Energy Efficiency Archives


July 07, 2017

Recycler Priced for Recovery

by Debra Fiakas CFA

Shares of Appliance Recycling Centers of American (ARCI:  Nasdaq) has trended downward over the last year, despite some strong fundamental progress in the company’s position the recycling sector.  The corporate name tells at least part of the company’s story.  Besides recycling appliances such as washers, dryers and refridgerators, ARC also sells new and like-new appliances right out of the box.  The company has eighteen stores branded ApplianceSmart across the country.  Services to electric utilities and other energy companies related to energy efficiency programs provide yet another revenue source.

In the twelve months ending March 2017, ARC reported $101.5 million in total sales, providing $1.2 million in net income or $0.19 per share.  Importantly, operations generated $2.0 million in cash flow during this same period. The profits are a welcome improvement over losses reported in fiscal years 2016 and 2015.  Sales had been declining and did not fully cover operating expenses in 2015 and 2016.

Besides having a spotty track record in producing profits, ARC also has debt on its balance sheet.  At the end of March 2017, the company had $6.2 million in total debt on its balance sheet.  This represented a debt-to-equity ratio of 47.52.  Debt at any level might give some investors pause, especially if there is no consistent profitability.

Still there are some elements in the ARC story that should interest investors.  In April 2017, the company opened a new recycling center in the Milwaukee area.  The company has teamed up with a state program to recycle old kitchen appliances, cleaning up the environment and removing unsafe, uneconomical appliances from neighborhoods.  The company also launched new contact center services to consumers called Customer Connexx.  The service supports scheduling of services of local utility programs related to appliance safety and energy efficiency.

Shares of Appliance Recycling Centers are trading below a dollar a share, which might be off-putting for some investors.  For those who are not shy of penny stocks, ARCI could be your stock.  The shares are now priced at 4.2 times trailing earnings.  There is no forward price-earnings ratio given that the company has a limited following among sell-side analysts.  With recent demonstration of recovery (no pun intended!), the stock appears to be priced at a bargain.

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

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

December 28, 2015

Lights of Energy Focus

by Debra Fiakas CFA

It is the season of lights.  Lights for Hanukkah.  Lights for Christmas.  Energy Focus (EFOI:  Nasdaq) has been having a season of lights all year.  The company reported $62.3 million in total sales of its LED lighting products in the most recently reported twelve months.  Customers included large business and industry, property owners and the military.  The oil and gas industry is an important market vertical.

Energy Focus really shines for the U.S. Navy with its explosion proof LED globes in all the colors the Navy needs to provide military personnel safety warnings.  The Navy also buys special LED lights for the berths on its ships.

The company has been in the lighting business for over thirty years.  Energy Focus has successfully made the transition to new more environmentally friendly technologies such as LED by investing consistently in research and development.  Research and development expenses represent about 5% of total sales.

Sales provided $6.2 million in net income or $0.66 in earnings per share in the last reported twelve months.  The stock is currently trading at about 14 times trailing earnings.  Although small, Energy Focus has cultivated a following of analysts who have published relatively bullish views on the stock.  The consensus estimate for 2016 is $1.02 in earnings per share on $87.9 million in total sales.  That represents about 12% growth in earnings, suggesting the stock is trading at a bit of premium to growth projected for the next year.  That might still be a bargain given the long-term opportunities in LED lighting, especially for a company with standout products and strong customer relationships.

Energy Focus is well capitalized, with very little debt. Consistent generation of operating cash flow has helped build cash on the balance sheet to nearly $35.0 million.  Fast growing market opportunity, strong and loyal customers, profits, cash flow, low-leverage balance sheet.  EFOI is truly a bright and shiny light!

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

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

December 01, 2015

Looking for Cash in Old Refrigerators

by Debra Fiakas CFA

Appliance Recycling Centers of America (ARCI:  NYSE) is a typical small company, toiling away in seeming obscurity and struggling to get proper valuation of their success.  There is little glamour in old refrigerators and washing machines, but ARCA has figured out how to wring cash from recycling our household appliances.  In the last three fiscal years the company converted 1.6% of sales to operating cash flow.

Unfortunately, things have turned a bit sour in the world of old Frigidaires and tired Maytags.  Last week ARCA reported financial results for the quarter ending September 2015.  The company suffered an operating loss in the quarter.  Sales totaled $28.1 million, resulting in an operating loss of $1.1 million and a net loss of $773,000 or $0.13 per share.  Sales were lower year-over-year due to slower activity in municipal and utility energy efficiency programs.  Weakened pricing of scrap steel and iron have resulted in lower selling prices for metal by-products from the company’s recycling plants.

It is does not appear to be a temporary weakness.  Revenue in the first nine months of 2015 totaled $85.8 million compared to $99.2 million in the same period in the previous year.  This represents a 13.5% decline in sales value, but the operating profits collapsed into a loss of $2.5 million in 2015 from a $3.2 million profit in the previous year.

Of course reported results according to GAAP rules are often deceptive.  Operating cash flows can provide a clear picture on the health of a smaller company.  For ARCA the picture has turned a bit bleak.  After years of being a cash generator, the company has to use $2.1 million in cash to support operations in the first nine months of 2015.  A line of credit was drawn down by $3.2 million to help pay the bills.

The line of credit has come in handy for ARCA over the past few months, but it is also a bit of problem for the company.  The loss in for the year-to-date has put the company crosswise with the credit facility covenants.  Management has pledged to arrange a replacement facility sometime in the next year.

Raising capital through equity is probably not an alternative.  The stock is currently trading well below a dollar a share, representing multiple of sales of 3/100s.  It would be a costly effort to boost cash resources with a sale of common stock.

Although the debt-to-equity ratio is 141.90, net long-term debt is $2.6 million and suggests ARCA’s balance sheet can support more debt.  That pesky line of credit is a problem here as well.  At the end of the most recently reported quarter the outstanding balance was $12.4 million, casting quite long shadow across ARCA’s capital structure.  

It might be better for ARCA to simply tighten its belt by reducing costs.   Economic conditions will eventually cycle around to support higher selling prices and deeper demand.  

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

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

November 22, 2015

Zumtobel Turns LED into Dividends

by Debra Fiakas CFA

Based on Austria, Zumtobel Group (ZMTBF:  OTC or ZAG:  Vienna) is a supplier of modern lighting products using Light Emitting Diode (LED) technology.  Zumtobel sells its lights and components under three international brands Thorn, Tridonic and Zumtobel and two regional brands ACDC and Reiss.  Zumtobel has a long history in lighting with its foundation in the 1950s in Dr. Zumtobel’s Electrogerate und Kunstharzpresswerk.  The Thorn brand, which was acquired in 2000, dates back to the 1920s when founder Jules Thorn set up the Electric Lamp Service Company. 

Zumtobel sells lights in over 90 countries and its sells a lot of lights.  The company’s lighting products can be used both indoors and outdoors.    Revenue has grown in each of the last four fiscal years.  In the twelve months ending June 2015, revenue was Euros 1.3 billion, providing Euros 66.5 million in operating income.  That represents cash earnings profit margin of 5.1%, well above the 3.8% profit margin recorded in the prior year. 

The company did not enter the race to LED lights until 2001, but the technology has been a winning proposition for Zumtobel.  LED products provided more than 50% of the company’s revenue in the last fiscal year.

The LED segment of the lighting market is large and growing.  In June 2015, industry research firm ResearchMoz issued a forecast of 45% compound annual growth for LED lighting and a market size of US$42 billion by 2019.  LED lights use only a fraction of the energy required to drive an incandescent light bulb.  As a consequence LED lights produce 90% less heat.  Most importantly, LED lights offer a lifetime of 50,000 hours of illumination.  Mix long life and low cost of use, the resulting value proposition is hard to resist for either homeowners or businesses.  Suppliers of LED lighting get support from electric utilities which often advocate switching from conventional bulbs to LED in order to create efficiencies in electricity usage.

Zumtobel has some competition in the LED light market.  There are over 150 different LED lighting systems offered around the world today.  The proliferation in LED bulbs and lamp styles has helped draw new customers to the technology.  The result has been decreases in production cost and more competitive pricing.  According to Statistica, LED is expected to reach a 53% penetration level of the global lighting market.

Investors should be attracted to Zumtobel for its building profitability.  The company’s dividend of Euros 0.22 per share and dividend yield of 1.1% are good reasons fall in love.  Granted the price-earnings multiple of 55.6 times trailing earnings for ZAG might sour the relationship, but that multiple seems more palatable against the company’s secure foothold in a large and growing market

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

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

October 25, 2015

Energy Recovery Recovers Its Own Energy

by Debra Fiakas CFA

Energy Recovery (ERII:  Nasdaq) has announced a breakthrough license of its hydraulic fracturing pump to oil and gas patch service provider Schlumberger (SLB:  NYSE).  Called the Vorteq by Energy Recovery, the pump features the company’s core pressure exchange technology, representing an entirely new approach to driving the chemical-laced water producers send deep into the earth to extract oil and gas. 

Energy Recovery develops and markets components and equipment for fluid flow and pressure cycles found industrial processes.  Its patented pressure exchange devices are designed to take advantage of energy created in fluid flows and pressure cycles.  The company has developed applications for reverse osmosis desalination, industrial turbines and pumps, and high pressure fluid flows such as oil and gas pipelines.

Energy Recovery’s most recent product innovation is an alternative hydraulic fracturing pump for use in extracting gas from shale deposits.  The Vorteq value proposition is compelling as it replaces the bank of high-priced pumps that must be deployed around the well site to keep fracking operations underway without interruption.  Field tests with another gas patch field services company have helped prove the versatility of the pumps in various conditions.

Apparently impressed and keen to capture the potentially disruptive forces of the Vorteq pump, Schlumberger has agreed to pay an upfront fee of $125 million to gain exclusive world rights to the technology.  Once fully commercialized sometime in 2016, Schlumberger will pay royalties based on the number of Vorteq pumps in use.  Previously, the Company had planned to lease the Vorteq pump to oil and gas producers, retaining all risk in the asset functionality and useful life.  While not yet tested, the leasing arrangement appeared to be a low-margin business model.
The license arrangement solves a vexing problem for Energy Recovery, which has long been known more for its product engineering capabilities than its ability to market and sell.  The Vorteq was the third product Energy Recovery had aimed at the oil and gas market.   Sales have been few given the extended down cycle of the oil and gas sector. 

After sharpening his teeth on this deal, newly appointed CEO, Joel Gay, may have the confidence to move more aggressively in other markets.  Energy Recovery engineers have suggested there are additional applications for other industries with significant flows of high pressure or corrosive fluids.  Energy Recovery can use Schlumberger as a reference relationship taking advantage of that company's reputation for discerning due diligence.
In the first day of trading following the news of a landmark license deal for the Company, shares of Energy Recovery soared.  Volume on the day was several multiples of recent trading volumes and the stock had started the day by gapping dramatically higher on the open.  We believe the conference call that management had scheduled in the hour prior to the market open helped stoke the fires of enthusiasm for the development.

Shares of Energy Recovery had been stagnant for months despite a widely publicized launch of the Vorteq hydraulic fracturing pump in December 2014, and its plans to field test and eventually lease the equipment in the U.S. oil and gas patches.  The reluctance of investors to accord value to the Company’s unproven leasing business model for the Vorteq could be understood.  Now that the Company had proven its ability to craft a profitable business arrangement for the Vorteq , in our view the value of the other oil and gas applications of Energy Recovery’s pressure pumping technology should be recalibrated. 

Energy Recovery seems to have staged its own revival.  It is a company well worth revisiting on the Schlumberger breakthrough.

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

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

October 22, 2015

Can Rubicon Hire Bring Shine Back To Sapphire?

by Debra Fiakas CFA

On Friday Rubicon Technology, Inc. (RBCN:  Nasdaq) announced the appointment of a new chief operating officer to manage the company’s sapphire materials production.  Rubicon is a producer of materials used in electronics components, including the company’s specialty, monocrystalline sapphire materials.  

Rubicon chose a seasoned operator for the COO post, which now encompasses functions previously carried about by managers in two different positions.  The new hire, Hany Tamim, was previously with SunEdison (SUNE:  Nasdaq), the developer and producer of solar cells and modules.  He has experience in managing crystal growth and wafer production, two steps Rubicon needs to get right to keep costs low.   By elevating these job functions to a position in the corporate suite, Rubicon seems to be signaling a new view on the importance of operational success to the company’s future.

