or expertise to analyze the issues involved) are getting spooked, and the stock has fallen from the mid $9 range to the $6 range today in the last few days.

Because I believe the current selling is irrational and motivated by fear, I’ve been buying agressively all the way down, and PW is approaching the size of my largest individual holding.  I believe Lesser and other insiders would also be buying, if they could.  They were actively buying last year when the stock was in the $12.50 range.  Unfortunately for them, but perhaps fortunately for those of us with money to invest, they are most likely barred from buying by SEC rules.  So long as they believe they are near a material announcement, such as a deal to acquire assets, they cannot trade the stock.

Hence, there are few buyers who are both aware of the opportunity presented by Power REIT, and able to grab the shares dumped by skittish small shareholders.

If and when a deal materializes, I expect the stock to head up rapidly.  As I said above, insiders seem to believe such a deal is close.  Why else have they not been buying the stock at such a large discount to the $12.50 they were buying it at last year?

Disclosure: Long PW.

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 30, 2012

A Green Peak Oil Company Expanding in North America: Stagecoach Group

Tom Konrad CFA

stagecoach group
logoWhat’s the budget-conscious way to travel in the US?

  • If you buy in advance, flying is still reasonably priced, but increased security and wait times mean that it’s quicker to drive for shorter trips.
  • With current high gas prices, driving is increasingly expensive.
  • Except on a few routes, Amtrak is slow, has very limited service, and costs a bundle.

In our new peak oil world of $4 gas and, more and more people are opting for bus travel.  The young like it: My girlfriend’s daughter travels by bus almost exclusively, even though she owns a car.  None of the problems above are likely to get any better. Airline and gas prices will go up with oil prices.  TSA procedures are ever more invasive.  Amtrak needs fundamental reform and rail lines that are separate from freight to deliver better service.

Hence the Bus.

Cost and travel time, booked a month ahead,
NYC to Albany
Booking Travel time Cost
Amtrak 2:45 $40
Airlines 1:12 plus 2hr for security $99
Drive 2:50 (Google maps) $25 for gas
Megabus 2:45 $8

Which is why Stagecoach Group‘s (LSE:SGC) Megabus division has been driving rapid profit growth in North America.  For passengers, the price is right (see table), and the buses have amenities like free Wi-Fi.

Now Stagecoach Group is buying part of struggling Coach America‘s business in order to accelerate Megabus’s expansion in Texas and California with ready-built depot infrastructure.

Megabus.com revenues, Stagecoach 2011 Annual report

Green Profit From Peak Oil

Investors should take note.  Megabus can achieve these low fares because they use much less fuel per passenger than flying or driving.  Those fuel cost savings will only grow as oil prices rise.

As a green, I’m not willing to invest in oil companies in order to profit from the rising oil prices.

Many people say the solution is Electric Vehicles (EVs).  But expensive batteries leave Nissan’s (OTC:NSANY) Leaf and Tesla’s (NASD:TSLA) Model S in an expensive niche despite extensive government subsidies.

Alternative transportation companies such as Stagecoach (LSE:SGC), bus manufacturer New Flyer Industries (TSX:NFI), and bicycle maker Accell Group (AMS:ACCEL) are already mass market.  They seem at least as likely to drive (and pedal) off with the profits from Peak Oil than makers of electric vehicles.

Stock Valuation

Alternative transport stock valuations are good, too.   At a price of 236 pence, Stagecoach paid a 3.1% dividend last year, and has raised its dividend for the last four.  The P/E ratio (based on 2011 earnings) is 9.9.  That’s a pretty good valuation for a growing company which will gain from rising oil prices, and is likely to do well from budget tightening in an economic downturn.

In contrast, luxury car company Tesla will probably be hurt if the economy falters, has no prospect of paying a dividend, and lost almost $300 million ($2.87 per share) last year.

EVs may be sexy, but this value investor is taking the bus.

Disclosure: Long NFI, ACCEL. I may buy SGC in the next 72 hours.

This article first appeared on the author's Forbes.com Green Stocks blog.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 21, 2012

New Flyer Sees Bus Market Revival

Tom Konrad CFA

Highlights from New Flyer Industries’ (TSX:NFI, OTC:NFYEF) first quarter conference call

The Numbers

New Flyer announced first quarter results on May 9.  The results were:


Q1 2012 Q1 2011
Earnings up; reverses loss $2.7 million profit $6.4 million loss
Revenue up 6.2% $227.6 million $214.3 million

The improved numbers mostly arise from a more favorable product mix, and the benefits of New Flyer’s restructuring, which removed most of the debt burden.  The North American transit bus market remains very competitive, and this competition led to Chrysler’s Daimler‘s Orion bus division to wind up operations in the quarter.

Management held the analyst conference call on Friday.  Here are the highlights:

Bus Market Revival

Orion exited the market just in time for a revival.  Transit agencies are once again issuing inviting bids for new buses, after a two year drought.  State tax collections are rising, and transit agencies are contending with aging fleets and increasing ridership, driven by increasing oil prices.  Overall demand for new buses is at “an all-time high.”

Management does not believe that Orion’s exit and the larger bid universe will be enough to allow the remaining manufacturers to increase prices this year, as all manufacturers compete to refill backlogs and manufacturing slots, but they do anticipate prices will stabilize.

New Midi Bus

New Flyer has been working for the last year to diversify its product offerings.  The first announcement of this type came last week, when they announced a partnership with British firm Alexander Dennis to jointly develop a new smaller size “midi” bus for the North American market. Alexander Dennis has deep experience in the international midi bus market, having manufactured 16,000 buses in the class. New Flyer will be contributing its expertise with North American standards.  New Flyer will  manufacture the midi buses at its existing plants and sell them to existing and potential new customers.  This new opportunity will come very cheaply for New Flyer, and cost $10 million or less to build prototype buses and retool an assembly line.

Management  continues to look at other diversification opportunities, but can’t say if there will be any more announcements this year.

Conversion of Outstanding Notes

Management reiterated their intent to redeem the outstanding notes left over from the conversion of their old IDS securities in August.  The remaining IDS securities trade in Toronto as NFI-UN and over the counter as NFYIF.  After the conversion, management reiterated their long-stated intention to reduce the dividend to about C$0.04875 monthly or C$0.585 on an annual basis.  At the recent stock price of C$7.14, this amounts to an 8.2% annual dividend yield, beginning with the dividend declared in August and paid in September.

Conclusion

Overall, the future is looking very bright for New Flyer.  Their current backlog should allow them to maintain production at the current level for the rest of the year, and strong demand and new offerings mean they may be able to increase production and prices in 2013.  Combine that with a dividend yield which will be over 8% even after it is reduced, and New Flyer remains a stock to buy and hold for the long term.

Disclosure: Long NFI

This article first appeared on the author's Forbes.com Green Stocks blog.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 27, 2012

Why the Sell-off at New Flyer?

Tom Konrad CFA

new flyer logoHeavy duty transit bus manufacturer New Flyer Industries (NFI.TO/NFYEF.PK) released its fourth quarter earnings and annual report on March 21, quickly followed by analyst downgrades from CIBC and Canacord Genuity.

Too far, too fast

Over the next few days, the stock fell from over $8 to below $7, although it is still well above the level where followers of my Ten Clean Energy Stocks for 2012 would have purchased ($5.65) even after dividend payments worth $0.22.  After a rise like New Flyer has had over the last three months, some investors took the opportunity to get out now that it looks like any improvement in the heavy duty transit bus market will take longer than they had hoped.

Transit Bus Market

The US market for transit buses continues to be weak.  While North American bus ridership is at its second highest level since 1957 (the highest being during the 2008 gas price peak), The transit bus market remains dismal, mostly due to tight municipal budgets in the US and continued uncertainty surrounding the Transportation bill currently being held up in the US House of Representatives.

While New Flyer has been able to maintain production rates because of their strong backlog, several competitors have idle capacity, and have been bidding very aggressively to keep that capacity active. Rather than bidding aggressively in response, New Flyer is instead reducing its backlog in order to maintain production rates.  Over the coming year, management expects to maintain production without aggressive bidding by continuing to reduce their backlog, even to the point of producing some buses ahead of schedule

While in the long term, the aging US fleet and increased bus ridership should lead to a resurgence in demand for new, the current competitive climate is likely to lead to near term consolidation among the five major players (Gillig Corporation, North American Bus Industries (“NABI”), Orion and Nova Bus are the other four.) New Flyer has the largest market share, at 35% of new deliveries in 2011, up from 34% in 2010, most likely due to the idled capacity at other manufacturers.  One other bright spot is the shift towards clean propulsion buses (mostly hybrid and compressed natural gas), which made up 68% of New Flyer's sales in 2011.  These buses have higher margins than conventional diesel buses.

Transport Bill Held Up

The current weak state of the bus market is compounded by political uncertainty.

The US Transportation bill needs to be renewed by March 31st to avoid a halt of road work and other federal transportation programs, such as subsidies to municipal transit authorities towards bus purchases.  As of March 26th, Congress looked more likely to pass a short-term stop-gap measure, although even that stop-gap is in doubt, with each party maneuvering to blame the other for its failure

While President Obama and Democrats are touting the job creation benefits of investing in transportation infrastructure (which include jobs in public transit and bus manufacturing,) Republicans in the House are objecting that the Senate version of the bill does not "address the issue of rising gas prices."  House leader John Boehner (R) wants to include provisions opening up more federal lands for oil drilling.  Bohener's position is disingenuous (increasing drilling will not significantly affect gas prices, since oil prices are now set mostly on the demand side, not the supply side.)  Instead, if Congress wants to address the pain Americans feel from rising gas prices, the most effective policy measures they can take are increasing support for public transit and other alternative transportation which allow Americans to get around without using as much gas as they do in cars.  Endangering current support by putting the Transportation bill in question is a step in the wrong direction.

If no bill or stop-gap measure is passed, we can expect a further fall in New Flyer's stock price, but Congress reaches a useful agreement this week, we can expect a quick rebound.

Conclusion

I expect at least a stop-gap transportation bill to pass this week, which should help stabilize New Flyer stock.  In the longer term, we should expect to see consolidation in the transit bus industry, as well as an industry rebound, as higher ridership and an aging bus fleet compels transportation authorities to find the funding to order replacement buses.  In terms of consolidation, New Flyer is more likely to be an acquirer than to be acquired.  The recent annual report if full of references to how the recent share restructuring "provides the flexibility needed to pursue strategic opportunities for continued long-term growth and diversification." 

Given that other bus manufacturers are currently in deeper distress than New Flyer, I expect that if they make an acquisition, it will be at an attractive price.

DISCLOSURE: Long NFYEF.
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 27, 2012

Historic Oil/Gas and Gas/Coal prices provide opportunity for fuel switching

Oil Gas and Coal Gas Ratio That sound you hear is the stampede of shale gas drillers away from dry gas plays. The irrational exuberance of shale gas drillers, chief amongst them Chesapeake's voluble Aubrey McLendon, is leading to an impressive destruction of capital. The long run marginal cost is significantly above the current spot price. With natural gas storage bursting at the seams, natural gas is reverting to its historical nuisance byproduct as drilling moves to liquid rich plays. While not sustainable in the long term, the present pricing situation presents opportuinities to displace coal generation and some oil in the transport sector.

Both the gas/coal and oil/gas ratios are at record levels:
oil gas coal gas ratio

Sources: Natural Gas (EIA); Oil (EIA); Coal (EIA)

Natural gas is now cheaper than coal on a per unit energy basis, and a btu of natural gas also yields more electricity than coal. Only half of coal plants have scrubbers, with older plants now facing the decision of whether to upgrade or to switch to natural gas. Central Appalachian coal at $60/ton is now selling below its mining cost of $65 -$75/ton, which means there is limited scope for coal prices to adjust downwards should fuel switching accelerate.

The oil gas ratio is at record levels also, which has translated to large differentials between CNG and gasoline/diesel (making for compelling payback period calculations):
average retail fuel price
Source: Alternative Fuels Data Center; Clean Energy Fuels

This presents an opportunity for Clean Energy Fuels if they can increase the volume of fuel they sell, as their margin per gallon of gasoline equivalent is currently in the range of 35c.

alternative fuel consumption
Source: Alternative Fuels Data Center; EIA Annual Energy Review 2010

In 2010 2.4% of US primary energy consumption in the transport sector came from natural. With the possibility of a strike on Iran, the oil/gas ratio could go significantly higher, which may result in a knee jerk narrowing of the CLNE oil/gas ratio spread as hands are wrung about $4/gallon gas.

clne oil gas ratio

Disclosure: None




November 28, 2011

Time to Buy One of the Best Peak Oil Investments

Tom Konrad CFA

accell-logo[1].gif The Euro crisis rolls out a bargain in the stock of a leading e-bike manufacturer.

A little over a year ago, I concluded a 27 part series looking into non-oil stocks that might benefit from rising oil prices by picking what I thought were the four best stocks I had found in the process.  I had not yet bought any of the stocks picked because, as I said at the time,

I personally do not yet have a position in any of these stocks because I expect the stock market to continue to decline in the near term.  I'm waiting to make my purchases (of a possibly slightly different set of peak oil stocks) at even more attractive valuations.

It took a bit longer for the market to fall than I expected.  Now it has, especially in mainland Europe.  This is a good thing for bottom-fishers seeking peak oil stocks: With high gas prices, limited domestic oil supplies, and a realistic attitude towards climate change, Europe is far ahead of the US in spawning companies that will be able to survive and flourish in a world of constrained oil supplies.

The Four Picks

One of my "four best" peak oil stock picks was a Chinese company with a NASDAQ listing.  The other three were European.  The Chinese company was Advanced Battery Technologies (ABAT), which I liked because of their e-bike business and apparent cheap valuation.  I did not foresee that the company would be one of many Chinese companies accused of cooking their books.  The allegations have not been proven, but ABAT has also not been able to provide enough information to clear its name, so the stock has fallen by two thirds since I wrote the article, but I'm only interested in investing in companies with financial statements I can trust, so I'm no longer watching the stock.

VOS SGC ABAT ACCEL.png

The best performing of the four picks is London-listed Stagecoach Group (SGC.L), an operator of rail and bus services in the UK and North America.  Stagecoach is up about 50% since last September, but I did not participate in the gain because I was waiting for a pullback.

In between these two lie Dutch bicycle manufacturer Accell Group (ACCEL.AS), and German commuter and high-speed rail supplier Vossloh AG (VOS.DE).  Both of these companies did well through the middle of this year when the Euro crisis began to heat up, and now they're both below their levels from when I originally wrote the article.  Last week, I took a position in Accell stock, because I like the current valuation (at 12.74 Euros.)  With the crisis continuing, there is still room for further declines, but I feel like there is currently enough blood on the streets to take an initial position, despite the ongoing uncertainty.

Accell Group

Accell Geographic.png Accell Group is a Europe-centric manufacturer of bicycles, bike parts, bike accessories, and fitness equipment.  The stock trades on the Amsterdam stock market with the symbol ACCEL.  The company owns a wide portfolio of national and international bicycle brands, and the company's strategy is to buy and cultivate brands that are or can be leaders in their respective national or functional niches.  The company's annual report lists 18 "main" brands with focuses on everything from bikes for kids (Loekie), to high-quality bikes and e-bikes in the Netherlands (Koga-Miyata), to bike parts suppliers like Junker and Brasseur.  If there is an underlying theme among the brands it is attention to research in innovation combined with sophisticated distribution and marketing. 

Accell's current strategy is to reemphasize the lackluster fitness segment, while putting greater emphasis on higher margin e-bikes and sales outside its core European markets.  Europe's high fuel prices and compact cities have led to a cycling culture and a rapid adoption of e-bikes, giving Accell an early advantage in developing the sorts of e-bikes that appeal to commuters. 

This e-bike expertise is why I see Accell as a good peak oil stock: As higher fuel prices lead motorists to seek other modes of transit, e-bikes allow people at all levels of age and fitness to participate in bicycle commuting.  Accell has the experience selling to bicycle commuters to understand the features they want.

Accell Segments.png
  Accell maintains a high but variable dividend yield by setting the dividend at approximately 40% of net profits each year, and allowing shareholders to opt to take the dividend either in shares or cash.  Nearly half of all shareholders opted to take the dividend in additional shares in recent years (48% in 2010, 44% in 2011).  This both allows the company to offer a high (6.7%) dividend yield and to reinvest substantial cash in the business.

Stormy Europe

Both management and analysts following the company expect 2011 sales and earnings to exceed those in 2010, despite a disappointing third quarter.  In Q3, poor weather in the company's core European markets depressed sales, while the economic storm clouds emanating from the uncertainty around the Euro are making dealers reluctant to build up stocks of next season's models.  One bright spot was Germany, where demand remained strong, driven by increased purchases of Accell's more expensive e-bikes displacing purchases of conventional bicycles.

All this uncertainty drove the share price down sharply last week until, at Euro 12.76 the company is trading at only 7.6 times expected 2011 earnings and 1.25 times book value.  With a current dividend yield of almost 7%, I'm comfortable buying and holding this stock through the ups and downs of the European market.

Accell yield.png
Further, although Accell's core European markets may be hurt by the fallout of the Euro crisis, I feel that much of that damage is already priced into the stock.  Accell's growth markets are in the rest of the world, and a falling Euro will only make it easier to increase exports.

All in all, now seems like a great time to take Accell for a spin.

DISCLOSURE: Long ACCEL.AS

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.

August 04, 2011

New Flyer: An Offer You Can't Refuse

Tom Konrad CFA

A couple readers have asked me if they should accept the New Flyer (NFI-UN.TO/NFYIF.PK) Rights offering to exchange their C$5.53 principal 14% subordinated notes for nine shares of New Flyer common stock.  The answer is most emphatically YES.

When I last wrote about New Flyer, I knew that they were planning to convert from their unusual stapled security structure to a more conventional share structure, but I was not certain how they could entice IDS holders to go along with the swap. 

Now, it's clear.  The New Flyer IDS is the combination of the C$5.53 note and one common share of New Flyer, and currently trades for C$7.66.  The subordinated note is worth more than the face value because of the high interest rate, but is callable for C$5.80 next year, and hence is worth no more than about C$6.40 (call price plus interest) if not exchanged.  That means New Flyer common shares are currently worth at least C$7.66-C$6.40 = C$1.26.

The Tender offer gives you the right to exchange the IDS for 10 common shares (one that you already own, 9 in exchange for the subordinated note).  This is worth at least C$12.26, 60% more than the current IDS price.

When New Flyer issues all these new common shares in exchange for subordinated notes, note holders who make the exchange will have an instant gain, but the value of all shares will be diluted.  Since only the company structure is being changed, not its net value, if everyone exchanges their notes for common shares, the whole exchange will be a wash in terms of the value to IDS holders.  But any IDS holder who chooses not to make the exchange will not participate in the gain, yet they will still be diluted by all the new shares issued, and hence will suffer a net loss. If some IDS holders choose not to exercise the Rights, those who do make the exchange will benefit at the expense of any IDS holders who do not exercise their Rights.