Rubicon needs to find its groove, so to speak.  The company has experienced a decline in fortunes over the last three and a half years due to what it calls a slump in the market for materials intended for electronics.  Rubicon’s products include sapphire core in two to six inch diameter cylinders, patterned sapphire wafers, and sapphire shapes in various sizes.  The sapphire cores are sliced for use in Light Emitting Diodes (LED) or as lens covers in mobile devices.   Patterned sapphire wafers are also used in LED applications for better efficiency in extracting light.  There are additional uses for the company’s sapphire components in electronics destined for the communications, aerospace, and other end markets.

Business for Rubicon peaked in 2011, when sales totaled $134.0 million.  That was also the last year the company reported a profit.  Since then sales have slumped, declining to $33.0 million in the twelve months ending June 2015, and resulting in a net loss of $40.0 million.  Operations only required $21.4 million in cash to keep the business going during the last twelve months.  Even though the company had $36.0 million in cash on its balance sheet at the end of June 2015, and could potentially support operations for another year, it is understandable why leadership at Rubicon would give Mr. Tamim a shoutout.  ‘Help!  We need to cut costs so we can survive until the world reawakens to the merits of sapphire materials.’

Rubicon has only tangentially benefited from the exit of GT Advanced Technologies (GTATQ:  OTC/PK) from the sapphire materials sector, following the breakdown of GT’s relationship with Apple, Inc.  (APPL:  Nasdaq).  Apple and GT have differing stories on who was at fault in the demise of Apple’s plans to use sapphire glass on its iWatch and iPhones.  The iWatch eventually debuted with sapphire glass components, but iPhone 6 has been produced with conventional glass alternatives.  GT Advanced Technologies declared bankruptcy to get away from the toxic sapphire glass production alliance it had with Apple.

No one has stepped up to take GT’s mission to bring sapphire any closer to handheld electronic devices than the optical lens components.  There is no surprise there.  In the end it seemed more a passing dream by Apple engineers and designers, who were not willing to accept the limitations of sapphire crystal growth and the high costs associated with new product development.

The benefit Rubicon may have enjoyed from GT’s exit is not in terms of new sales.   GT’s former vice president in charge of crystal growth systems development has joined Rubicon as that company’s chief technology officer.  So besides Mr. Tamim, Rubicon has a CTO who is also highly sensitive to cost issues in sapphire crystal manufacturing.

Rubicon appears to have its back to the wall with continued losses and dwindling cash resources.  We have kept the company in the Materials Group of our Mothers of Invention Index of companies that are contributing to energy efficiency because we believe sapphire materials will have a place in 21st century advanced electronics picture.  

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

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

August 20, 2015

A Little More Respect for Lime Energy

by Debra Fiakas CFA

Last week Lime Energy (LIME:  Nasdaq) reported exceptional sales growth in the quarter ending June 2015.  Revenue from the company’s energy efficiency solutions was $32 million, increasing and impressive 135% compared to a year ago.  Sales were boosted beginning by the March 2015 acquisition of EnerPath, a provider of software solutions for utility energy efficiency.  However, several of the company’s utility programs were expanded and that drove organic sales as well.

Is it time to give Lime some new respect?

In the renewable energy sector, efficiency programs are often overlooked as a contributor to climate and energy relief.  Lime Energy made its bones in the efficiency sector with programs for small- and medium-sized businesses to save on the cost of lighting, space heating and cooling, equipment operation and water heating.  The acquisition of EnerPath gives the company a bigger stake in utility-based programs.  
Sales in the twelve months ending March 2015, were $64.8 million, resulting in a net loss of $5.3 million or $1.01 per share.  On its own Lime Energy had yet to achieve profitability.  What is more, operations still required cash resources.  The quarter ending June 2015, was the first quarter that EnerPath contributed for the full period.  Thus it appears the company’s new annual revenue run-rate is around $124 million.  In the June quarter the combined companies reported a small operating profit and earnings adjusted for non-cash expenses was a respectable 5.3% of sales.  It appears that EnerPath brings a more effective operating structure to Lime. 

Lime Energy is a small company with a market cap of $35.5 million and trading volume in its stock is only about 10,000 share per day.  It has been overlooked as a investment in the modern energy industry.  LIME trades at 0.6 times sales, which could be a bargain for a company that just doubled in size.  It is also very interesting for an operation that is approaching profitability.

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

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

May 13, 2015

US Crawls Closer to Energy Policy

by Debra Fiakas CFA

Last week President Obama signed into law the Energy Efficiency Improvement Act of 2015.  The law is intended to reduce energy requirements in commercial buildings, manufacturing facilities and residential structures.  The law improves building codes, provides assistance to manufactures to achieve energy efficiency and paves the way for conservation activities by federal agencies.  It is the closest thing the United States has to an energy policy… far.

It took years to get this small piece of energy policy through Congress.  Indeed, at one point in its convoluted travels through the House of Representatives and Senate, several of the bill's Republican sponsors actually filibustered against it.  First, there was some sort of crazed attempt to protect the Keystone XL pipeline.  Then, additional delays resulted from attempts to add amendments that would enable exports of natural gas and others that would have reduced the U.S. Environmental Protection Agency authority to regulate future power plants.

The legislation was widely supported by the utility industry.  Both the Natural Resources Defense Council and the U.S. Chamber of Commerce were early advocates.  Such support bodes well for the success of the legislation.

Part of the reason the bill was well received is the voluntary and market-driven character.  Title I of the law providers for voluntary approach to reducing energy use in commercial buildings.  Title III of the act requires federally-leased building without Energy Star labels to benchmark and disclose energy usage data.

Senators Portman and Shaheen, who had sponsored the Energy Efficiency bill have also put forth the Energy Savings and Industrial Competitiveness Act.  It was sent to a congressional committee in early March 2015.  It would establish a national strategy for energy efficiency with a model building code.  It would also promote energy-efficient supply chains for companies with the federal government agencies leading the way and support energy efficiency in schools.  The legislation is projected to create 192,000 jobs and save $16 billion annually in energy use as well as reduce carbon dioxide emissions by 95 million tons within the next fifteen years.

For investors the legislation may not seem important.  However, an unexpected consequence of this law might be in creating a standards-based approach to energy efficiency.  With all business aiming at the same target, it creates some production and marketing efficiencies.  I expect more innovators to be encouraged to invest in products and processes that might otherwise have been thought uneconomic.  Interestingly, the legislation does not rely on penalties or punishments.  It simply promotes market forces and competition.  I also expect this to lubricate interest in bringing efficiency products to the market. 

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

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

April 09, 2015

Orion Energy Systems: Seeing The Light

by Debra Fiakas CFA

On Monday Orion Energy Systems (OESX:  NYSE) issued a press release to reiterate previous guidance for sales in the quarter ending March 2015.  Given that the quarter has already ended, it is more like a pre-announcement of results than guidance.  At any rate management has indicated the results, when finally reported will bring sales for the fiscal year ending March 2015, to some point in a range of $72 million to $74 million.

The announcement might not be so much motivated by a need to assure shareholders of financial performance, as much as it created another opportunity to drill home points about the company’s evolving business model.  Orion Energy Systems used to be described as a power technology company.  Today management skips all the high brow language about technology and points directly to the only technology it has been able to turn into a product.  So now management is describing Orion as a “producer of energy-efficient LED lighting for residential and commercial applications.”

The press release might have been regarded as a bit redundant given that Orion management has had plenty of opportunities to give its pitch to investors during the company’s recent road show.  In late February 2015, Orion raised $19.1 million by selling 5.5 million shares of its common stock at $3.50 per share.

It is relatively easy to undertake due diligence on Orion and its market opportunity .  Test out a few LED lights on your own.  Most hardware stores have a selection on display.  Statistica offers a few details on the market for LED lights, suggesting LED now accounts for a 53% share.  Manufacturing efficiency is expected to lead to selling price reductions, helping to drive market share to over 60% within the next five years.

Orion Energy Systems is operating in a strong market, but its stock has gone through a period of trading weakness beginning right about the time management began that road show period.  The stock was left looking quite oversold until the offering closed.  Indeed, while management was out pounding the pavement with its efficient-lighting story, the stock registered a particularly bearish formation in a point and figure chart called a ‘double bottom breakdown.’  Yes, that technical indicator is just as scary as it sounds and this one suggested the stock had developed such a negative momentum it could drop to zero.

Now it appears OESX has begun a recovery.  Still it is possible to buy a growing company at a compelling price  -  even more compelling than the price paid by an entire group of investors who heard the company’s ‘lighting’ pitch first hand.

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

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

January 27, 2015

Leveraging Finance and Charity To Make Affordable Housing Greener

by Tom Konrad CFA

Many people still think of green technologies as costly. But cost is never the main barrier to efficiency measures, which often can boast internal financial returns far higher than even risky junk bonds.  The barriers against energy efficiency and legion, but cheif among them are the small size of the investments and split incentives, where the person making the investment is not the same person who reaps the rewards.

A Colorado based NGO, the International Center for Appropriate and Sustainable Technology (ICAST), recently launched a charity-finance hybrid to overcome this problem of split incentives.

The hybrid includes a charity and crowdfunding platform, Project Sunlight, as well as a new community development financial institution, the Triple Bottom-Line (TBL) Fund. By combining donations and social-impact investments, ICAST hopes to increase the pool of low-interest money available to fund these retrofits.

The idea of making affordable housing energy efficient is an alluring one. After all, more efficient apartments not only save tenants money, but also can improve their health, safety and comfort. At the same time, landlords benefit from higher property values, lower turnover, higher occupancy and tenants’ better ability to pay rent. And, of course, everyone benefits from reduced greenhouse gas emissions.

MC-Empire Dairy-Lighting-Jan2012 (12).jpg
Ravi Malhotra (left) and ICAST staff discuss energy efficiency options with the owner of an affordable housing complex.

Many energy-efficiency upgrades also pay for themselves in energy savings over the long run: ICAST’s retrofits generally pay off in seven or eight years, with some improvements, such as lighting, paying back in as little as two years.

But it’s hard to find many low-income rental building owners willing to pay the upfront costs. Many low-income apartments suffer from a classic split-incentive problem: the landlord pays for the building upgrades, but the tenants receive most of the benefits.

It takes low-interest loans to entice landlords, and ICAST’s ability to do these projects is limited by the supply of investment funds available at low interest rates. It’s Economics 101, says Ravi Malhotra, executive director of ICAST: “The number of owners we can sign up at 4% is much smaller than the number of owners we can sign up at 2%.”

For ICAST, the magic number interest rate is around 3%. “We can find as many projects as we have capacity to do as long as we can offer owners funds below 4%,” Malhotra adds.

A financing conundrum

The catch is that ICAST needs both a loan loss reserve and money to fund its operations. Together, these cost about 2.5% per year.

A quick check of the math shows that won’t work: if ICAST gets money at 3% and loans it out at “below 4%”, there wouldn’t be enough room to both run ICAST and fund the reserve.

In other commercial settings, a host of government programs and utility incentives exist to bridge the gap, but the unique nature of commercial property for residential use leaves most low-income housing to fall through the cracks.

Only a handful of US utilities offer rebates for low-income housing, Malhotra says. Some government programs have historically supported weatherization upgrades for affordable housing, at least, but these funds – which have only served about 5% of market demand over the last 30 yeaars – are decreasing.

Leveraging investments with charity

The solution, according to Malhotra, is to sell loans that are essentially subsidized by charity instead of by government. Donations to Project Sunlight will pay for a loan loss reserve and ICAST’s operating expenses. This will enable accredited investors backing the TBL Fund to earn an annual return of 3% over five years.

Although 3% interest is a fairly low rate, Malhotra thinks many investors will be interested because of the outsized social impact, so long as the money is safe.

And there’s some evidence investors would consider these loans to be safe. Over the last eight years – including during the 2008 housing crisis – ICAST has completed more than $10m worth of commercial multifamily housing upgrades without any defaults. Current “green” loans have default rates of less than 0.5%, according to the TBL website.

Additional safety comes from the 5% loan loss reserve, in addition to a 20% loan loss reserve provided by the state of Colorado for projects in that state. The underwriting process includes screening applicants against risky borrowers, as well as due diligence aimed at preventing upgrades that do not provide real benefits.

Is the investor appetite there?

Even before its official launch, the TBL Fund is already catching the attention of some impact investors. By the end of 2014, it had garnered $500,000 in loan funding from investors, and Project Sunlight had received $44,000 in charitable donations.

It remains to be seen if other investors will step up – and if Project Sunlight will receive enough donations to match the demand for investment in the TBL Fund. Malhotra thinks ICAST will need 10% of its funds to come in the form of donations to be able to offer the 3% return rate for the rest.

One idea would be to ask investors if they would be willing to donate 10% of their investment to the charity. No individual has yet both invested and made a donation but, Malhotra says, “All we can do is ask.”

Tom Konrad is a freelance writer and portfolio manager specializing in clean energy and income investments.

An earlier version of this article was first published on The Guardian, and is republished with permission. Further reprints require permission from The Guardian.

December 16, 2014

Energy Recovery Offers Savings to Gas Industry

by Debra Fiakas CFA

In early December 2014, Energy Recovery (ERII:  Nasdaq) staged an analyst and investor event in New York City principally to introduce its most recent technology innovation, VorTeq.  The product is a hydraulic fracturing solution for the gas industry.  Unlike its other products, the VorTeq is a colossal apparatus requiring a semi-tractor to transport it into place as a replacement for the ‘missiles’ now found at natural gas well sites. 

VorTeq Animation

In the current configuration, high pressure pumps are used to drive a blend of fracturing sand, water and chemicals down into the well hole.  Pump components, including somewhat fragile valves, are at risk of damage when exposed to the highly corrosive fracturing mix.  To avoid costly down time for pump repair, fracturing service providers keep a bank of replacement pumps at hand.
Energy Recovery proposes to lease its VorTeq solution as a replacement for the standard missiles.  The VorTeq is an energy exchanger, which of course is Energy Recovery’s signature technology and knowhow.  Using the VorTeq  instead of the standard missile allows the energy from water driven by the high pressure pumps to be transferred to the fracturing mixture without letting the fracturing mixture come in contact with  fragile pump components.  The point of energy exchange is made in a cylinder-shaped device composed of a few components, all machined from high performance tungsten carbide.  Importantly, using the VorTeq instead of the conventional missile requires no other equipment modification.

Essentially Energy Recovery is transferring the point of risk from the fracturing service provider’s pumps to the VorTeq.  When queried about the risk of damage to the VorTeq components, the Company’s engineers expressed high confidence that the VorTeq is better able to withstand contact with the abrasive fracturing mixtures.  Tungsten carbide is among the most durable materials available.  Furthermore, the components of the VorTeq are machined to nanoscale, making it impossible for grains of fracturing sands to slip between the few moving parts in the VorTeq device.  If this proves out in the field, Energy Recovery will have brought a vital new technology to the gas industry.

Management spent much of the meeting with analysts explaining the economic proposition for its potential new customers of VorTeq.  On average a fracturing pump fleet costs about $4.1 million to maintain each each.  This is based on an average 2,000 pump hours per year.  Instead of buying a missile, the fracturing services company would lease a VorTeq from Energy Recovery for $1.6 million per year.  Pump maintenance costs are expected to immediately decline to about $1.5 million per year, bringing total costs down to $3.1 million.  Savings for the year to the fracturing operations would be $1.0 million, arising from maintenance cost reduction.

The Company believes that the $1.0 million in savings for this hypothetical pump fleet will be compelling enough to get fracturing service companies to make the change.  Additional savings could be realized from the reduction in total pumps required to performance the same work.  Energy Recovery is apparently not relying on this economic benefit in its sales pitch as this is a reduction in capital cost rather than an operating cost savings.  Nonetheless, it does not appear that Energy Recovery is ignoring interest among their potential customers in reducing capital costs.  The Company intends to offer the VorTeq to fracturing service providers through an operating lease rather than a direct sale.  This would replace the usual capital requirement for the purchase of missiles that typically cost $750,000 each.

Energy Recovery estimates the market opportunity for the VorTeq worldwide is near $1.3 billion, of which about $849 million originates in the U.S.  The natural gas fields using slick water and hybrid chemistries for fracturing are considered the optimum initial markets.   Thus the Company is looking for entrance opportunities in the Permain, Eagle Ford, Anadarko Woodford and Haynesville basins.  Management characterized its conversations with fracturing service companies as ‘loose and high level.'
Addressable Markets

During the analyst meeting the Company announced a relationship with Liberty Oilfield Services, which will help with the first field tests of the VorTeq.   Liberty is not among the largest oil field services companies, but for what it lacks in size Liberty offers a willingness to work conjointly with Energy Recovery engineers to achieve operational success.  For their efforts Liberty will get pricing concessions for the first VorTeq units it leases.  The field tests are expected to require at least four and as many as nine months to complete.  Energy Recovery engineers anticipate making changes to the VorTeq based on operating experiences during the trial and even referred to at least three different generations.  Under the current schedule VorTeq Gen-3 is expected to be available for commercial introduction by the third quarter 2016.

Energy Recovery offered an update on its other products, including the flagship PX pressure exchange devices sold to the desalination market.  The Company has not given up on selling PX devices, but now estimates the market is only $50 million in annual value, a significant decrease from previous guidance of a $100 million market size.  Apparently, the desalination sector is expected to be even more unreliable and uneven than even in recent years.  However, Energy Recovery management appeared quite bullish on opportunities in the oil, gas and chemical processing and distribution sectors for its ISO Boost and ISO Gen systems.  ISO Boost reduces the need for conventional pumps along gas distribution lines and ISO Gen capture's energy from pumping activity to augment conventional electricity sources.   The Company is particularly bullish on ammonia and urea processing as particularly promising markets and makes a well thought out value proposition for both the ISO Boost and ISO Gen products.  The Company quantified the addressable market in gas processing and pipelines and chemical processing at $3.6 billion.

Sales and Marketing

In our view, the real concern for Energy Recovery is not necessarily the size of its addressable markets.  Instead investors should be concerned about the ability of Energy Recovery to capture market share.  The Company claims $100 million in value in its business pipeline for the ISO Boost product alone and at the analyst meeting revealed a key order from Conoco-Phillips Canada.   Apparently, there is additional interest from Saudi Aramco and SinoPec.  In our view, the sale to Conoco-Phillips is particularly encouraging as we have long had more concern about Energy Recovery’s ability to penetrate the oil and gas market than we have had for their ability to perfect a technology solution to the industry’s operational problems.

Still the Company’s engineers held sway at the analyst meeting and sales executives were only introduced during the question and answer period to field some of the more pointed questions about marketing plans for the VorTeq product.  Despite having three products on the market already, the Company does not seem to have a clear marketing and sales strategy for any of them  -  at least none that is well articulated to the public.  The new leadership in the sales and marketing department has hired sales personnel with experience in the target industries.  In our view, that demonstrates progress in the case of Energy Recovery after a very public dismissal of sales leadership some months ago.  Attendees of the analyst event were provided examples of sales literature prepared for VorTeq, ISO Boost and ISO Gen.  Clearly, that suggest more progress.  However, we will be looking for more evidence of the ability to grab market share from competitors peddling conventional energy solutions or otherwise convince potential customers that Energy Recovery's solutions are worthwhile.

While we do not maintain formal estimates for Energy Recovery, we would not have been moved to change sales or cost assumptions based on information imparted at the analyst event.  The Company appears to have made progress in its strategy to expand beyond supplying energy saving devices to the desalination market and we applaud that success.  However, earnings potential from the new products is still uncertain.  Thus it is difficult to pinpoint the timing of breakeven or profits.  Such uncertainly typically leaves a stock interesting only at nominal prices that resemble more options on the technology than a value pinned to earnings.

Investors cannot use the Company’s financial condition as an excuse to discount share value.  The Company has no debt and held $31.2 million in cash on its balance sheet at the end of September 2014.  Total cash usage to support operations during the most recently reported twelve months was $2.3 million, which was considerable lower than the reported net loss of $7.1 million in the same period.  We believe current cash resources are more than sufficient to support operations to the point of breakeven and profitability as well as finance the completion of field trials for the new VorTeq solution.

While financial condition is not a great concern, we listened with some reservation to management’s discussion of its VorTeq solution for the fracturing service market.  Company engineers were responsive to our concerns about the transfer of risk of damage from pumps owned by the service provider to the VorTeq, which will remain the property of Energy Recovery.  They were steadfast in their confidence that their components would be better able to withstand contact from corrosive materials than comparatively more flimsy pumps used at the gas wellhead.  However, we note that Energy Recovery plans to retain ownership of the VorTeq systems and will be responsible for maintenance.  During the analyst event the Company was a bit vague on the manufacturing cost for VorTeq and had no estimates for the cost of such maintenance.  Accordingly, we are concerned that the proposed lease price of $1.6 million per year that has been proposed may not be adequate to ensure a profit for Energy Recovery.  We are concerned that in their zeal to create a marketable proposition,  the Company will leave too much ‘on the table’ with its gas field services customers.
Rating and Trading Strategy

We continue to rate ERII at Hold.  There are no strong near-term trends up or down for ERII shares.  We cannot characterize the stock as either oversold or overbought.  That said, we note the stock registered a particularly bullish formation in a point and figure chart in the third week in November.  The ‘triple top breakout’ formation suggested new upward momentum in the stock to a price of $7.25.  We believe that formation was fueled in part on information that was filtering to the market ahead of the analyst meeting.  Subsequent to the event, the stock has weakened albeit under diminishing volume.  We view Energy Recovery as a strong technology play, but look for reform in the sales and marketing functions before we can call it an all-round strong operation.  Even as a technology play we have an interest in the stock and would add to positions in periods of trading weakness.  There is a level of price support at $4.00.  Should the stock fall below this level but still possess intact opportunities and product viability, we would be more aggressive buyers of ERII.

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

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

September 15, 2014

Three Stock Alerts: CREG, EFOI, OPTT

By Harris Roen

Three volatile alternative energy stocks release earnings reports. Two of the stocks jump, one drops.

China Recycling Energy Corp (CREG)
More Info
Latest earnings report for China Recycling Energy Corp shows a huge jump in revenues and net income. Insider selling, however, has led to stock losses. CREG is down 75% from where it was trading just this March. Seeking Alpha
Energy Focus, Inc (EFOI)

Profits jump for Energy Focus Inc, up over 50% from the previous quarter. EPS losses collapse to near zero, and next quarter guidance is positive. EFOI has gained 24% in two days on very large volume. Reuters
Ocean Power Technologies, Inc (OPTT)

Ocean Power Technologies more than triples revenues from the previous quarter and year-over-year. Net income drops, but quarterly EPS losses narrow. OPTT popped up 15% Friday, but is still down for the year and almost 80% below its highs of 2010. CNN Money


Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

August 18, 2014

Hannon Armstrong's Strong Q2 Keeps It In My Top Picks

By Jeff Siegel

Hannon Armstrong (NYSE:HASI), one of my top picks for 2014, just made me very happy.

Yesterday, the company announced its Q2 Core Earnings of $4.7 million or $0.22 per share. On a GAAP basis, the Company recorded net income of $2.9 million.

Here are some other highlights. . .

  • Raised approximately $70 million in April, 2014 in a follow-on offering.
  • Increased the flexibility and expanded the capacity of its existing credit facility by $200 million.
  • Completed more than $200 million worth of transactions, including the acquisition of a $107 million portfolio of land and leases for solar and wind projects.

CEO Jefferey Eckel commented on earnings, saying. . .

April 23, 2014, marked the first anniversary of HASI's initial public offering (IPO) and we are pleased to continue our success with the accomplishments of the second quarter of 2014. Since the IPO, we have completed nearly $1 billion of transactions. For the quarter, we generated and paid a $0.22 dividend, completed a follow-on equity raise and closed more than $200 million in transactions. This includes acquiring a portfolio of long-duration lease streams for solar and wind projects as well as the rights to finance additional transactions from this new platform client. As we have demonstrated over the past few quarters, we continue to execute on high credit quality transactions that should translate well into dividend growth for our shareholders.

Opportunities for HASI continue to be robust. The recently announced Presidential initiative calling for an additional $2.0 billion of federal energy efficiency projects and the EPA proposed regulations to cut carbon emissions from existing power plants will encourage more investments in energy efficiency and clean energy throughout the country. HASI is well positioned to capitalize on these opportunities and will continue to seek projects generating attractive risk-adjusted yields.

Hannon Armstrong remains one of my top long-term picks in the alternative energy space. With top-notch management in place, continued demand for alternative energy financing, and a solid 6% dividend, this is a must-own stock for any savvy energy investor.


Jeff Siegel is Editor of Energy and Capital, where this article was first published.

June 10, 2014

Force in Name Only

by Debra Fiakas CFA

One of the companies in our novel alternative energy indices is Forcefield Energy, Inc.  (FNRG:  Nasdaq).  For a time it was listed as among alternative chemical products and now is included among waste-to-energy developers, but it could be as easily included in our data base among sellers of LED lighting products.  The identify confusion is due in part to Forcefield’s own description, which includes a laundry list of capabilities and technologies.

The company lays claim to proprietary products for heat recovery and the conversion of waste heat to useful purpose.  Forcefield comes by this capability though a 50.3% interest in TransPacific Energy based in the U.S. Forcefield is also a distributor of LED lighting from LightSky, a China-based LED manufacturer.  Another China-based subsidiary is involved in the production of trichlorosilane, a chemical that is used in the production of polysilicon for photovoltaic cells.  That subsidiary was sold in February 2014.