In other words, although this exchange is voluntary, any IDS holder who chooses not to participate will suffer immediate dilution and a net loss in the value of their share large enough to more than offset any benefit from holding on to the high-interest subordinated note until it is called.

If you're a New Flyer IDS holder, you've been made an offer you can't refuse.  Don't.

DISCLOSURE: Long NFYIF.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

June 12, 2011

Questions About Dividend Spook New Flyer Investors. Why I'm Buying

Tom Konrad CFA

If I could only own one stock, it would not be a stock.  It would be a Canadian "income deposit security:" New Flyer Industries which trades in Toronto as NFI-UN.TO and on the Pink sheets as NFYIF.PK.

Cyclical industry

New Flyer is the largest of the fiveNew Flyer marketshare.png suppliers of heavy duty transit buses in North America.  Unlike its competitors, New Flyer is focused solely on transit bus sales, parts, and service.  The company has industry leading technology, offering a full range of bus styles and propulsion systems, including  diesel, liquid or compressed natural gas, gas and diesel hybrids, electric trolley buses, and hydrogen.  They are currently developing a pure electric version.

Transit buses are a cyclical industry which is currently in a downturn.   Municipal transit agencies are the main customers, and bus manufactures' sales move in line with transit agencies' budgets.
Many transit agencies currently face budget cuts even as high gas prices stimulate demand.  That's because fare box collections typically only cover about a third of the costs of running a transit agency, the rest must come from local, state, and federal transfers.

Both New Flyer and their competitors have shed workers to better match their production capacity with lower demand, but the remaining capacity is still enough to keep the bidding for contracts very competitive. 

The Payout

The New Flyer income deposit security (“IDS”) consists of one common share and a C$5.53 principal 14% subordinated note.  The monthly distribution currently consists of a C$0.03298 cash dividend and a C$0.06453 interest payment on the note, for a total monthly distribution of C$0.0975.  At the closing share price $7.79 on June 10th, that's a 15% yield. 

Unfortunately, the increasingly competitive environment means the company will probably need to cut payments to IDS holders in the coming months.  New Flyer has made significant progress cutting costs and improving operational efficiency, yet an increasing tax rate and lower selling prices have reduced distributable income.  Distributable income has been roughly equal to IDS distributions over the last two quarters, while the long term average distribution was only 80% of distributable income.  Since the company's tax rate is set OT increase over the next year, and the competitive environment is unlikely to improve much before then, payouts will almost certainly need to be reduced.

Strategic Options

New Flyer's board is in the process of evaluating a number of strategic options, both to better cope with the cyclical nature of the industry and the unsustainable distributions.  On the recent May 13 conference call (MP3) they stated that they expect to announce their new strategic plan "in the next couple of months."  I take that to mean by the end July.  Including cutting the dividend, they are looking at acquisitions in adjacent industries with the intent of making their overall business less cyclical.  I take this to mean other types of buses, perhaps light duty transit or intercity motor coaches, or the acquisition of a parts and maintenance company.  Investor worries surrounding the upcoming decision seem to have driven the recent price drop from the C$11.50-12.00 range to the current price below C$8.

Any acquisition would put more pressure on company resources, so I consider it a certainty that the dividend will be cut.  The interest payment, however, cannot be eliminated unless the notes are called.  The first opportunity to call the notes will be in 2012, for 105, meaning that note holders would need to be paid C$5.8065 (which would have to be raised through other borrowing or the sale of stock), and IDS holders would still retain their equity interest in the form of a common share.

I can't predict if the company will call the notes, but the Q1 2011 book value per share was US$2.36 or C$2.32, so the combined book and principal value of an IDS is C$7.85, above the current stock price.  For a company that will almost certainly continue to pay the interest on the subordinated note until the notes are called,  this seems like a bargain.  The interest payment alone amounts to a 10% yield at C$7.79.  New Flyer should be able to remain current with these interest payments even if income falls another 30%, which I consider unlikely.

Past and Future Trades

NFI chart 2011.png
I last took an in-depth look at New Flyer in October 2009, when the stock was trading around $9 because the Chicago Transit Authority had delayed a large order and thrown off production.  I expected the company to work though these problems, and advocated buying at that price. 

Since then the stock rose as high as C$12 this February.  I began reducing my holdings when the price exceeded $11 mainly for rebalancing, which left me with the capacity to purchase more as the stock has fallen since March, making purchases at $10.50, $9, and $8.  I will probably make one more purchase if it falls as far as $7.  Despite the fact that the current price seems extremely cheap for an income investment, the overall uncertainly and current general market decline might conspire to drive it that low again.

No matter what the structure, New Flyer is an excellent value company at the current price.  I like the income security nature of the current structure, and would be happy to hold the New Flyer IDS at current prices even if the dividend is reduced to zero, but I'd also be comfortable if New Flyer converts to a more traditional equity structure.  If the current IDS were somehow converted into straight equity trading at the same price (C$7.79), the P/E ratio would be about 8, after taking into account the reduced earnings due to the loss of the interest tax shelter.  (This tax shelter arises because interest on the note is treated as an expense for tax purposes, while dividends would not be.) 

Although I expect the price to recover only slowly from whatever low it finds, I don't see any reason to delay my purchases until it is back on the upswing, since the current 15% yield seems an excellent compensation for my investment.

DISCLOSURE: Long NFYIF.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 25, 2011

The New Golden Age of Railroads

John Petersen

Did you know that both Warren Buffett and Bill Gates have billion dollar investments in railroads?

If so, did you ever wonder why?

For Mr. Buffett, it's an indirect investment through Berkshire Hathaway, which bought the Burlington Northern Santa Fe railroad outright in February of last year. For Mr. Gates, it's a direct 10.04% stake in Canadian National Railway.

The reason is simple. Railroads are the cheapest, cleanest and most energy efficient ground transportation networks in the world, which effectively guarantees them an increasingly important role as the world comes to grips with peak cheap oil.

Railroads aren't just a little more fuel efficient than long-haul trucking. They're up to four times more fuel efficient and getting better every year. A 2009 study commissioned by the Federal Railroad Administration reported that rail fuel efficiency varied from 156 to 512 ton-miles per gallon while truck fuel efficiency ranged from 68 to 133 ton-miles per gallon. According to the Association of American Railroads, U.S. freight railroads averaged 484 ton-miles per gallon in 2010, a 106% improvement over the industry average of 235 ton-miles per gallon in 1980. If we'd done that well with passenger cars, the fleet wide average would be up around 33 mpg by now.

Trucking is certain to remain a backbone element of the world's transportation infrastructure, however the pressure to move loads from the highways to the railways can only increase as oil gets more expensive and emissions regulations get more restrictive.

One of the most appealing aspects for investors who are interested in the rail transportation sector is a limited universe of Class I Railroads, which the Department of Transportation’s Surface Transportation Board generally defines as carriers with over $400 million in revenue. The following table identifies the seven Class I Railroads and provides summary data on their rolling stock fleets, route networks, revenues, incomes and market capitalizations.

5.25.11 Railways.png

While most alternative energy investments are subject to a good deal of volatility and uncertain growth potential, railroads are about as green as fundamental value investing gets and their growth rates should be stunning for decades to come. I'm not one to blindly follow investment gurus, but in this case I believe the long-term fundamentals couldn't be better. As we enter the age of cleantech, I believe we'll also be entering a second golden age for railway transportation.

Disclosure: None.

May 23, 2011

The Best Peak Oil Investments: Maersk

Tom Konrad CFA

Containerized shipping is the most efficient way to move goods, but few ships are nearly as efficient as they could be.  One company is steaming ahead of the pack.

It seems obvious that more international trade increases greenhouse gas emissions.  After all, if we buy local products rather than products made halfway around the world, we will save all the carbon emissions required to ship them to us.  It also seems to make sense that rising fuel prices will lead to a decrease in international trade, as companies reduce fuel use by assembling things closer to markets.

This facile intuition can lead us to some very inaccurate conclusions.  The manufacture of materials typically accounts for far more of their embodied carbon than their transport, and the mode of transport will also have a big impact on embodied carbon.

Here is a chart showing the associated CO2 emissions of various modes of transport (source):
Air plane (air cargo), average Cargo B747
500 g
Modern lorry or truck
60 to 150 g
Modern train
30 to 100 g
Modern ship (sea freight)
10 to 40 g
With trucks emitting far more CO2 per mile than cargo ships, a consumer in Los Angeles will have lower emissions from transport of an iPad shipped in from China than he would if he could buy the same item assembled in Indiana. (That is, if Apple were to assemble iPads in Indiana.)

Contrary to the obvious assumption, rising fuel prices might actually cause the use of ships for freight, as manufacturers reduce fuel use not by shipping things shorter distances, but by relying more heavily on efficient sea freight at the expense of less efficient land- and air-based modes of transport.  Efforts to reduce carbon emissions might also end up increasing international trade and shipping, as countries with strict carbon emissions shift production (and emissions) to countries with less strict caps (or no caps at all.)

Ship Shape

While rising fuel prices and greenhouse reduction goals may end up favoring the shipping industry as a whole, they will also do a lot to re-shape the industry.  Fuel, after all, is not just a source of emissions for the shipping industry, it is a cost, so higher fuel prices mean that more efficient shippers will have a greater cost and profitability advantage.

There are many highly economical measures that a ship owner can take to improve the efficiency of their vessel, many of which were discussed in a panel on shipping at the Carbon War Room's Creating Climate Wealth Conference on May 4th.  According to Peter Boyd, the Carbon War Room's COO, there is the potential to save 30% of shipping fuel just by applying measures with paybacks of three years or less.  Such measures include hull coatings, sails, using fans to force air bubbles under the ships hull, making the ship ride higher in the water, and waste heat recovery from the ship's engines.  The economics of such measures are further improved because some ports give discounts or special privileges to more fuel efficient (and less polluting) ships.