Forcefield management describes the company as “a new force in the field of energy.”  Certainly with all these energy-related interests it seems formidable, at least until an investor looks at the company’s financial performance.  With the chemicals business out the door, revenue has been shrunk down to just $295,250 in the most recently reported twelve months and the company lost a net $2.1 million.  In the same period Forcefield burned up $3.8 million in cash to support operations.

FNRG shares are now trading at a multiple of 290 times sales  -  a valuation which is probably not sustainable.  Forcefield management has a challenge before it.  It is understandable, in the interests of building a ‘clean, green’ business model, why management would divest of a messy chemical operation.  However, neither its waste-to-energy business nor the LED lighting sales are sufficient to make up for the chemicals revenue.  New strategic relationships hold considerable promise, but none have delivered significant new revenue.

Forcefield Energy made an appearance at the Marcum Micro-cap Conference in New York two weeks ago.  It is well that management is making an attempt to bring investors up to date on the strategic changes in the company’s business model.  Management was to win new shareholders, but it might be premature to take a position in stock sitting well above its sales value.

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

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

May 19, 2014

NovX21: Urban Miner

by Debra Fiakas CFA

There's Platinum in them catalytic converters.
Mention platinum and most of us think about beautiful and expensive jewelry.  However, platinum can be found in the dullest of products.  Catalytic converters used in automobiles for emissions control represent about one-third of the demand for platinum. The devices attached to the rear of our cars uses a mix of previous metals to remove nitrogen oxides, carbon monoxide and hydrocarbons from engine exhaust.  The catalytic converter on a typical car uses a gram or less of platinum, while a diesel truck requires five to ten times that amount.  A gram may not seem like much by multiple that by millions of automobiles and you begin to get a picture of demand.

While there is steady and growing demand for platinum, supplies of this precious metal are anything but stable.  South Africa is the world’s largest supplier of platinum, producing as much as 70% of world supply.  Russia and Zimbabwe are number two and three.  Anglo American has closed some of its South Africa mines as the result of higher taxation and strikes by labors continue to plague the remaining operations.  Zimbabwe has banned exportation and has demanded in-country refinement in order to capture more of the value in the supply chain.  New political upheaval in the Ukraine, compounded by Russia’s aggressive actions in that region, has made some in the industry nervous about Russian supply sources as well.

Some manufacturers have simply replaced platinum in their catalytic converters.  However, NovX21 (NOV:  TSX-V, PORMF: OTC) is addressing the problem of supply with an ‘urban mine.’  The company has developed a chlorination process to reclaim platinum as well as palladium and rhodium from spent converters.  It takes NovX21 about two months to process a converter, but the time is well spent.  The process recovers as much as 97% of the precious metals in the ceramic component of each converter.  On average each ceramic component yields 3,000 grams of precious metals per ton of ceramic.  There is no waste with the NovX21 process, even the ceramic can be reclaimed and sold to a ready market for hydraulic fracturing materials.

The company estimates it will cost about CAD$168 per ounce to operate its reactors.  Compare that to the current price for platinum near CAD$1,466 per ounce.  Accordingly, it seems there is sufficient profitability to recover the $10 million capital cost of each plant.

Protected by U.S. and Canadian patents, it is a process that is economically competitive and environmentally friendly.  The Company has developed a line that is capable of processing 50,000 tons per year.  To scale up for higher volumes, a series of reactors can be placed side-by-side, sharing pre-processing and post-processing infrastructure.

NovX21’s closed loop system generates no emissions or wastes, giving it a ‘good neighbor’ profile.  The NovX21 process is apparently so benign it can comply with regulations for any industrial park.  This has impressed local officials in the Quebec, Canada area, who have expressed interest in locating NovX21’s first production plant in their district.

The company is counting on insecurity in the platinum supply chain to get its foot in the door with distributors.  Besides perfecting its process, management has been scouring the globe for sources of used catalytic converters.  Both Europe and North America   The company is also actively seeking off-take agreements and is prepared to offer samples and provide test results to demonstrate the quality of their reclaimed metals.

NovX21 management promised commercial production within the next year and is currently vetting sites for the first production plant.  Equipment sourcing and construction will follow before year-end 2014.  The first plant is likely to feature four reactors and have a capacity of 200 tons per year.  Construction is expected to require eight months to a year.

The stock of NovX21 trades on the Toronto Stock Exchange-Venture under the symbol NOV.  Although the stock has built of relatively good trading volume, but the stock is still priced at a thin Canadian dime.  One of the problems in valuation might the prospect of dilution.  NovX21 currently has 100 million shares outstanding, but another 55 million shares could be issued upon exercise of warrants and options the Company has issued in the course of raising capital and compensating employees and service providers.  Fortunately, I do not expect to see a flood of derivative exercises until the stock reaches the CAD$0.25 to CAD $0.30 price range.  The average warrant exercise price is CAD$0.23 and for the options it is CAD$0.21.

NovX21 is not a stock for everyone.  It is a stock that requires a tolerance for business risk and price volatility.  However, for those with nerves of steel and the patience to wait for commercial operation, NovX21 could be an interesting long-term play on ‘urban mining.’

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

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

May 15, 2014

Obama's Next $2 Billion For Energy Efficiency: How To Take The Money And Run

By Jeff Siegel

It's all about the money.

I don't care how you slice it — when it comes to investing, personal politics are irrelevant.

This has long been how I've approached wealth creation, and it works quite well. Even as I denounced the continued reliance on outdated and economically inferior energy and transportation systems (i.e. the internal combustion engine and tar sands production), I make no apologies for profiting from new opportunities in fossil fuels.

My gains in shale over the past few years alone are reason enough to stick to this strategy.

Of course, when I'm given the opportunity to profit from new developments in cleaner energy, well, that just puts another smile on my face.

And last week, I was grinning like the Cheshire cat. You should be, too.

Easy Pickings

While I'm no cheerleader for the Obama administration, I'd be lying if I said some of his policies haven't made me rich. From his early initiatives in renewable energy to the tragedy that is Obamacare, if you're ever looking for an easy way to make some cash, just follow the trail of lucre from K Street to the White House.

What can I say? It's easy pickings!

Now last Friday, President Obama announced a new series of commitments and executive actions he plans to use to advance solar deployment and energy efficiency measures. The PR alone reads like a crib sheet for energy investors.

You see, one section in the follow-up press release instantly caught my attention. Essentially, it looks like a loose mission statement for a company that's already been landing fat government contracts for energy efficiency and renewable energy initiatives.

I'll tell you the name of the company in just a moment. But first, let me share with you the section to which I'm referring.

Follow the Money

Here it is:

Drive $2 Billion in Energy Efficiency Investments for Federal Buildings: Today, President Obama is announcing an additional $2 billion goal in federal energy efficiency upgrades to Federal buildings over the next 3 years... The $2 billion investment announced today extends and expands the President’s commitment to energy upgrades of Federal buildings using long-term energy savings to pay for up-front costs, at no net cost to taxpayers. Federal agencies have already committed to a pipeline of nearly $2.7 billion in projects.

Folks, last year I told you that the Obama administration was setting the stage for this kind of thing. Heck, it was in October of 2013 when I commented on the new Energy Secretary's first speech, which included the following statement:

Efficiency is going to be a big focus going forward. I just don't see the solutions to our biggest energy and environmental challenges without a very big demand-side response. That's why it's important to move this way up in our priorities.

Then, in December of 2013, the President ordered the federal government to get 20% of its energy from renewables by 2020. To put that in perspective, the federal government owns and occupies about 500,000 buildings.

There's no doubt this initiative has long been in the making. And last week, we got further confirmation after we learned that another $2 billion has been earmarked for this. I suspect some of this is going to trickle down to Hannon Armstrong Sustainable Capital (NYSE: HASI)

Lucrative Deals Coming

I first told you about Hannon Armstrong last year in my 2014 Alternative Energy Stock Predictions piece. In it, I wrote...

Hannon Armstrong is basically a specialty finance outfit that offers debt and equity financing for modern energy and sustainable infrastructure projects. The company has actually been around for more than 30 years, and since 2000 has provided or arranged nearly $4 billion of financing.

HASI focuses primarily on infrastructure projects that have high credit quality obligors, fully contracted revenue streams, and of course, inherent economic value. Some of these obligors include U.S., federal, state and local governments, high credit quality institutions and utilities.

The company is actually the leading provider of financing for energy efficiency projects for the government.

Hannon Armstrong released Q1 earnings on Monday. Results were pretty much in line with estimates, although the company's pipeline of projects in the second half was impressive enough to placate investors looking for bigger numbers. The stock continued to charge along nicely.

While HASI is not immune to broader market moves, I remain convinced that increased spending on the federal level will result in some very lucrative deals for this financing firm.

Invest accordingly.

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

April 06, 2014

Orion Energy Systems: Right Industry, Right Time

by Debra Fiakas CFA

March 31st marked the end of fiscal year 2014 for Orion Energy Systems (OESX: Nasdaq), a provider of energy-saving lighting systems.  The half dozen or so analysts who follow the company on a regular basis think the company will be able to report about the same level of sales as the same quarter last year, but will actually suffer a penny loss instead of making a profit as they did last year.  If they are right it will be a setback for Orion, which higher sales this year than last and has so far had a small profit. 

Orion Energy Systems - Exterior Lighting

That Orion’s prospects are improving should be no surprise.  The benefits of efficiency measures to reduce energy costs are just recently beginning to gain respectability.  The Consortium for Energy Efficiency (CEE) reports that in 2012 alone efficiency programs sponsored by electric utilities in the U.S. saved enough power to serve over 12 million homes for one year  -  126 TWh.  The data was enough to help CEE analysts to conclude that energy efficiency is the most important source of clean, cheap energy because utilities do not need to generate as much power if their customers require less electricity.  A reported from the Natural Resources Defense Council says energy efficiency has outperformed all other energy resources combined, including the various fossil fuels and nuclear power.

The elevation of energy efficiency on par with energy sources should support higher valuation multiples for energy efficiency solution providers, especially those that have honed a profitable operating structure.  Orion has managed to maintain its gross profit margin over 30% although its profits have slipped from a peak of 33.7% in 2011.  Orion has also struggled to keep revenue on a consistent upward march.  Sales in the twelve months ending December 2013, were $98.2 million, back up to the company’s record revenue level of $100.6 million recorded in 2012.

However, analysts expect only $98.3 million in the fiscal year .  It is not until next year that the consensus reflects a decisive acceleration in sales activity  -  the kind that generates profits.  The consensus estimate for fiscal year 2015 that begins today is $0.12 in earning per share on $108.8 million in total sales.

Comparisons of Orion’s earnings in the coming quarters should be favorable.  That could keep the stock on an upward trajectory similar to the ramp that can be seen in the OESX historic stock price chart.  A review of trading patterns during the last two months suggests that the stock is may be poised to take a bit of a breather in the near term.  That would provide an interesting opportunity to take a long position in a company that has established a foothold in the right industry at the right time.   

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

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

March 12, 2014

How Geothermal Heat Pumps Can Soar Like Solar

Tom Konrad CFA

Geothermal Heat Pumps (GHP) are a niche market.  They shouldn’t be.

Disclosure: Long WFIFF, short LXU puts (a net long position.)

A Better Mousetrap?

Ralph Waldo Emerson never said “Build a better mousetrap, and the world will beat a path to your door.”  The mousetrap that likely inspired the misquote was invented seven years after his death.  Unfortunately, many people take it literally.  GHPs have all the hallmarks of a better mousetrap: They do the job of heating and cooling a building more efficiently than any other option.  Despite the larger up-front cost, they are a mature technology and usually the most economic option for buildings that can accommodate them.

Not only can GHPs cut energy costs for heating and cooling by up to 80%, they can also provide other benefits such as essentially free hot water when in cooling mode, lower reliance on fossil fuels, and the elimination of above ground outdoor equipment.  These advantages have earned GHPs a small but dedicated cult of true believers, but not broad market acceptance.

The world has not yet beaten a path to the GHP door.  Instead, GHPs have a slim and only modestly growing market share.  A study by  Frost and Sullivan projects  the market for GHPs in North American commercial buildings to grow at a 7.8% annual rate from 2012, 4.7% faster than the North American climate control market as a whole. An industry representative pointed me to a Navigant study which projects the world installed base to grow from 13.3 million tons to 36.2 million tons in 2020, see chart below.

Navigant installed capacity.png

Unfortunately, growth in installed base is not comparable to industry sales. For a young industry with a low installed base, sales are approximately the increase in the installed base.  I eyeballed the chart to get annual estimates of  world sales from the chart, and found that Navigant is projecting less than 5% sales growth in 2013 to 2015, followed by rapid growth (20-30%) in the 2016 to 2018 time frame.  Navigant’s discussion makes clear that the later rapid growth rates require a revival of the economy and easier access to capital.

In the short term, Navigant’s study seems less optimistic than Frost & Sullivan’s, while it is more optimistic in the medium to long term. Using either projection, the near term less than 5% annual market share growth is clearly not the type of market transformation many would expect from a “better mousetrap.”  Does the rapid market growth Navigant expects after 2015 have to depend so greatly on easy access to capital?  Are other factors holding the GHP market back?

Siege Mentality

I struck a few raw nerves when I asked if air source heat pumps are a threat to geothermal heat pump suppliers last month, despite the fact that I answered my own question with a “No.”

Except in moderate climates, super-insulated homes, or situations where the installation of a geothermal heat pump (GHP) would be particularly difficult, GHPs have the better economics.  This is despite recent advances in air source heat pump (ASHP) technology, which led me to ask the question in the first place.  ASHPs don’t provide hot water, while many GHP systems can.  Also, as the recent heavy snows in the Northeast demonstrated, there are some advantages to having a heat exchanger which is not exposed to the elements (see pic).

ASHPs Snow.jpg
One advantage of a geothermal heat pump’s ground loop compared to the air source heat exchangers shown is that you don’t have to dig them out after a snowstorm. This pic also shows an installation problem which is allowed under manufacturer specs, but may lead to less than optimal performance if both pumps are operating simultaneously: one heat exchanger blows air directly at the other. This problem is analogous to poor ground loop design for GHPs.

Given all these advantages, why the raw nerves? I suspect it’s because geothermal heat pump sales continue to disappoint and proponents are looking for someone to blame.

ASHPs in Net-Zero Buildings

Another target of geothermal advocates’ ire is Marc Rosenbaum (who teaches the online Net Zero Energy Homes course in the Northeast Sustainable Energy Association’s Building Energy Masters Series.)  He also raised hackles when he recommended minisplit air source heat pumps (ASHPs) for most single family net zero homes (I quoted Rosenbaum extensively in the previous article.)

He relates the story of the Putney School’s 16,000-square-foot Net-Zero Field House.  The team designing this building modeled its heating costs using a GHP, and also using ASHPs with additional solar photovoltaics  sufficient to provide the extra electricity needed to run the ASHPs.  They found that it was cheaper to expand the solar system to power the ASHPs than it would have been to pay the extra installation costs of a GHP.   Furthermore, the price of solar has fallen significantly since the Putney Field House was built; the price of the ground loop for a GHP has not.

Nevertheless, Rosenbaum’s preference for ASHPs in highly insulated buildings does nothing to explain GHPs’ low market share growth rate.  Net Zero buildings are the exception, not the rule, and have a far lower market share than geothermal heat pumps.  When the heating load is very low, the operating cost advantage from the greater efficiency of GHPs is not enough to repay the additional installation costs.  That is not the case in 99.9% of new and existing buildings today.

GHPs Almost Everywhere Else 

My own home, a farmhouse built in 1930, is much less efficient and requires a lot more heat than a Net Zero home, despite my own significant improvements.  I don’t have enough suitable roof space for photovoltaics to make up for the extra energy ASHPs would require, even if that could be done economically.  I opted for four ductless minisplit ASHPs rather than a GHP system, but it was because the minisplits allowed me to do the install without adding air ducts.  Adding air ducts to my 85 year old home would have significantly increased the cost and disruption of installing a GHP system.

ClimateMaster, a division of LSB Industries (NYSE:LXU), makes a ductless split system called the Tranquility Console Series which probably would have been suitable for my needs, but I did not know about it until I received comments on an earlier version of this article telling me about it, nor did any of the geothermal installers I spoke to.  Unfortunately, the efficiency ratings are low for GHPs with a COP of 3.3 in the ground loop configuration. This is not much better than the Mitsubishi air source units I had installed, which operate at a COP of around 2 from around -10° to 20°F outdoor temperatures, and exceed 3.3 COP when the ambient temperature is 35°F or more.  The added efficiency at low temperatures would probably not have been sufficient to pay for the ground loop, but I would have been interested to get a quote.  Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) offers the Envision Series Consoles with slightly higher heating efficiency (up to 3.5 COP) for certain models.

Mr Slim COP.png

Since GHPs are economic in most situations, other factors must be holding them back.

The relative complexity of a geothermal system is one likely suspect.  As Rosenbaum says about ASHP minisplits,

“[O]ne thing I really like about the minisplits is how they are packaged systems from a single supplier, and are highly engineered as a system and therefore very reliable. GSHP systems are, at least where I have practiced, essentially custom engineered and installed, usually by several entities who have a shared responsibility to make sure the systems perform.”

Given the large up-front cost of a GHP system, the risk of a poor installation is likely to deter nonprofessionals from using GHPs even more than it deters experienced professionals like Rosenbaum.

The Curse of Complexity 

The cure for installation risk would be a way to validate the performance of GHPs in the field, and track problems back to their source.  When contractors lose the ability to blame others for their mistakes, they quickly stop making those mistakes or they go

out of business.  Without such monitoring, it’s nearly impossible to track increased electricity use back to the source.

I recently spoke to Matt Davis, the co-founder of Ground Energy Support and a professor of hydrology at the University of New Hampshire.  Ground Energy Support provides GHP monitoring to GHP owners and contractors, as well as data and analysis to support the development of the industry.

Ground Energy Support recently published a 14 page Homeowner Guide to Geothermal Heat Pump Systems.  While I found the guide easy to understand, it makes clear that GHPs are not for everyone.  The start of the guide directly helps homeowners decide if they and homes are suitable for a GHP, while its length indirectly makes the point that GHPs are not always “plug and play.”  The six pages dedicated to finding and selecting a suitable GHP installer indirectly makes clear that the process is not for anyone with only casual interest in GHPs and their savings they bring.

If GHPs are to become commonplace, the process of financing and purchasing a reliable GHP system have to be simplified to the point where it becomes a matter of calling a name in the phone book.  The success of SolarCity Corporation (NASD:SCTY) in providing solar to homeowners who are more interested in the green in their checking account than the green of their electricity shows the potential.  That success is based on SolarCity’s ability to provide financing, installation, maintenance, and performance verification services internally.  All the homeowner needs to do is pay the monthly bill for electricity production.  The value proposition is simple: a hassle-free installation and savings from day one.

The SolarCity of Geothermal

Geothermal heat pumps also have the economic potential to deliver that same value proposition: hassle free installations, and reliable savings from day one.  But if the industry is to achieve this potential, several things have to come together:

  • A single company responsible for the entire installation, from engineering to installation to maintenance.
  • Reliable monitoring of heat production from the ground loop.
  • A financing tied to the geothermal installation itself, to allow a lease-like structure which allows homeowners to see the benefits from day one.

We already have the corporate and financial structures to bring the solar lease model to GHPs.  In fact, it takes little stretch of the imagination to see a solar lease company acquiring or partnering with GHP installers and offering a geothermal lease along with the solar lease to its customers.  In cold climates not known for their sunny winters such as the Northeast US, the underlying economics of GHPs are far superior to those of solar photovoltaics.  These economics should enable very attractive GHP leases, as soon as the other pieces are in place.

First, the homeowner and the geothermal lease company would have to have a reliable, objective way to monitor the performance of the GHP system.

Geothermal Monitoring

Ground Energy Support is tackling this problem with its GXTracker, which monitors the heat output of the ground loop and monitors or models the electricity consumption of the pump itself.  Heat production monitoring lets everyone know if a system is operating as designed, and helps diagnose the problem when it is not.

Of the 30 GHP systems Ground Energy Support has been monitoring for the last two and a half years, 60% have had some operational, maintenance or mechanical issue.  Most of these were minor maintenance issues or improper settings which caused only minor drops in performance, but which would have gotten worse if undetected. But 17% of the systems had significant design or installation problems.  A third of these were oversized systems which can lead to higher energy costs but were likely the result of homeowner preferences.  Another third were easily fixable and not the fault of the installer: a failed heat pump (covered under warranty), and an air duct which was left open to an unfinished garage.  The rest (high pumping penalty caused by too large a pump or too small pipes, and an undersized ground loop) could have been avoided if the homeowner had been able to vet the installers’ track records – another potential benefit of ubiquitous monitoring.

One other way proper monitoring of GHPs might help the industry is enabling the implementation of incentives for renewable heat production from geothermal ground loops, analogous to the incentives for photovoltaics.  The Massachusetts legislature currently working on a bill to allow heating and cooling with renewable fuels to benefit from the same incentives the state give to renewable electricity.  The bill states that the heat must be “verified through an on-site utility grade meter” or similar means.


Advocates of geothermal heat pumps should spend less time discussing the well established attractive economics of GHPs in theory, and more time delivering those economics.  The key to this is making the buying process simple for the customer while providing verification and taking responsibility if those economics fail the be acheived .  While GHPs are not the best fit for every home, in many climates the majority of such homes will benefit more from a GHP system than a new conventional heating and cooling system.

The solar lease is an excellent model for taking a renewable energy system and making it attractive to the general public.  The GHP industry can follow down this path, but first it has to adopt reliable monitoring as a standard feature.  This will hold installers to account for their design and implementation, while giving customers confidence that they will get what they pay for.

Adopting monitoring could start with customers wanting to know that their systems are operating as designed.  It could also begin with states like Massachusetts giving incentives for verifiable renewable heat production, or an installer deciding to break open the market by offering a geothermal lease.  UPDATE: It looks like at least one installer, Orca Energy, is alreadyoffering a geothermal lease to developers of new homes in a partnership with GHP manufacturer Bosch Thermotechnology.  New homes are a natural starting point for residential geothermal leases because of the lower installation costs and greater ease of design.

It seems to me that the group that has both the most to gain and the most power to affect change is GHP manufacturers.  If they were to include monitoring as a standard feature, they might be able to catalyze this market themselves.

To Davis’ knowledge, only Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF. Disclosure: I own this stock.) and  Modine Manufacturing Company (NYSE:MOD) currently offer any sort of energy monitoring.  Modine’s is part of their optional Orb controller.  Waterfurnace seems farthest along in this regard.  Sensors are standard on Waterfurnace’s most advanced (and efficient) models, the 7 Series.  According to the company, the thermostat retains 13 months of energy usage data.  I’m inquiring to determine if that includes heat production.

I suspect the extra costs of making such monitoring standard would be more than compensated by greater customer satisfaction and increasing sales.

Is this the start of a move by manufacturers towards better monitoring, or will change come from the bottom up?  If geothermal heat pump sales are going to soar, change will have to come from somewhere.

This article was first published on the author's blog, Green Stocks on February 28th.

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.

February 03, 2014

The Muscle Car Of Energy Efficiency

Tom Konrad CFA
Disclosure: I am long TSX:PRI / PENGF.

The poster child of energy efficiency has long been changing a light bulb.  First, it was swapping out an incandescent for a compact fluorescent, now the swap is to an LED.  Changing a light bulb is a small step that anyone can take, and it’s so cost effective that it can pay for itself in months if the bulb is used frequently.

This is a good example of household energy efficiency measures: a small action requiring a limited investment that anyone can take that pays back quickly.

But efficiency does not have to be small scale and simple.  Efficiency can also be an industrial scale engineering project.  At any scale, however, it tends to be profitable, often very profitable.

CHP and Waste Heat Recovery 

Combined Heat and Power (CHP) is just such an industrial-scale energy efficiency opportunity.  CHP, also called cogeneration, involves capturing the waste heat from a power plant and delivering it to an industrial or other customer.  A related technology, Waste Heat Recovery, involves capturing waste heat from an industrial process and either using it to generate power, or for some other process.

combined heat and power-DOE.png

Image source:

CHP has been around for over a century.  I once toured the 40MW cogeneration plant at the Miller-Coors brewery in Golden, Colorado, which has been operating since 1976.  The waste heat from the power plant is used as process heat for the brewery, and some even goes to heat the nearby Colorado School of Mines campus.  That tour happily ended in the tasting room, which is where I developed a taste for Blue Moon and got the phrase “CHP is the muscle car of energy efficiency” stuck in my head.

CHP accounts for approximately 8% of current installed US generating capacity, and President Obama is seeking to increase that by half again by 2020.