The problem is that approximately two thirds of the shipping fleet is leased, not owned, by its operators.  This creates a split-incentive, because the ship owner (who would pay for the upgrades) does not get the benefit of savings on fuel consumption. 

Ship operators who own more of their ships will therefore have an advantage in terms of reducing fuel use.  The largest operator of container ships, A.P. Moeller-Maersk (Copenhagen: MAERSK-A,MAERSK-B), has such an advantage, since they own approximately half of the ships they operate.  Furthermore, Maersk has shown a commitment to fuel efficiency, providing data on all their ships (even the poorly performing ones) to ShippingEfficiency.org, doing retrofits on their existing fleet, and aggressively incorporating fuel saving technologies into the new ships they order.

Ship operators who lease most of their ships only have one easy option to save fuel: slow steaming.  Just as you get better gas mileage by driving 55 than driving 70, ships can also unlock substantial fuel savings with "slow steaming."  Maersk is also a leader in its commitment to slow steaming.  While any operator can choose to run its ships slower to save fuel, this, too, provides a hidden advantage for ship owners: Lowering ship speeds effectively lowers the global fleet's carrying capacity, increasing the demand (and prices) for ships.

Conclusion

If you, like me, believe that current high oil prices are not just a blip, you should also believe that shipping companies with a proven commitment to efficiency will outperform their peers in the years to come.  Since the shipping fleet takes decades to turn over, energy efficiency first movers will retain a long term advantage, even if other firms belatedly wake up to the advantages.

What is less clear is how the shipping industry as a whole will fare as a result of long term increases in the price of fuel.  Shipping will probably gain market share from less efficient modes of transport, but higher fuel prices may also cause the entire transportation pie to shrink.  This uncertainty suggests that a long position in Maersk (MAERSK-B) might best be hedged with a short position in a broad transport ETF, such as the iShares Dow Jones Transportation Average (IYT.)

DISCLOSURE: No Positions.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

October 03, 2010

The Four Best Peak Oil Investments

Tom Konrad CFA

The best four stocks I've found in my six month quest to find the best peak oil investments.

I apologize for being a tease. 

Since March, I've been writing this series I've called "The Best Peak Oil Investments," but in many cases what I've actually done is to warn readers to stay away from particular sectors.  This bait-and-switch was compounded for my syndicated readers at Seeking Alpha when their editors decided to re-title the early articles in this series "Peak Oil Investments I'm Putting My Money On." 

If you've stuck with the series for the last seven months and twenty-five articles despite the sometimes misleading titles, I'm going to (finally) try to make it up to you.  After mentioning over fifty stocks in the course of this series, and dismissing entire sectors, I'll narrow my stock picks down to the four I like best at current prices.

My Criteria

These stocks are chosen to do well in what I called "The Methadone Economy" in part nine.  If oil prices continue to rise, I expect it to take a toll on economic growth and the availability of funding will probably remain tight.  I'm looking for companies that have solid balance sheets and can fund investment from internal cash flow.  I'll be looking for positive free cash flow, low debt, and high current ratios. 

I'm also looking for companies that typically reduce the use of the personal car, rather than simply making the car more efficient to drive.  More efficient vehicles do reduce fuel use per mile, but because of their lower operating costs may encourage driving, and fail to reduce overall fuel use as much as the efficiency number might lead us to believe.  I also see problems with most alternative fuels, mainly because there are limits to supply, which should lead to the prices of any widely adopted alternative fuel to track the price of oil.

The stocks I do like are Alternative Transportation stocks such as rail and bus companies, bicycle and e-bike companies, and Smart Transportation companies that combine information technology and pricing schemes to reduce waste in the transportation system by making the markets for travel services more efficient.  Unfortunately, I was not able to find any pure-play or nearly pure-play smart transport stocks that meet my financial strength and liquidity criteria.  Portable Navigation Device (PND) maker Garmin (GRMN) has the financial strength I'm looking for, but the increasing competition from GPS-enabled smartphones kept the company out of this list, even though I'm personally an avid user of the company's PNDs.

Top Four Peak Oil Stocks

#1 Advanced Battery Technologies (ABAT) is a Chinese company whose core business in making polymer Lithium-ion batteries.  The company recently bought an e-bike manufacturer which uses ABAT's batteries in its bikes.  I consider batteries in general the best way to invest in vehicle electrification, and ABAT's focus on e-bikes rather than cars also appeals to me.  At the recent stock price of $3.47, ABAT trades at a trailing price earnings multiple of 6.7, has an off-the charts current ratio of over 32.  Free cash flow has been negative over the last year, but turned positive in the last two quarters, and the company has enough cash on the balance sheet to internally fund operations for many years at current rates.  I discuss ABAT in more detail in this article on six electric vehicle and hybrid electric vehicle stocks.

#2 Stagecoach Group (SGC.L) is an operator of rail and bus services in the UK and North America, and it was my favorite of the three mass transit operators I've found because of low debt, relatively strong liquidity, and low price/earnings multiple.

#3 Accell Group (ACCEL.AS) is my top pick among bicycle company stocks.  Accell has a large stable of brands controlling leading positions in many European bike markets and segments.  High gas taxes and dense cities have helped Europe establish a lead in adoption of bikes for commuting and short trips, meaning that Accell has more experience meeting the needs of such riders, who grow in number with oil price rises.  Although I also like the business of bike component manufacturer Shimano (SHMDF.PK), Accell currently trades at a much better valuation.

#4 Vossloh AG (VOS.DE) German commuter and high-speed rail supplier Vossloh trades at an inexpensive price/earnings ratio of 11, with decent growth and dividends that are well covered by income and cash flow.  You can read more about Vossloh in my recent article on mass transit supplier stocks.

Honorable Mentions

In a recent article, I implied I'd pick my five favorite peak oil investments, not four.  When it came to actually picking, I found myself eliminating potential candidates on one criterion or another until I had just four. 

However, I do have two honorable mentions.  The first is the Powershares Progressive Transport Portfolio (PTRP), which I said "The Powershares Progressive Transport Portfolio (PTRP) is a good option for investors looking for a one-stop shop of non-oil related stocks that are better prepared to cope with rising oil prices." One caveat: as some commenters on the original article pointed out, PTRP trades at very low volume, so PTRP is only appropriate for a long term investor and should always be traded using limit orders to minimize price impact.

A second honorable mention is Kandi Technologies (KNDI), which was profiled in a series of guest posts here.  Kandi is a profitable but little known Chinese company making electric mini-cars.  I bought a small position on the speculation that it might become better known, but I did not want to include it in this list because I consider it much riskier than the somewhat similar ABAT, which is already in the list.

Trading

For US based investors like myself, it's unfortunate (if not surprising) that only one of these companies is listed on a domestic exchange, and that one is a Chinese company.  To trade the three European companies, North American investors will need to go through the world trading desk of their broker, and this will involve paying much higher transaction costs.  The high transaction costs mean that these stocks should only be purchased as long-term investments to be held for several years.  However, that should not be a problem for peak-oil motivated investors, since we already can only be certain that oil prices will rise over the long term; short term price changes are anyone's guess.

I personally do not yet have a position in any of these stocks because I expect the stock market to continue to decline in the near term.  I'm waiting to make my purchases (of a possibly slightly different set of peak oil stocks) at even more attractive valuations.

Benchmarking

Even though I'm not buying these stocks today, I find it useful to look back on my stock picks and see how they have performed over time.  As I write on September 11th, a $10,000, equally weighted portfolio of these four stocks would contain 720 shares of ABAT, 878 shares of SGC.L, 61 shares of ACCEL.AS, and 24 shares of VOS.DE.   Since I've come out saying that investing in oil exploration and production companies is not the best way to invest in peak oil, I plan to test my theory by comparing this portfolio in the future to 183 shares of the Energy Select Sector SPDR (XLE), which is composed of oil E&P companies. 

[Late note: This article was not published until October 3, at which point the portfolio had risen 5.8%, while XLE was up by 4.0% between writing and publication.  While this makes the relative valuation of the companies less attractive, the reasons for choosing them over oil and gas companies are unchanged.  I have not yet bought any of them because I'm still expecting a significant market correction, and am waiting for even more attractive prices.]

Conclusion

These are my top oil related picks, but I have to admit I'm as curious as you are as to how they work out.  Can you do better?  Leave your picks in the comments, and I will track them along with my own when I check back to see how these stocks and XLE are doing.


DISCLOSURE: None.
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.

September 20, 2010

The Best Peak Oil Investments: Pure-Play Mass Transit Suppliers

Tom Konrad CFA

I'm attempting to bring this series on peak oil stocks to a conclusion in which I can choose five stocks that should benefit from rising oil prices.  One sector I feel should be represented is suppliers to mass transit companies, but I only looked at the percentage of revenues coming from mass transit and rail when I brought you my list of nine mass transit stocks.  From that list, the following companies get substantially all their revenues from mass transit, passenger rail, or rail freight:

  1. New Flyer Industries (NFYIF.PK/NFI-UN.TO), is the largest manufacturer of heavy-duty transit buses in North America, and has been a long-time favorite of mine.  The company trades in Toronto under the ticker NFI-UN, which is an unusual "stapled" security consisting partly of company stock and partly of a high-yield bond, giving it a much higher yield than most other companys.  This makes apples-to-apples comparisons with different stocks difficult, but I'll do my best.
  2. Vossloh AG (VOS.DE) supplies rail fastening systems, switching, services, and both diesel and electric locomotives, including locomotives for high speed rail.  Their electrical systems unit supplies electric drivetrains for both locomotives and trolley buses.
  3. While Portec Rail Products (PRPX) is a pure-play rail supplier, I'm not going to include it in this comparative valuation because the stock is currently trading based on the a takeover offer from L. B. Foster (FSTR).  This offer is on hold pending a ruling from the US Department of Justice, but L.B. Foster is confident enough of obtaining final approval (after some asset dispositions) that they increased the offer price to $11.80 per Portec share and agreed to pay $2 million to Portec if they are unable to consummate the deal by the end of the year in order to induce Portec to extend the agreement when the original offer expired on August 30.
  4. Wabtec Corporation (WAB), primarily serves the freight and passenger rail industries, supplying braking and other safety systems for both rail cars and locomotives.
One last company I will add to the list is the Spanish firm Construcciones y Auxiliar de Ferrocarriles (CAF.MC), also known as CAF.  A reader suggested I look into CAF shortly after the publication of the original list of transit stocks.  CAF manfactures railway cars, components, and complete turnkey rail systems.  In 2009, 58% of revenues came from Spain, rapidly growing international operations accounting for the balance of 43%. 

Valuation and Liquidity

The following table lays out several important valuation and liquidity ratios for these companies:

Company
New Flyer
Vossloh
Wabtec
CAF
Ticker
NFI-UN.TO VOS.DE WAB CAF.MC
Share Price 9/7/2010
C$11.51
€80.18 US$45.84
€345.15
Financial Stmt Date
6/30/2010
6/30/2010
3/31/2010
12/31/2009
TTM Earnings Yield
0.05%
9.1%
5.1%
10.5%
P/E
218
11.0
19.4
9.5
TTM Free Cash Flow Yield
6.6%
5.1%
0.1%
-0.7%
Dividend Yield
10.2%*
2.5%
0.1%
3.0%
Net Debt/Equity
5.75
1.5
0.8
3.8
Current Ratio
1.35
1.6
2.4
1.1
YoY Sales Growth
2.6%
14%
4%
25%
* Note: The yield on New Flyer's securities is not comparable to the other numbers in this chart because it includes the value of interest payments on the debt portion of the security

The only one of the four I currently own is New Flyer.  The bus manufacturer is returning to profitability after a year of losses caused by the downturn and an unexpected delay in an order from a large customer.  This has caused fairly strong price appreciation for what I consider an income security, so I have recently sold a little over a third of my holdings in order to rebalance my portfolio.

Wabtec and CAF both show weak free cash flow.  For Wabtec, this reflects a temporary surge in investment to support future growth.   In my opinion, Wabtec's strong balance sheet, with its low debt and a strong current ratio, should be sufficient to sustain this planned surge in investment.
 
CAF's low free cash flow seems to reflect a surge in working capital with the build-out of current projects.  Since CAF contracts to build entire turnkey transit facilities, large surges in working capital requirements are part of its normal course of business.

Vossloh seems the best overall value of the four, with an inexpensive price/earnings ratio of 11, decent growth and dividends that are well covered by income and cash flow.  The company does not have excessive debt, and maintains a moderate liquidity buffer.

Conclusion

Vossloh AG seems like the best buy of these four at current prices.  The conservatively managed balance sheet and moderate Price to Earnings ratio of 11 mean this company should be able to weather continued economic weakness, while still being able to benefit from any potential increased investment in mass transit systems.

DISCLOSURE: Long NFYIF and PRPX.

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.

September 10, 2010

The Best Peak Oil Investments: Accell and Six Other Bicycle Stocks

Tom Konrad CFA

This article gathers all the bicycle and e-bike stocks I've found in one place, and takes a look at a recent find: Accell Group (ACCEL.AS).

When I first became interested in alternative transportation as a peak-oil investing theme in late 2007, I was frustrated at my inability to find very many good alternative transportation stocks: The list of bike stocks I found was already very out-of date, and the lists of rail transit and bus companies I found did not distinguish between publicly traded companies I could invest in, and private companies I could not.

Almost three years later, I finally feel I've found enough publicly traded alternative transportation stocks that I feel I have a chance of finding a few good value stocks.  My alternative transportation stock list has expanded to 27 names, and is still growing with a new reader suggestion every couple of weeks.  Recently I published lists of nine mass transit stocks and three mass transit operators.  I also found four bicycle and moped stocks, only to find that list instantly out-dated because of three new reader suggestions and one bike manufacturer I found among the holdings of the Powershares Global Progressive Transport Portfolio (PTRP.)

List of Bike Stocks

In the interest of having a list of bike stocks all in one place, here are the ones I currently know about, along with where to find a more detailed discussion of the company's business and fundamentals.

Dorel Industries, Inc (DII-B.TO, DIIBF.PK),
Giant Manufacturing (GTMUF.PK, TWSE:9921), and
Piaggio & C.S.p.A. (PIA.MI, PIAGF.PK) are discussed in my first article on bike and scooter stocks.

Advanced Battery Technologies (ABAT) features in my second list of electric and hybrid electric vehicle stocks.

Shimano (SHMDF.PK), sometimes called the "Intel of the bike industry" is discussed here.

I have yet to write about these bicycle makers:

Accell Group (ACCEL.AS) was suggested to me by Peter Cox of Greentech Opportunities, whom I met at the San Francisco MoneyShow.  I take a look at it below.

Merida Industry Co (9914.TW) is a bicycle company based in Taiwan.  I have been unable to find an English-language version of Merida Industries' annual report or other filings.  If any readers know where to get them, or some other source that includes Merida's full financial statements, let me know, and I'll write about it in a future article.

Accell Group

Accell Group is a Europe-centric manufacturer of bicycles, bike parts, bike accessories, and fitness equipment.  Sales by CountryThe stock trades on the Amsterdam stock market with the symbol ACCEL.  The company owns a wide portfolio of national and international bicycle brands, and the company's strategy is to buy and cultivate brands that are or can be leaders in their respective national or functional niches.  The company's annual report lists 18 "main" brands with focuses on everything from bikes for kids (Loekie), to high-quality bikes and e-bikes in the Netherlands (Koga-Miyata), to bike parts suppliers like Junker and Brasseur.  If there is an underlying theme among the brands it is attention to research in innovation combined with sophisticated distribution and marketing. 

As I discussed in my first bike stock article, I'm most interested in bike stocks because I expect rising oil prices to stimulate the use of bikes first for short trips and errands, and then for commuting.Sales by Segment  This trend is already much more advanced in Europe than in the United States because of their more compact cities, higher gas taxes, and greater awareness of green issues.  This has helped Accell's brands to stay in the forefront of e-Bike and commuter bike development, and possibly giving them a better understanding of what the future bike market will look like than rival North American manufacturers.  With a greater focus on volume production, Asian bike manufacturers such as Taiwanese Giant (and possibly Merida) with a greater focus on volume production rather than technical innovation and tailoring bikes to their customers needs are more likely to be followers than innovators in this regard. 

Accell might be better in a rapidly rising oil price environment where bicycle demand grows and changes rapidly, while the volume manufacturers are more likely to have the advantage in a more slowly evolving environment associated with a more gradual rise in the price of oil.  As I recently discussed, I think the more likely scenario is highly volatile and rising oil prices, giving a slight advantage to innovative companies like Merida and Shimano.

Liquidity and Valuation

The following table summarizes some of Accell's important liquidity and valuation ratios:

Share Price 9/3/10
€32.80
Financial Stmt Date
7/23/10
TTM Income Yield (PE)
10.3% (9.7)
TTM Free Cash Flow Yield
9.6%
Dividend Yield
4.8%
Net Debt/Equity
124%
Current Ratio
2.35

Accell's liquidity is good, and the company is not highly leveraged.  The high 4.8% dividend yield should be considered in light of the fact that Accell has a policy of setting the annual dividend at around 40% of the previous year's profits.  This allows the dividend to fluctuate over time, allowing a higher average dividend than would be likely in a company with the same level of profitability but a fixed dividend policy.  Despite the financial crisis, revenue and earnings have been growing steadily at least as far back as 2002, with 12% compound annual revenue growth and 22% compound annual earnings growth over that period.  The most recent 6 month earnings statement showed more subdued growth, with year-over-year revenue growth of 3% and year-over-year profit growth of 9%, but high growth is not necessary to justify Accell's quite reasonable valuation.

Conclusion

Overall, Accell seems a good value play in an industry that should benefit from rising oil prices.  The only company included in the list of bicycle stocks above with a comparable valuation is Advanced Battery Technologies (ABAT).  ABAT has the advantage (at least for US based investors) of trading on NASDAQ, but is a Chinese company and only about 46% percent of its sales consist of e-bikes and batteries for e-bikes, while Accell gets almost all of its sales from bikes and bike parts.  If I had to buy only one of these seven at current prices, I'd buy Accell.  In fact, I currently have an open limit order to buy the company at only slightly below the current price. 

DISCLOSURE: None.
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.

September 07, 2010

The Best Peak Oil Investments: Three Mass Transit Operators

Tom Konrad, CFA

Government budgets are putting pressure on mass transit operators, but the best public companies are likely to benefit from the trend.

Three recent Economist articles led me to question my assumption that rising oil prices should be good for mass transit operators.  In the August 19th edition, there was an article about mass transit service cuts in Atlanta, as well as one about the likelihood of rising rail fares in Britain

In crisis, there is also opportunity.  Reading beyond the gloomy headline of the Atlanta article, it becomes clear that the Metropolitan Atlanta Rapid Transit Authority's (MARTA's) decision to cut 40 of 131 bus lines has more to do with the operational inefficiencies of a state-run bus service.  MARTA has several competing, subsidized, transit agencies in the Atlanta region, does not receive any subsidies of its own, and has significant legislative constraints about how it spends its money.  Inflexible rules have even forced MARTA to buy buses that it does not have the money to operate. 