Primary Energy Recycling

I expect Primary Energy Recycling (TSX:PRI, OTC:PENGF) to be part of the coming expansion of the US CHP fleet.  Primary Energy operates four recycled energy projects and one CHP project at ArcelorMittal (NYSE:MT) and US Steel facilities in Northern Indiana.   These facilities collectively avoid 1,850,000 tons (or 24 kg per share) of CO2 per year  according to EPA data.  Although the company’s customers are concentrated in the steel industry, the facilities they serve are among the most efficient and profitable facilities worldwide, giving Primary Energy significant protection from a steel industry downturn.

The company has 30 years of experience operating and improving these and other CHP facilities.    It previously had as many as 14 such plants, but many were sold when much of the company’s debt came due in 2009 in the midst of the financial crisis.  This was only one of several challenges the company has faced in recent years.  Others were the changes in Canadian tax law which effectively removed the tax benefits of the income trust tax structure, and the recontracting of all but one of their five facilities.  The contract for the final facility (Cokenergy) has been extended several times as the details of a long term contract are worked out.

In an interview, Primary Energy’s CEO John Prunkl explained to me that there is virtually no risk that this contract will not be extended.  It is part of a three-way agreement between ArcelorMittal, SunCoke, and Primary Energy.  The first two finalized their contract in October, and that part of the deal represents 90% of the economic impact for ArcelorMittal.  Primary Energy’s piece is the other 10%.  Analysts John McIlveen at Jacob Securities Inc. and Jeremy Mersereau at National Bank are also both confident the contract will be renewed.

The contract is expected to be similar to the existing contract, but is likely to contain a variable component which will allow Primary Energy to profitably invest to improve the energy efficiency of the facility, as they have at their other facilities.  In 2012, they completed an upgrade at their Portside facility which improved its efficiency from 70% to 90%.  Primary Energy has already begun the upgrades to Cokenergy to improve its efficiency.


The recontacting of the Cokenergy facility will also allow the company to borrow against its cash flows and invest in expanding its business without issuing new equity. They are currently evaluating a number of opportunities, but Mr. Prunkl emphasized to me that they would be emphasizing care in project selection rather than speed of execution.  The types of opportunities they are looking for are with industrial customers, located within the customers’ facilities.  They welcome complex projects where they can efficiently convert hard-to work with fuels into power and heat for their customers.  They expect to be able to achieve a risk-adjusted internal rate of return in excess of 12%.

The Stock

Primary Energy Recycling’s stock trades in Toronto with the ticker PRI, and over the counter in the US as PENGF.  It pays a US$0.05 quarterly dividend, which amounts to 4.5% at the recent price of C$5.00 / US$4.49.  The company has low debt, with only $41 million compared to a $223 million market cap, which is why it should be able to grow both its business and the dividend without issuing new equity.  I expect the stock price will increase somewhat when the Cokenergy contract is finalized, and more when definitive plans for expanding the business are announced.  While a finalized contract is likely soon, plans for business expansion will take longer.  Mr. Punkl did not want to make any promises regarding timing.  He said, “We’re going to work hard to avoid negative surprises on our investment plans after the Coke Energy deal.  We’re more concerned with making sure the investment will be the right one for us. ”

One downside is that the stock is very illiquid, with an average volume of only 6 thousand shares traded daily, and the average has been closer to two thousand since the start of the year.  Hence, it should only be bought with limit orders or very small market orders to avoid paying over the odds.  I hope a few readers already got a chance to buy after reading my Ten Clean Energy Stocks for 2014.


Primary Energy Recycling is an independent power producer using the greenest form of fuel imaginable: waste heat.  It has a rock solid balance sheet, a healthy dividend, and four long term contracts with solid industrial partners.  With its fifth and final contract soon to be finalized, Primary Energy is on the cusp of several years of growth.

CEO John Prunkl says, “We’re pretty excited, but it does require patience.”  I think investors should be (patiently) excited, too.

This article was first published on the author's blog, Green Stocks on January 23rd.

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.

January 31, 2014

LSB Industries And Activist Fund Position Themselves For Board Election

Tom Konrad CFA
Disclosure: I am short LXU $30 puts – an effective long position.

LSB logoWhen four non-independent board members of a company resign shortly after that company receives a letter from an activist hedge fund seeking changes to the board, we can be forgiven for thinking that the fund is getting what it wants.  That’s not what seems to be happening at chemicals and climate control conglomerate  LSB Industries, Inc. (NYSE:LXU). Disclosure: I am short LXU $30 puts – an effective long position.

On December 30th, hedge fund Engine Capital, LP. published an open letter to LSB’s board, requesting the appointment of new, independent board members with industry expertise, and that several current directors resign to make room, and possibly to decrease the size of the board, which it considers large for a company this size.

If the company did not promptly achieve “significant progress,” the Engine Capital stated that it was “fully prepared  to nominate five directors by the January 23, 2014, deadline.”

Three, Not Five

That’s where the resignations come in.  In conjunction with the resignations, the board amended the company’s bylaws to “reduce the maximum number of members of the Board of Directors from 14 to 10 directors.”  Rather than opening up the vacated board seats for independent directors, the positions were eliminated.  Now, only three board seats will be up for election in 2014, down from five, and only two (down from four) will be available in 2015.

The percentage of board seats currently available fell only slightly, from 36% to 33%, due to the smaller board but that statistic does not reflect the true impact of the board’s moves.  While the resigning directors were non-independent as the SEC defines the term, few have the qualities which would lead us to expect that they will act independently of the Golsen family, which includes Jack Golsen, the company’s Chairman and CEO, and Barry Golsen, the company’s President, COO, and a continuing board member.  Jack Golsen’s current board term expires in 2016, while Barry Golsen’s expires in 2015.  Of the other continuing board members, most are over 60 years old, and most have served on the board with the Golsens for over 20 years, with many having served since 1969 or 1971.

The fact remains that the board will be able to claim that if the remaining three directors are nominated for re-election, they will be “independent” under SEC rules.  They are Mr. Robert Henry, Donald W. Munson, and Ronald V. Perry.  Mr Henry was appointed to the Board in 2013.  He is the President and CEO of Oklahoma City University, and fills a vacancy left by the resignation of a previous director (now deceased) due to ill health.  (Note: A previous version of this story incorrectly identified the previous director, Bernard Ille, as the probable nominee.)  Mr. Perry is a 63 year old travel executive, and is also a relatively fresh face on the board, having served only two terms starting in 2007.

Mr. Munson is 81 years old, and first become a director in 1997.  Munson was singled out in Engine Capital’s letter as the only director with relevant climate-control industry experience, although even this is not recent.  He was an executive at Lennox (NYSE:LII) and Trane, a division of Ingersoll-Rand (NYSE:IR), but he retired 22 years ago.

While it seems unlikely that that these three directors bring significant value or independent thinking to LSB’s board, they still qualify as “independent” under New York Stock Exchange rules.  This is likely to make them somewhat harder to defeat in proxy voting than the resigning directors: Steven Golsen and Tony Shelby are both employees of the company, and so clearly not independent even by NYSE rules.  Steven Golsen is the COO of the Company’s climate control business, while Mr. Shelby is the company’s CFO.  Not only are they not independent, but, as employees, the board has access to their knowledge and expertise whenever it chooses to ask for it.

No Real Change 

One of Engine Capital’s critiques of management was over-promising and under-delivering when it comes to fixing operational problems.  It gave the example of LSB’s Pryor facility,  and quoted management saying:

“We expect to resume production [of the Pryor facility] during early in March. It takes a few days for warming up the catalyst when we start production,” and “…but as far as Pryor is concerned, they are all hooked up and ready to go, they are warming up the catalyst now.” Despite these comments, the Pryor facility was not started up until late April. In October 2013, the Pryor facility again was taken offline. The Company disclosed the issue only the following month during the 2013 Q3 earning call on November 6, 2013. During that call, management stated, “We expect to have the facility back in operation during November.” On December 3, 2013, management issued a press release stating that the plant was now anticipated to start up in December. It is now December 30, 2013, and shareholders have still not heard about the Pryor facility resuming production.

In the company’s response to the letter, the company noted that it had resumed production at Pryor, but that resumption turned out to be premature, and the unit was taken down again on January 8th.

I made two attempts to contact Engine Capital’s managing partner, Arnaud Ajdler, for comment, but have not yet received a response, possibly because of the Martin Luther King holiday.

LSB's Response

Shortly after the above was written, LSB published an open letter to shareholders countering the arguments of Engine Capital’s December 30th letter.  It argued two main points:

  1. The board had already considered the proposals outlined by Engine Capital with its advisers, and found them less likely to benefit shareholders than the plan in place.  
  2. The 19% ownership stake (including convertible preferred stock) of the board and management closely aligned their interests with shareholders.

Few shareholders have the resources or expertise to evaluate which plan is more likely to produce more value for shareholders, and planning company strategy is the board’s job.  With three board positions likely to be contested at LSB’s annual general meeting, the relevant question for share holders is: Which candidates are most able to set company strategy and oversee management to protect our interests?

Board or Just Bored?

The current directors do not seem to have the qualities which would lead them to act independently.  The board Chairman and company CEO are the same person, Jack Golsen.  He has served in these capacities since he founded the company in 1969.  The combination of Board Chair and CEO roles is always questionable, as the role of the board is to oversee and provide strategic guidance to management, led by the CEO.  It takes incredible objectivity to oversee oneself effectively.

When a Chairman/CEO is also a company’s founder and has led the firm for 45 years, I find it hard to see how he could muster this objectivity.   The fact that other members of his family also hold so many leadership roles in the company would make the task of emotional separation even more difficult.

A strong and independent board can potentially provide objectivity if it is lacking in a founder/Chairman/CEO.  Unfortunately this does not seem to describe the current board or the three members up for election this year.  They are Ronald V. Perry, Robert Henry, and Donald W. Munson.  Mr. Perry is 63 and the head of a travel firm.  Mr. Munson is an 81 year old retired executive from Lennox, and Mr. Henry is the 60 year old president and CEO of Oklahoma City University (OCU).

Mr. Henry was appointed to the board in November 14th, 2013 to fill a vacancy left by the resignation due to ill health of an 86 year old former director who had served since 1971.

From Mr. Henry’s biography, he seems to be a leading member of Oklahoma City society, and he likely moves in the same circles as the Golsens, who are donors to OCU.  As a former Attorney General of Oklahoma and US Appeals court judge, he seems likely to be able to exercise independent judgement despite any personal relationship with the Golsens and their charitable donations to his employer.   Nevertheless, his appointment begs the question as to why the board did not appoint someone who had both industry expertise and independence?

Given the timing of the appointment, it seems likely that Engine Capital was already in discussions with LSB at the time.  The fund highlighted the lack of board industry expertise in its letter.

With this track record, even after the resignation of four non-independent directors, it’s difficult to imagine board providing useful perspective or objective oversight of management.

Alignment of Interests

Lack expertise or objective oversight might not be a problem if the Golsen family’s 19% ownership stake aligned their interests with shareholders’, as the company’s letter claims.  But the family also has an interest in their salaries, which totaled $2.7 million for Jack, Barry, and Steven Golsen in 2012.

More importantly, the incentives for owners of preferred stock and common stock are not the same.  All of the company’s preferred stock is owned or controlled by members of the Golsen family, which, unlike the common stock, pays a dividend.  As part of the same SEC filing announcing the board resignations, the company declared $300,000 in preferred dividends payable to the Golsen family.  Common shareholders have never received a dividend.

The fact that preferred stock is entitled to dividends before common stock (that’s what makes it “preferred”) means that owners of preferred stock have more protection from poor company performance.  They also have a Preferred Share Rights Plan which could allow the Golsen family to acquire a large number of common shares at no cost in the event of a takeover attempt.  This Plan seems only to protect preferred rights holders from loss of control, not to align their interests with common shareholders.


With the resignation of four non-independent directors and reduction in the size of LSB’s board, the company has managed to appear to be making a step towards reform while making it harder for the activist fund to gain influence.  Gaining influence in a tightly controlled family firm is never easy.  It looks like the task  just got significantly harder for Engine Capital in its quest to unlock shareholder value at LSB.

LSB’s board claims that it has evaluated Engine Capital’s suggestions and found them wanting.  It also claims that its members are independent of the Golsen family, and that the family’s interests are aligned with common shareholders.

As outside shareholders, we do not have the information, and likely lack the expertise to set the firm’s strategy.  That is why we hire the board to oversee management and provide or hire expertise to set strategy and oversee management.  The board, as it currently stands, does not seem to have the independence to go against the wishes of the Golsen family, or the expertise to know when it should do so.

I would feel more comfortable that the board was making the right decisions if its members seemed independent and had relevant expertise. I’m hoping Engine Capital’s nominees will be better on both counts.

This article was first published in two parts on the author's blog, Green Stocks on January 21st.

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.