Demand for public transit services is rising, even as transit agencies like MARTA are cutting back.  This should open up opportunities for efficient and flexible privately run operators willing to fill in the gap left by the retreating public sector.

The story behind the likely large increases in Britain's rail fares leads to a similar conclusion.  Rising rail fares will be driven by government belt-tightening, and rail operators must negotiate with local authorities for their share of revenues and expenses.  This seems to imply that rail operators will not be able to capture a share of rising revenues beyond what can be justified by growing expenses, and may even see their margins squeezed in coming years.  But the effect on bus and coach (inter-city bus) operators should be positive, as rising rail prices induce commuters and travelers to seek more economical alternatives.

The Companies

I've recently been researching three London-listed transit operators with both bus and rail divisions.  I've been aware of FirstGroup PLC (FGP.L) for some time, and the company appeared in my recent list of nine public transit related companies.  While looking at the holdings of the Powershares Global Progressive Transport Portfolio (PTRP) for this series on Peak Oil stocks, I came across another: Stagecoach Group, PLC (SGC.L), and Stagecoach's annual report pointed me to two other publicly competitors: National Express (NEX.L) and Arriva

Arriva was recently acquired by the German government-controlled Deutsche Bahn, and so is no longer publicly traded.  Although this gives investors one less option in the sector, another article in the Economist predicts that Deutsche Bahn may continue looking for acquisitions as part of its growing rivalry with the French rail operator SNCF.

Although each company treats revenue breakdown differently, each company seems to earn a little more than half of their revenues from bus services and a little less than half from rail services.  All three operate in the UK and North America, while National Express also has operations in Spain.

The economic downturn hurt revenue at all three firms, but all  have seen revenue increase since 2009.  Both FirstGroup and Stagecoach Group maintained profitability through the downturn, but National Express lost money in 2009 and went through a fairly dramatic restructuring.  It has only recently returned to profitability. 

National Express might potentially be a turn-around play, but I expect economic times to remain difficult, and so prefer companies with more financial strength.  The other two seem to have adapted well to the downturn, but Stagecoach's low debt means that the company probably has more flexibility to take advantage of any opportunities opened up by a retreat of public sector transit providers.

Below is a table summarizing several valuation and liquidity ratios for the three companies.

Company
FirstGroup
National Express
Stagecoach
Ticker
FGP.L
NEX.L
SGC.L
Share Price 8/26/10
342.8p
222.3p
170.0p
Financial Stmt Date
3/31/10
7/29/10
4/30/10
TTM Income Yield (PE)
8.9% (11)
0.04% (25)
9.1% (11)
Free Cash Flow Yield
17.3%
2.4%
14.6%
Dividend Yield
6.0%
4.5%
3.8%
Net Debt/Equity
139%
22%
24%
Current Ratio
79%
41%
97%

Conclusion

Of the three stocks, Stagecoach's combination of low debt, relatively strong liquidity, and reasonable earnings multiple make it my favorite of these three bus and rail transit operators.  Had I known about National Express and Stagecoach when I was putting together my Ten Clean Energy Stocks for 2010 (in which I included FirstGroup,) I would have chosen Stagecoach in FirstGroup's place.

DISCLOSURE: None.

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.

August 21, 2010

The Best Peak Oil Investments: Shimano

Tom Konrad CFA

I missed Shimano (SHMDF.PK) in my recent list of bicycle and scooter stocks, but in many ways, Shimano is the best of the lot.


Shimano Inc. manufactures bicycle components and fishing and rowing gear, with the bike segment accounting for about four-fifths of sales, but I had not realized that they were public until I received a note from a reader in response to my recent article on bike and moped stocks.

In that article, I noted that, while bike sales rose in response to rising oil prices in 2008, bicycle repairs surged far more.  As a manufacturer of components, Shimano may be better placed than other bike companies such as Giant Manufacturing (GTMUF.PK) and Dorel Industries, Inc (DIIBF.PK) to take advantage of a surge in bike repairs. 

Shimano has a 70% market share in some key components such as gear wheels, derailleurs, and brakes.  This is possibly due in part to a corporate philosophy that keeps Shimano from competing with its customers by not building complete bikes.  If Shimano did build complete bikes, many bike manufacturing firms might feel compelled to return the favor by making their own high-end components.  As it is, Shimano's place in the bicycle industry is a lot like Intel's place in the computer industry: the maker of many of the highest tech components manufactured with great precision to exacting specifications, and, in fact, Shimano has often been called "The Intel of the bicycle industry." Many bicycle buyers care more that it is made with Shimano parts than which manufacturer does the final assembly.

Revenues by segment

Two Edged Sword

For investors, the high-end nature of Shimano's products is a two-edged sword.  The benefit is that Shimano's continual research into new technology and strong brand recognition create barriers that help the company maintain market share and margins.  The company's large market share also helps reduce unit cost of production, allowing the company to fend off competition with relatively low prices while maintaining profit margins.  The problem is that the high-end components in which Shimano specializes are less likely to appeal to more casual riders who are interested in using their bikes to run a few local errands than to more hard-core cyclists.  It was this class of casual rider that accounted for most of the new riders in 2008, when high gas prices caused a surge in interest in cycling.

On the other hand, not all of Shimano's products are made for the wanna-be Lance Armstrongs of the world.  For instance, Shimano introduced an automatic gear shifter for bicycles in 2003, designed with the urban commuter in mind.  For someone whose largest concern is dodging traffic and the morning meeting he's preparing for, an automatic shifter is just the thing. 

Valuation

Shimano has an extremely strong balance sheet, a large plus in the current economic climate.  The company has no net debt, an extremely high current ratio of over 5, and strong cash flow from operations even when revenues were depressed by the recession in 2009. 

With so much going for the company, the stock trades at a very high valuation.  At the recent ¥4,350 ($52.50) stock price, the company pays a  1.4% annual dividend, and trades at a P/E ratio of about 32.  As a value investor, I'd like to see the stock drop 30-50% before I'd be ready to buy it.  At the right price, this is certainly a company I'd like to own.

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.

August 09, 2010

The Best Peak Oil Investments: Bicycle and Scooter Stocks

Tom Konrad CFA

When gas prices rise, more people turn to bicycles for transportation.  Will these bike and scooter stocks ride in the oil price's slipstream?

UPDATE: Here is an article on one more bicycle stock that should have been on this list: Shimano (SHMDF.PK).
A 2008 survey of bicycle retailers found that the vast majority of bike store owners felt that their sales had increased because many people were turning to bicycles for some of their transportation needs because of high gas prices.   95% of store owners reported that they had new customers because of high gas prices.
Survey graphic
While few people can completely replace their car with a bicycle, many people can make some trips on two wheels and human power.  And 2008 is not the first time we've seen a surge in bike sales along with a surge in oil prices: the all time record for annual bike sales was in 1973, during the last oil crisis.  If future gas prices return to the levels seen in 2008 and stay there, we should not be surprised to see a sustained increase in the use of bicycles for transport, as well as a rise in the purchase of bikes, bike parts, and accessories. 

One fly in this ointment is that the biggest increases  in sales for bike retailers during 2008 were in service and repair, followed by new bikes and accessories.  Bicycle manufacturers saw increased sales in 2008, but not as large as the increases in ridership, because much new ridership came from cash-strapped individuals dusting off old bikes and getting them in shape to run errands or commute.  I think it will take a longer sustained rise in oil prices than we saw in 2008 to permanently shift the transportation landscape towards bicycles; investors should not expect perfect (or even near-perfect) correlation between oil prices and bike company profitability. 

Bike Stocks

Babies to Bikes- Dorel Industries


Dorel Industries, Inc (DII-B.TO, DIIBF.PK) is primarily a manufacturer of juvenile (baby) and home products, but in 2004 they began acquiring bicycle manufacturing and related businesses with the purchase of Pacific Cycle.  They now own Cannondale, GT, Schwinn, and several athletic apparel and accessory brands such as SUGOI.  This segment accounted for $681M or 32% of 2009 sales, up from 30% in 2008.  So while bicycles are currently less than a third of sales, they are growing in importance.

In terms of valuation, 2009 earnings were $3.21 per share, easily justifying the recent $33 share price with a trailing P/E ratio of slightly over 10. Dorel has relatively little debt at only 36% of equity and good liquidity ratios, but does not pay a dividend.  Overall, the low valuation and strong balance sheet are good compensation for the relatively small fraction of sales that come from bicycles.

USA Today comic - Schwinn
from Dorel's 2009 Annual General Meeting presentation

Taiwan's Giant of Bike Manufacturing

Taiwan's Giant Manufacturing (GTMUF.PK, TWSE:9921) is the world's largest bicycle manufacturer, with $1.2B in annual sales, twice Dorel's bicycle sales.  Giant began as a low-cost manufacturer in 1972, getting its start with an early order from then-independent Schwinn.  Today, Giant makes everything for every market, including racing bikes with world-class technology to cheap volume bikes churned out in low-cost factories in China. 

Giant's sales fell slightly in 2009 with the slowing economy and lower gas price, but improved margins meant that earnings per share held constant.  Giant pays a dividend; it was TWD 4.5 dividend in 2010.  The company's stock price is currently trading around TWD 100, having doubled since its March 2009 low.  With no long term debt, this company is well positioned for an oil-induced increase in bike sales, even if the oil price increase also undermines overall economic growth.   Although the trailing P/E ratio is still a reasonable 15, I feel the stock has room to fall because of the recent run up if the current stock market decline continues.

A Scooter Stock: Piaggio
The First Commercially Available Plug-in Hybrid is an Italian Scooter

Piaggio & C.S.p.A. (PIA.MI, PIAGF.PK) is the leading manufacturer of motor scooters under the Piaggio's and Vespa brands.  Where bicycles are more likely to replace the car on short errands than everyday commuting, a scooter will be a practical option for many commuters hoping to reduce their fuel costs.  Piaggio scooters get between 50 and 100 MPG, and the company has even released a high-end plug-in hybrid scooter, the MP3 300ie in Europe.  After the initial version flopped due to too little power for too high a price, Piaggio has given it a larger engine and power to match the 9000 euro price tag.  Even with the larger engine, the hybrid 300ie still gets 141 MPG.

With the stock price at EUR 1.92 Piaggio's Price/Earnings ratio was a reasonable 14, especially if the analyst consensus of a long term growth rate of 30% is correct.  Year over year earnings growth was over 40% in the last year.  The company also boasts a 3.65% dividend yield. 

Electric Bikes and Electric Scooters

Chinese Lithium-Polymer battery and e-bike/electric scooter manufacturer Advanced Battery Technologies (ABAT) was my top pick in my recent  in my article Six More EV and HEV Stocks.  I concluded that about 50% of the company's revenues come from e-bikes and electric scooters, and the company's valuation seems very attractive.  Follow this link for more detail.

Conclusion

For the investor looking for an investment in two-wheeled transport, Giant and Piaggio are attractive pure-play options, and ABAT has an attractive valuation.  These alternative transport companies provide relatively low-cost alternatives to the car that have benefited in the past from rising oil prices.  All three are profitable and don't have excessive debt; Giant and ABAT have no long term debt.  Piaggio pays a decent dividend, but is probably the riskiest of the three given its debt burden.

Because scooters cost considerably more than bikes, Giant would probably be the best investment if rising oil prices exacerbate the weakness of the economy, and people have very little money to spend.  Piaggio would likely perform better if the economy is relatively strong even as oil prices rise.  Advanced Battery Technologies falls somewhere in between the two.

The data in this article comes mostly from third party sites such as Morningstar and Reuters, so I would not make a decision without first investigating each company in more detail. 

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.

July 08, 2010

The Best Peak Oil Investments: Nine Mass Transit Stocks

Tom Konrad CFA

In 2007 and 2008, high gasoline prices gave a large boost to mass transit ridership. Here are the stocks that might benefit if that scenario repeats itself.

Americans are notoriously attached to their cars, but high oil prices in 2007 and 2008 led many to get on a bus or train.  According to a 2009 paper Transit Ridership Models:
Present Status and Future Needs [pdf]
by Grace Galluci and John D Allen, Ph.D. from Chicago's Regional Transportation Authority, current published transit ridership models do not yet incorporate changes in gasoline prices.  The authors consider this a serious omission, since, in addition to the obvious intuitive link between gas prices and ridership, they found a strong correlation between gas prices and transit ridership using CRTA ridership data and local gasoline prices.  The following chart comes from this paper, and shows ridership following the local gas price (with a slight lag.)

CRTA ridership vs Gas Price

Gas Price and Transit Profits

Although it may be safe to assume that transit ridership will increase with rising gas prices, a higher gas price may not make mass transit companies more profitable, since diesel to fuel buses and locomotives is a major expense for many mass transit agencies.   Hence, an investor expecting increases in the price of oil should prefer mass transit operators with fleets that use less diesel per passenger mile, and the suppliers to such operators.  Operators and suppliers of electric rail and trolleys are best in this regard, followed by operators and suppliers of fuel efficient hybrid buses and similar vehicles.  Vendors of Smart Transportation systems that allow transit operators to match vehicle capacity to demand in real time should also benefit, since the simplest way to reduce fuel use per passenger mile is to replace fuel guzzling buses with smaller vans at non-peak times, while adding vehicles at peak.

Mass Transit Stocks

Most transit authorities are public entities, but there are still a good number of public companies that provide goods and services to the sector.  What follows is a list of those companies culled from our Alternative Transport Stock List with significant exposure to mass transit.  For each stock, I include a description of its mass transit business, and how exposed the company is to rising oil prices.

Mass Transit Vehicle Suppliers

Alstom (ALO.PA, AOMFF.PK).Thalys and Eurostar at the Gare du Nord station, Paris  About one third of Alstom's business is as a supplier of locomotives for transit and high speed rail applications, in addition to signaling and support services.  Alstom supplies the locomotives for France's high-speed TGV trains.  The balance of Alstom's business is in electrical power generation, with strong presences in Hydropower, Natural Gas, Steam, and Nuclear generation, in that order.  Rising oil prices should benefit Alstom's transportation business, since high speed trains are a much more fuel-efficient alternative to air transport.

Bombardier Inc (BDRBF.PK, BBD-B.TO, BBD-A.TO).bombarier locomotive  Bombardier is another high speed rail stock, with a slightly greater market share for high speed locomotives than Alstom.  A little over half of Bombardier's revenues and profits come from high speed rail, with the balance coming from aerospace: they also sell regional and corporate jets.  Hence, while Bombardier has a larger percentage exposure to high speed rail than Alstom, the company is more likely to be hurt by rising oil prices than helped, because of the large exposure to aviation. 

New Flyer Industries (NFI-UN.TO, NFYIF.PK)New Flyer's Excelsior Bus New Flyer is the largest manufacturer of heavy-duty transit buses in North America, and also one of my Ten Clean Energy Stocks for both 2009 and 2010.  New Flyer builds transit buses for transit operators powered by a wide variety of fuels, from diesel, to diesel-electric hybrids, Compressed and Liquefied Natural Gas, electric trolley buses, and even supplied the fleet of Hydrogen Fuel Cell buses for the Vancouver Olympics.  Rising bus ridership from rising oil prices increases the demand for buses, and also increases the incentive of transit authorities to invest in the more expensive (and profitable to New Flyer) electric hybrid buses.  The beneficial effects of rising oil prices should be felt more quickly by New Flyer than by suppliers of passenger locomotives, since transit authorities can expand bus systems and switch to hybrid buses much more quickly than they can expand rail transit systems.

My most recent in-depth look at New Flyer is here.Vossloh rail switch

Vossloh AG (VOS.DE, VOSSF.PK).  Vossloh supplies rail fastening systems, switching, services, and locomotives, both diesel and electric.  Unlike Alstom and Bombardier, all of Vossloh's business is related to rail transit, making it a good bet in an era of long term rising oil prices.

Mass Transit Operators

Firstgroup, PLC (FGP.L, FGROF.PK).FirstGroup/First Student school busses  Firstgroup operates mass transit services in Britain and North America.  In North America (37% of revenues), they operate the Greyhound bus brand, and subcontract the yellow student bus service for school districts.  In the UK (53% of revenues), they operate both bus (19%) and rail (35%) services both competitively and on behalf of transit authorities.  The balance of revenues comes from mass transit contracts in the rest of Europe.

Fristgroup uses financial markets to hedge fuel price risk, and so stands to benefit in the short term from increases in ridership caused by oil prices.

Mass Transit Equipment and Service Suppliers

Cubic Corporation (CUB).BART toll kiosk  Cubic is primarily a defense contractor (70% of sales) that also provides fare collection systems and services to transportation authorities (30% of sales.)  While I like the Smart Transportation potential of the company's IT and fare collection expertise, Cubic is only likely to benefit over the very long run as increases in mass transit ridership lead to increased demand for the company's services.

L. B. Foster (FSTR). L B Foster supplies a diversified mix of construction materials to the transportation industry, L B Foster railwith 47% of sales coming from rail (although not exclusively mass transit) products.  The balance of sales come from sales of steel pilings, fabricated bridges and concrete buildings, and tubular coated products.  The large fraction of sales to the rail industry should help the company over the long term in a rising oil price environment.  The benefit of rising oil prices should increase if L B Foster succeeds in its cash takeover of Portec Rail products, discussed below.  An in-depth discussion of the L.B. Foster bid for Portec Rail Products is available here.

Portec Rail Products (PRPX).Portec track lubrication device  As its name implies, Portec exclusively provides products and services to the rail and rail transit industries.  Products include lubrication and friction management (reducing noise, wear, and fuel use), track components, load securement, rail car repair, and environmental protection products for rail corridors.  If the L B Foster buyout goes though, shareholders will be paid in cash, so Portec is not currently a way to speculate on rising oil prices, but if the takeover fails, Portec's pure-play rail exposure should serve it well in a rising oil price environment.

Wabtec Corporation (WAB). Wabtec, also known as Westinghouse Air Brake Technologies Corporation, primarily serves the freight and passenger rail industries, supplying braking and other safety systems for both rail cars and locomotives.  As a pure-play rail supplier, Wabtec is well-placed to benefit from long term, sustained higher oil prices.

Stock
Percent of Sales from Transit & Rail
Alstom (ALO.PA) 33%
Bombardier Inc (BDRBF.PK) 55%
New Flyer Industries (NFYIF.PK) 100%
Vossloh AG (VOS.DE) 100%
Firstgroup, PLC (FGP.L) 100%
Cubic Corporation (CUB) 30%
L. B. Foster (FSTR) 47%
Portec (PRPX) 100%
Wabtec (WAB) 100%


Thanks to Jim Hansen of Ravenna Capital Management for bringing Vossloh AG to my attention.

DISCLOSURE: LONG PRPX, NFYIF

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.

July 05, 2010

Great Lakes Dredge and Dock (GLDD), An Oil Spill Cleanup Stock

Tom Konrad, CFA

Great Lakes Dredge and Dock is curiously in the center of a many emerging trends, some of which are not yet being talked about.