January 26, 2014

Are Air Source Heat Pumps A Threat To Geothermal Heat Pump Suppliers?

Tom Konrad CFA

heat exchangers.jpg Last year, geothermal heat pump (GHP) manufacturers introduced new heat pumps with break-through efficiency based on variable-speed compressor technology.  These manufacturers include Waterfurnace Renewable Energy  (TSX:WFI, OTC:WFIFF) and ClimateMaster, a division of LSB Industries (NYSE:LXU).

Air Source and Ground Source

Variable speed compressor technology was not restricted to geothermal heat pumps (also known as ground source heat pumps or geoexchange): It had first found its way into what are often considered ground source’s poor cousins: air source heat pumps (ASHP).

Both types of heat pumps use a refrigeration cycle to draw heat from the outside in winter to heat a building, and pull heat from the inside to cool it in summer.  GHPs use large loops of buried tubing to exchange heat with the ground, while ASHPs use an above-ground fan and heat exchanger assembly similar to the evaporator on a traditional whole house air conditioner (see photo.)

Heating performance of a variable speed air-source heat pump (in this case Mitsubishi hyper-heat) compared to traditional models. Source: Mitsubishi

Before the advent of variable speed compressor technology, air source heat pumps were only suitable in mild climates because heating performance fell off rapidly at temperatures below 40°F (see chart), while the near constant temperature of the earth allowed GHPs to operate efficiently in any climate.  Now, the most efficient ASHP models only begin to lose significant heating efficiency at 25°F and still maintain significant heating capacity at 0°F, a change which has made them practical in most of the United States.

With variable speed technology, these units are now suitable for heating climates where the temperature occasionally falls below 0°F, although they may require some form of back up heat.  The improved technology has meanwhile made the efficiency of the best air source heat pumps equivalent to that of many GHPs, especially when used in less extreme climates.   Although even the best ASHPs are still much less efficient than the best GHPs, the cost savings from dispensing with the ground loop and (in some cases) air ducts mean that ASHPs are an economic option in many cases where GHPs or conventional heating were previously the only viable options.

Air Source Heat Pumps In Practice

In a recent article, Marc Rosenbaum, director of engineering at South Mountain Company on Martha’s Vineyard in Massachusetts, says that nearly every building he has worked on for the last several years has used ASHPs almost exclusively.

There are caveats, of course.  Rosenbaum works exclusively on very high performance, super-insulated buildings.  He also teaches a course on designing net-zero energy buildings.  And even with super-insulation, he uses other heat sources in larger buildings.

I’m in the process of my own retrofit of a 1930 farmhouse which I bought two years ago.   I’ve spray-foamed the basement and attic as well as improved the overall building envelope with air sealing, and expect to continue to make envelope improvements going forward.  I was able to have four Mitsubishi ASHPs installed in the most important rooms without having to give up interior space for ducting.   This cost me about $12,000 after utility and tax rebates and is saving me about $1,000 to $2,000 in annual energy costs.  A comparable GHP system would have saved me $2,000 to $3,000 annually, but would have cost about $30,000 after utility and tax rebates.  The extra $1,000 annual savings did not seem to me to justify the extra $20,000 in cost, given that I expect to sell in less than ten years, and both systems significantly boosted the home’s value by adding air conditioning.

Alternative Energy Specialist Scott Lankhorst of Advanced Radiant Design in Stone Ridge, New York, says that he does not see ASHPs and GHPs as direct competitors.  GHPs are “typically only installed on homes of a minimum square footage, with multiple rooms that need direct heat delivery.”  This agrees with Rosenbaum’s finding that “Compact superinsulated homes in [many] climates… can often be heated with a single zone unit… in the main space. As long as the doors to other rooms remain open, the temperatures in those rooms will usually be within 2°F of the [main space].”

Air Source Heat Pump Suppliers 

Total Connect Comfort app
The Honeywell smartphone app for controlling my four Mitsubishi ASHPs and oil-fired boiler.

Lankhorst says that the most efficient air source units are from Mitsubishi (OTC:MSBHY) and Fujitsu .  The latter are easier to install, but the Mitsubishi systems can work with a Honeywell (NYSE:HON) wireless programmable thermostat.  This can be accessed via the web or mobile devices, which is useful in a building with multiple units.  After discovering the limited programability of the factory controller for my Mitsubishi units, I installed the Honeywell thermostats in addition to a thermostat for my boiler which I now control them all through the same interface.


While variable speed air source heat pumps can be competitive with geothermal heat pumps in retrofit situations and smaller, better insulated buildings and less extreme climates, GHPs remain the most efficient way to heat and cool a building.

If super-insulated, small buildings ever become the standard way to build a home, geothermal heat pump manufacturers such as Waterfurnace and LSB may have something to fear from air source heat pumps.  Fortunately for GHP manufacturers, but unfortunately for the rest of us, that day is still a long way off.


This article was first published on the author's Green Stocks blog on on January 14th.

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.

December 28, 2013

The Pros Pick Three Green IT Stocks For 2014

Tom Konrad CFA

bigstock-green 2014.jpg
Green 2014 image via BigStock
Being green is not all about wind turbines and solar panels.  In fact, it’s usually greener to be smarter about using what we have than to replace it with something new, no matter how green.

My panel of professional green money managers understands this.  When I asked them each for their top three green stock picks for 2014, there were as many picks focused on smarter resource use as there were solar stocks.

I recently gave you their three green income stocks here, and I’ll write about their three solar picks in a future article.  Here are three companies that help us use resources more efficiently by applying information technology to better target the resources we have already.

Garvin Jabusch of Green Alpha Advisors

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Shelton Green Alpha  Fund (NEXTX), and the Sierra Club Green Alpha Portfolio.   His “smart” pick for 2014 is Digi International (NASD:DGII).

He says,

Digi is an interesting firm in the machine-to-machine (M2M) Internet space, and, as a smaller firm at only $300 million in market cap, I feel like it’s a little below the mainstream radar, and has yet to have its growth prospects (including takeover potential) be fully appreciated. The growth potential of M2M communications itself is appreciated though, with estimates that up to seven billion devices will be connected to the Internet by the end of next year, and that this “Internet of things” has realistic potential to transform most economic sectors by adding real-time efficiencies to almost any operation. In this sense, that we as a society can thus squeeze ever more economic output out of fewer economic inputs, M2M technology is also a key, innovative, driver of sustainability. M2M is beginning to bring efficiency gains to dozens of applications including connected cars, smart energy metering, building automation and smart cities, microgrid infrastructure, energy transmission efficiency, security, traffic management, inventory management, food production and many more. Looking forward, additional applications of M2M technology may encompass nearly every aspect of a modern economy. That macroeconomic picture is compelling.

Almost limitless applications means great growth potential. We’ve been aware of the potential of M2M for a while now, but this is the first year we’ve become confident enough to start expecting more robust growth as the underlying technology becomes more mainstream and ultimately indispensable. The two main drivers are the rise of cloud computing and the gains in both coverage and speed of the mobile internet, both cell network and satellite enabled.

On the value side, DGII is trading at slightly under three times cash and at (or just below) its book value. With no debt and EPS positive and guided to grow 61% in 2014 and 36% in 2015, DGII looks like a good intersection of growth and value.

Rafael Coven of The Cleantech Group

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)  Coven picked two companies that use information technology to make our economy smarter and more efficient, but he did not have much to say about them.  HE told me that he had to be careful about what he says in the lead up to rebalancing the Cleantech Index on December 24th.

His picks are Trimble Navigation Ltd. (NASD:TRMB) and MiX Telematics Limited (NYSE:MIXT and JSE:MIX).

MiX describes itself as “a leading global provider of fleet and mobile asset management solutions delivered as software as a service to customers in 112 countries. The company’s products and services provide enterprise fleets, small fleets and consumers with solutions for safety, efficiency and security.”  The company is green in that the information collected from vehicles helps drivers reduce fuel use, as well as increasing safety.  While it’s obviously green to save fuel, avoiding traffic accidents may be even greener, since the damage requires resources which we’d rather use elsewhere.

Trimble describes itself as “a leading provider of advanced location-based solutions that maximize productivity and enhance profitability. The Company integrates its positioning expertise in GPS, laser, optical and inertial technologies with application software, wireless communications, and services to provide complete commercial solutions.” Trimble serves agriculture, engineering and construction, transportation, and wireless communication industries.  By using location based technologies, all of these industries (and many others) can deliver material more precisely, reducing both waste and mistakes.  Trimble just announced the acquisition of a private agricultural information firm C3, which will allow the company to integrate more detailed and precise soil data into the solutions it provides to farmers and related industries.


Of all the picks I got from my panel, these three are the ones I’m most interested in adding to my own portfolio.  Reducing waste has long been a central theme of my own green stock portfolios, and these companies seem to be trading at fairly reasonable multiples of earnings.

Don’t be surprised if one or two appear in my own annual list of ten picks for 2014.

This article was first published on the author's blog, Green Stocks on December 18th.

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.

November 21, 2013

Hannon Armstrong Yeild On Track For 7% in Q4 With More To Come

Tom Konrad CFA

hannon armstrong logo

After the close on Thursday, November 7th, Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) declared third quarter earnings.  Results were in-line with my, and other analysts’ expectations: Earnings per share (EPS) of 14 cents, and a declared dividend of 14 cents as well. This more than doubled the second quarter’s 7 cent EPS and 6 cent dividend. Note: I have a large long position in HASI.

HASI remains on track to reach managements’ dividend target of “over 7% of the $12.50 IPO price” (22 cents a quarter,) and provided some additional guidance for future dividends.  Brendon Herron, HASI’s Chief Financial Officer said that investors can expect the dividend to grow between 13% and 15% for the next couple of years, based on the 22 cent fourth quarter target.

Putting some numbers to the dividend guidance, at Friday’s closing price of $11.69, a 22 cent fourth quarter dividend would equate to a 7.5% annualized yield.  13% to 15% annual dividend growth would provide an annualized yield of  8.5% to 8.6% in Q4 2014, and 9.6% to 10% in 2015, assuming the share price does not increase.

Why The Decline?

Despite delivering on the company’s promises, the stock fell 5% from its Thursday $12.30 close, returning to levels it had last seen in mid-October, as it recovered from early-October lows.  I attribute those lows to investor worries about the federal government shut-down.  (Incidentally, I was buying in early October.  While much of HASI’s business is with the federal government, federal cost cutting is more likely to be a driver of HASI’s money-saving investments than a drag in the long term.  In the short term, federal projects may be delayed, but the company can make up the difference from other sectors in its vast pipeline.)

The most likely reason for the decline was selling by IPO investors.  Approximately 2 million, or 13% of outstanding shares, became eligible for sale in October.  Many of these IPO investors have doubtless been disappointed that the company has been consistently trading below the $12.50 IPO price, and were hoping the fourth quarter earnings announcement would provide an exit.

With an average share volume of less than 100,000 shares, it would not take much selling by short term IPO investors to drag the stock price down for several weeks.  In contrast. the long term income investors who are likely to be attracted by HASI’s future yield tend to move more slowly.  I expect they will eventually bring the price back up as they recognize the value of HASI’s current 4.8% annualized yield and forward 7.5%+ yield, but we can’t expect this to happen overnight.

Note that company insiders are still restricted from selling.  However, I don’t expect them to sell many shares when they are released from lock up.  According to SEC filings, company officers (most notably the CEO, Jeffery Eckel) have purchased over 50,000 shares since the IPO at prices between $10.99 and $11.76.  I would not be surprised if they are buying today.


Hannon Armstrong’s fall on Friday was most likely due to selling by IPO investors who were released from lock-up restrictions in mid-October.  If only a fraction of these investors try to sell their shares over the next few weeks, it could easily drive the stock down further given HASI’s low trading volume.

Long term investors and traders willing to hold a position for at least six months should take note.  Given the extremely reliable nature of its investment income, buying Hannon Armstrong at any price below $12 is not only likely to produce some capital gains as they reach their full dividend, but the 14 cent thirdquarter dividend should provide a floor for the stock price.  At $12, its annual yield is  4.7%, which is already in line with comparable US-listed stocks.  If selling by short term IPO investors is driving the stock down, it is a buying opportunity, not a reason to panic.

This article was first published on the author's blog, Green Stocks on November 15th.

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.

August 22, 2013

Lime Energy's Long Dark Year Of The Soul

Tom Konrad

DarkNight[1].jpg The last year has been hard on Lime Energy (NASD:LIME Disclosure: I own this stock.)  The company discovered problems with its internal reporting over a year ago, and the effort to restate the books and establish proper controls took much longer than anyone expected, in large part because the internal investigation uncovered additional problems as it proceeded.