I've been watching Great Lakes Dredge and Dock (GLDD)GLDD logo for a few months as a possible alternative transportation stock to talk about for my Best Peak Oil Investments series.  My thinking goes like this: barge and river transport are two of the most fuel efficient ways to move bulk cargo.  Barges are even more energy efficient than rail freight for most uses, according to the Congressional Budget Office.

One barge company I watch is Trinity Industries (TRN) which also manufactures and leases rail cars, as well as building wind towers.  I profiled Trinity in 2008.  While not extremely overvalued at current prices, Trinity is not a bargain at the recent price of $21.60, so I've had my eye out for other companies that might benefit from an increase in barge transport, which is why I started watching Great Lakes Dredge and Dock (GLDD).  The more barge traffic there is, the more need for channel dredging and port expansion projects, both staples of GLDD's business.

The Business


Revenue by Work TypeGLDD is the largest provider of dredging, land reclamation, and beach nourishment services in the US.  The company builds and deepens ports, reclaims land, excavates underwater trenches, builds and maintains beaches, and maintains the depth of shipping channels, both in the US and internationally.  They also have a small demolition unit, which accounted for 8% of 2009 revenues.

Geographically, the company has significant operations in high growth emerging markets, supplementing its dominance in the US market.  About 15 to 30% of revenues come from foreign markets, while the US market is effectively protected from foreign competition by two laws passed in the early 1900's: The Foreign Dredge Act of 1906 and the Merchant Marine Act of 1920.  

Growth Drivers

There are many potential growth drivers for the dredging business, some of which GLDD is talking about, and some of which it isn't.  The company lists the following drivers of growth going forward:
  • An increase in maintenance dredging due to increased interest in increasing port operating capacity by the US Army Corps of Engineers, the largest domestic user of dredging services.
  • Coastal berm construction to protect the Louisiana coast from the oil spill.  A GLDD dredge has recently begun work on these berms.  The size of the spill make me think that berm construction and coastal restoration will continue to create high demand for dredging equipment in the Gulf for years to come.
  • Expansion of the Panama Canal and the Port of Los Angeles
  • New legislation in congress will create a harbor maintenance trust fund which will add $250-$400 million to the annual US dredging market.
  • The 2009 Mississippi coastal improvements program created an additional $400 million demand for barrier island and ecosystem restoration work starting in 2011.
In addition, I see a couple of potential drivers for long term demand growth for dredging servicesDredge pic.  Rising sea levels due to global warming will increase the need for artificial barrier islands, wetlands restoration, and beach nourishment.  Global warming is also expected to lead to an increase in severe hurricanes.  That should in turn lead to more contracts such as the recent award as part of the Maryland shoreline protection project.  Meanwhile, increasing fuel prices will increase the demand for fuel-efficient transportation such as barges, and increase the need to maintain and expand port facilities.

Valuation

GLDD pays a $0.07 annual dividend for a modest 1.2% yield at theJuly 2nd $5.84 closing price.  At that price, the 12 month trailing earnings is a somewhat expensive 17.59.  However, the company has fairly low debt when compared to cash flow, and most analysts are expecting fairly rapid (25%+) annual growth over the next five years, so the company does not seem particularly overvalued at current prices, but neither does it seem to be a bargain, as it was when it fell below $4.50 in early March. 

Investor interest arising from the oil spill may keep GLDD from ever returning to the cheap valuations it saw in March.  But I'm not ready to buy just yet... a continued decline in the overall stock market is likely to create another great buying opportunity in either Great Lakes Dredge and Dock or my other barge transport stock, Trinity Industries.


DISCLOSURE: LONG TRN.

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.


June 01, 2010

The L.B. Foster / Portec Rail Products Takeover Saga

Tom Konrad, CFA

LB Foster (FSTR) may not succeed in their attempt to buy Portec Rail Products (PRPX) unless they raise the offer price.

As a Portec Rail Products (PRPX) shareholder since 2007, I've been watching the saga of L.B Foster's (FSTR) attempt to buy the company fairly closely, and it's been a lot more interesting than we could expect.  I've put together a detailed time line at the end of this article.

Offer Premium

The tender offer came at only a 4% premium compared to the price the day before it was announced, leading to a spate of class action lawsuits alleging that the Portec board did not do enough to get the best possible price for the company. 

Most analysts agree that the previous close is a poor measure of the value the market places on a company.  The first reason not to use the closing price from on the previous day is often biased upwards when if rumors of the impending merger leak out, and investors buy on this insider information.  Although such insider trading is illegal, my observation of stock price movements convinces me that it happens frequently.  In the case of Portec, the quick price rise right before the merger was announced at the same time that most stocks were falling and there was no significant news also leads me to believe that some investors were buying the company on the basis of rumors or insider knowledge.  The second reason against using the previous day's close is simple volatility: Had other trading prices from the previous day been used instead of the closing price, the offer premium could have been calculated as anywhere between 4% and 10%.

A better way to calculate an offer premium is to use the average price of the stock over the previous month or two.  Using this method, the actual offer premium was between 8.5% and 10.4%, which is still low but not alarmingly low.  A 20% premium is typical.

Portec chart

Class Action Lawsuits

The low offer premium led to a number of class action lawsuits against the Portec board, alleging that they had not fulfilled their fiduciary duty to find the best possible price for shareholders.  I initially opposed these lawsuits and suggested that shareholders unhappy with the price should not tender their shares, rather than joining a lawsuit.  However, the lawsuits ended up doing some good: it came out during the proceedings that Portec had received a slightly higher ($12.00) verbal offer from Ameridan Resources LLC, a merger and acquisition specialist firm.  The judge in the case found that the chairman of the board had breached his fiduciary duty in not bringing this offer to the board's attention, and put a temporary hold on the merger, which Foster and Portec recently filed a motion to have released.

Shares Tendered
shares tendered chart
According to the terms of the offer, 65% of Portec shares must be tendered in order for the deal to go through.  The companies initially expected to have enough shares tendered by March 25, but shareholder take-up has not been sufficient.  The companies have now extended the tender offer three times.  As of May 28, they still needed 6% of outstanding shares to be tendered in order for the deal to go through.

Will more than 65% of outstanding shares be tendered?  It looks too close to call.  But having enough shares tendered is not enough to ensure the merger goes through.  The judge in the class action suits must also lift her injunction against the merger.  She may not be willing to do so unless Foster raises the offer price to at least the $12 offered by Ameridan.

Conclusion

My best guess is that L.B. Foster will either raise their offer to appease the judge and entice shareholders to tender more shares, or the deal will not go through, opening the door to other potential bidders.  With no net debt and solid operating cash flow, Portec has a strong bargaining position, and the board is likely to be much more careful about their fiduciary duty after this experience.

With Portec stock currently trading around $11.40, new purchasers would make a quick 5% profit in the case of a takeover at $12, or a 3% profit if the deal goes thorough as is.  Since I've liked the company's business for a long time (see here and here), I'm holding my (untendered) shares in the hopes of a better offer or the chance to continue holding Portec for the long term.

DISCLOSURE: LONG PRPX.

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.


L.B. Foster/Portec Rail Products Tender Offer Time Line

  • June 2009.  LB.Foster approaches Portec to negotiate a buy-out.
  • June-December 2009: negotiations between Foster and one Portec board member.  Most board members are not aware of the negotiations.  Portec shares trade between $8.50 and $10.80.
  • Dec 18, 2009- February 16, 2009: Portec average closing share price $10.60.
  • Jan 17- Feb 16: Portec average closing share price $10.79.
  • Feb 17: L.B. Foster announces offer at $11.71/share, a 10.4% premium over $10.60, and a 8.5% premium over $10.79.  News reports call it a 4% premium (over the previous day's close.)
  • Feb 17-19: Several class action suits filed alleging board did not work hard enough seeking a higher offer.
  • Feb 19: I recommend against joining a lawsuit saying not tendering shares is sufficient.
  • March 1-March 21: In anticipation of dividend, tax loss buyers drive Portec to $11.73 to $11.76 a share.  They probably hoped to sell a month later, capturing the $0.06 dividend (subject to a reduced tax rate) and taking a capital loss of $0.06 or less, which can be written off against short term gains.
  • March 12: Portec announces regular $0.06 quarterly dividend.
  • March 22: ex-dividend date.
  • March 22: L.B. Foster extends tender offer until April 26.  Only 16.55% of outstanding shares have been tendered; 65% are needed.
  • March 22: Second inquiry from US Dept. of Justice looking into the merger negotiations. 
  • March 22-April 22: Investors begin to question likelihood of merger.  Tax loss sellers take much bigger losses than they expect as Portec falls from $11.67/share to as low as $11.33/share.
  • March 25: Tender offer initially set to expire.  
  • April 22: Judge in class action cases puts temporary stop to the merger.  Reveals that Marshall Reynolds, Portec's Board chairman failed to bring tell other board members about a $12 offer from Ameridan Resources LLC.  Says Reynolds breached his fiduciary duties.  Only one member of the board was aware or involved in merger negotiations between June and December 2009.
  • April 22-26: Portec trades over offer price, and as high as Ameridan $12 offer on speculation that Foster will raise its offer or Ameridan will purchase the company.
  • April 26: Offer again extended (to June 1). 54.33% of shares have been tendered; 65% are needed.
  • May 13: Dept. of Justice will not block merger on anitcompetitive grounds.  L.B. Foster agrees not to go ahead w/ merger without DOJ approval.  Drop-dead date extended to August 31.
  • May 21: Foster, Portec file motion to restart merger in class action case.
  • May 28: Third offer extension to July 30.  58.93% of shares have been tendered.
  • June 18: Expected ex-dividend date for Portec's quarterly $0.06 dividend.
  • Aug 31: Drop-dead date: last day the merger can proceed without a new agreement between the companies.


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