While the company was in danger of delisting, creditors were reluctant to provide funding, and this led the company to sell its two most capital intensive businesses: its asset development business, and its ESCO business.  The ESCO business required backing from surety partners with strong balance sheets willing to guarantee Lime’s work.  The uncertainty around possible delisiting caused these partners to draw back, preventing Lime from executing on contracts it had won, and leading Lime to sell that business to PowerSecure (NASD:POWR).

Lime’s asset development business also required significant capital which was no longer available.  Although Lime was able to identify opportunities, it was not able to execute on these opportunities without outside capital, and so Lime is winding this business down.

What is left is the company’s utility business, which provides turnkey energy efficiency programs to electric utilities, helping them reach small business customers.  Such customers are often difficult for the utilities to reach, but many regulators nevertheless require that utilities offer energy efficiency programs to these customers.

Lime is the leader in this business, as measured by its success in exceeding contracted goals for energy savings.  They recently won a national energy efficiency award from the Alliance to Save Energy (one of seven such awards for excellence in saving energy to companies and individuals.)

While Lime’s business is much smaller after a year of being starved of capital, that time forced management to take hard decisions.  Those decision have created  a much slimmed-down company focused on a capital-efficient niche where it has a true competitive advantage.  We can also have a lot more confidence in Lime’s financial statements, now that much stronger controls are in place to ensure proper reporting.

Lime logoLiquidity

Unfortunately, Lime is not yet quite ready to enter the heaven of profitability without one more trial.

Lime may need to raise more capital in another dilutive offering before it can fund its operations internally. While Lime’s utility business has had significant  success in terms of recognition and acquiring new customers, there is a lag between the initiation of a new utility program and when it begins to generate cash for the company.

Lime used up $1.7 million of its liquidity in the first quarter.  $1.3 million of which was for expenses related to the earnings restatements, but even so, the company was slowly eating through cash.   $281 thousand was used in operations, and $47 thousand was paid out as interest.

This left $2.4 million in cash at the end of the first quarter.   Significant accounting costs will have continued through the second quarter, but these will decline significantly now that the statements have been filed.  Nevertheless, these costs are likely to use more than half of Lime’s remaining cash.

Will the utility business move to profitability quickly enough to avoid an additional fund raise.  Management says “there is a chance we will achieve profitability on a consolidated basis” by the end of the year.  There may be enough cash to get there, but the cushion is worryingly thin.


If Lime’s return to compliance with Nasdaq listing requirements allow it to fund its working capital requirements with bank debt, or cash flow from its business grows quickly, then the company should be able to achieve profitability without further diluting shareholders.  The very real possibility that this won’t happen is why the stock fell from around $0.90 at the end of July to the low 60 cent range today.

If Lime is forced to raise funds by selling stock or convertible notes, expect the price to fall further.  On the other hand, any sign that expenses are falling more quickly than anticipated, or that revenue is increasing should lead to a rally.

I sold a little stock on the way down, but I’m currently holding the bulk of my shares, awaiting more news.  We may get a hint tonight in management’s conference call to discuss first quarter results.

Lime Energy’s business  is as slim as an ascetic after a year of fasting.  The focus gained should serve the company well in the future, but the lack of fat leaves very little room for error in the coming months.


This article was first published on the author's blog, Green Stocks on August 12th.

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.

August 19, 2013

Ameresco's CEO Expects Return To Growth In Q3

Tom Konrad CFA

Ameresco logoWith earnings announcements coming fast and thick over the last two weeks, it has been all I can do to keep up, let alone go into detail about the companies I usually follow, as I did with Maxwell Technologies (NASD:MXWL) earlier this week. (Note: I am currently long Ameresco and Short Maxwell.)

Rather than remain completely silent, I’m going to attempt to focus on the main take-aways I’ve gleaned from the filings and earnings calls, starting with Ameresco’s (NASD:AMRC) potentially confusing earnings.

Another “Miss”

Ameresco again missed First Call analysts’ average earnings estimates for the fourth quarter in a row, with a loss of 4 cents a share compared to the one cent gain predicted by the First Call consensus.   A 23% year-on-year decline in revenues also sent traders running for the hills.

The stock promptly plunged $1 to open at $8 when the market opened on August 8th.

I had a bottom-fishing order in to purchase at $7.75, which I revised to $8.10 later that morning in the hope of scooping up some cheap shares in the panic.  Neither executed, because the market quickly caught on to what I’d seen: the headline numbers were hiding a change in management’s outlook for the future.


As in previous quarters, Ameresco’s CEO, George Sakellaris, had attributed the weak results to slow conversion of efficiency projects, due to “a rather protracted disruption in the federal market” but with a big difference this time.

In previous conference calls, Sakellaris had not been willing to provide firm guidance about when he saw conditions improving.  This time, he said, “ We believe that several awarded projects appear to be nearing the contracted stage.”  He provided revenue guidance of $620 to $640 million for 2013, with income of $18 to $21 million, compared to $631 million in revenue and $18 million in income in 2012 (40 cents a share.)

Although revenue and earnings are likely to be flat for 2013, to achieve Sakellaris’ guidance, revenue for the second half of 2013 will have to be at least $384 million in revenue and $15 million in earnings, which amounts  to 17% revenue growth and 25% earnings growth over the second half of 2012.

The Future

Rapid second-half growth is also likely to continue into next year, since Ameresco’s pipeline of potential Energy Performance Contracts has been growing even as its sales have slowed.  The backlog was up 10% in Q2 year on year, driven by a 22% increase in awarded contracts.

Due to the compelling economics of energy efficiency, the contracts typically result in savings from day one for the customer, and they are often driven by a customer’s need to replace aging equipment.  Such projects cannot be delayed forever, so Ameresco has all the pieces in place to return to strong growth in the third quarter, and continue producing growth for a long time to come.

Disclosure: Long AMRC, Short MXWL.

This article first appeared on the author's Forbes blog on August 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.

July 08, 2013

The Sustainable Infrastructure Income Trust

Tom Konrad CFA

Jeffrey Eckel

Jeffrey Eckel has an investor relations problem.

No, there has not been any scandal involving fudging the books or sweatshop labor.  Rather, most investors simply don’t seem to “get” his company.

His company recently went public as a REIT, or Real Estate Investment Trust, and the traditional REIT investor likes the familiar.  They invest for income, and for many, a track record of past income and dividends is a must.  While Eckel’s company manages $1.8 billion of securitized energy efficient and sustainable infrastructure assets, it has not been able to invest in such assets itself until the funds from its IPO made that possible.

Dividend Policy
  • Commence dividend in Q2
  • Grow dividend as capital deployed
  • Distribute substantially all net income
  • Ramped yield of 7%
  • Yield targeted to exceed MLPs and infrastructure funds

Eckel’s firm is now in the process of investing those IPO proceeds, and he expects the average investment will yield near 5.5%.  Using a 2 to 1 leverage ratio, he plans to ramp that up to 7% of the IPO price ($12.50.)  This is well above the yields of most other REITs, but given that there are no other REITs which invest in the same asset class, traditionally conservative REIT investors don’t seem to know what to make of it.  Eckel’s predicted yield translates to annual earnings (almost all of which will be distributed to shareholders) of around 88 cents a share.  The two analysts who have initiated coverage so far are predicting 2014 earnings of $0.84 and $1.08, which makes sense given that Eckel is probably being a bit conservative about his earnings projections in order not to disappoint Wall Street.

One other, somewhat less serious, problem Eckel has is the name of his firm.

If you have never heard of “The Sustainable Infrastructure Income Trust” in this article’s headline, that’s because the company does not (yet) exist.  I recently sat down with Mr. Eckel at the Renewable Energy Finance Forum (REFF) Wall Street, and suggested the name to him.  His company is called Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI).  I think the re-branding might make it easier to convey exactly what his firm does.

Many successful public companies have names that don’t describe their businesses.  Proctor and Gamble (NYSE:PG) doesn’t monitor exams at casinos, and Honeywell (NYSE:HON) doesn’t raise bees.  But for every Honeywell or P&G,  there’s a General Electric (NYSE:GE) and a Waste Management (NYSE:WM).

I think small, environmentally oriented, investors might pay a little more for HASI than professional income investors.  The professionals care a lot about the financial sustainability of the dividend, but could not care less about the environmental aspects of the business of funding energy efficiency and other sustainable investments.  Retail investors are more likely to care about both.  It might be easier to attract their attention if  Hannon Armstrong’s name were more descriptive of what it does.  Hannon Armstrong produces sustainable income from sustainable infrastructure investments; the name should reflect that.  Hence, “The Sustainable Infrastructure Income Trust.”

Eckel seemed to take my idea seriously, so there may be some re-branding in HASI’s future.  He got an extra nudge  less than an hour later: The moderator of a panel he was speaking on at REFF Wall Street choked while trying to say “Hannon Armstrong” in Eckel’s introduction.   No doubt it was a coincidence, but it spurred me to write this article.

Pounds of CO2 Equivalent saved per dollar invested. Cogeneration includes fuel cost.
Source: Hannon Armstrong with data from EIA, CME Group, Company filings, HannieMae.


Rebranding or no, real dividends will get the attention of traditional REIT investors even if HASI’s environmental credentials do not.  HASI will announce second quarter results and its first dividend on August 8th.  That will give investors a taste, and I expect the stock price to “ramp up” from there as successive dividends are announced.  My guess is that we’ll see the full dividend by Q1 2014.

I like investing in companies that are having difficulty communicating their stories to Wall Street.  Eventually, the hard earnings numbers will reflect the company’s reality.  Whenever I have a chance to buy a stock before I have to pay full price, I’m as happy as a fashionista who finds a pair of Manolo Blahniks in the clearance bin at Bergdorf.

I don’t know when the sale on Hannon Armstrong Sustainable Infrastructure Capital will end, but it could be as soon as the first dividend announcement on August 8th.

Disclosure: Long HASI, WM.

This article was first published on the author's Forbes blog on June 28th.

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 16, 2013

LEDs: A better light bulb. Again.

by Marc Gunther

So you remember CFLs, right? The curlicue bulbs? The time they took to go on? The harsh light?

imagesDespite their drawbacks, compact fluorescents have sold fairly well in the US. They save customers money. Utilities promoted and subsidized CFLs, particularly in California. Walmart (NYSE:WMT) pledged to sell 100 million of them. Time magazine put one on the cover. By 2012, CFLs represented 27 percent of the bulbs installed in the over 3 billion medium screw-based sockets in the United States, according to a Navigant study quoted by NRDC. Other researchers put the number lower, about 20 percent, says IMS Research.

The trouble is, no one likes CFLs very much. Some CFLs took three minutes to turn on, for goodness sake! Consumers were dissatisfied with the quality of the light, and rightfully so, as even advocates of CFLs acknowledged.

Which is why Cree, Inc. (NASD:CREE), a leading manufacturer of LED bulbs, is taking direct aim at CFLs, as well as old-fashioned incandescents, as it tries to win mainstream America over to LEDs–which, by most accounts, are a superior alternative to CFLs and incandescents.

Can CREE and other leading manufacturers of LEDS—-they include Osram Sylvania, Phillips Lumileds (NYSE:PHG), and General Electric(NYSE:GE)–persuade Americans to change their lightbulbs, yet again? The stakes are high,  for consumers and for the environment. 

Recently, I asked Mike Watson, Cree’s vice president of marketing, about the company’s approach.

He told me that Cree will try to sell LEDS by telling people that they last longer and cost less than CFLs and incandescents, without requiring any sacrifice when it comes to performance.

“The whole point of the CREE LED bulb is to mimic incandescent light as much as we can,” Watson told me.

“CFL presented consumers with a lot of frustrations and tradeoffs,” he said. “As energy efficient as they may be, you paid for it by not having the light you want.”

As for incandescents, he said, they are like throwing money out the window. It’s time to bury that technology, as this Cree TV commercial suggests.

One thing that Cree will not do is focus on the environmental benefits of its bulbs.

“We don’t market ourselves as a green company, even though we really are,” he said. “The term ‘green’ to a consumer is as much political as anything else.”

“The economics come first,” he said.

He’s probably smart to shy away from green labels. As National Geographic reported recently, when academics at the Wharton School and Duke surveyed consumers about energy efficiency, they found that conservatives turned away from the bulbs when they were labeled with a “protect the environment” sticker. Crazy.

The fact is, LEDs are the environmentally-preferable choice. The U.S. Department of Energy’s Pacific Northwest National Laboratory (PNNL) studied LEDs, CFLs and incandescents, looking at their  ”total environmental impact, including the energy and natural resources needed to manufacture, transport, operate and dispose of light bulbs.” Its report concluded:

Today’s light-emitting diode light bulbs have a slight environmental edge over compact fluorescent lamps. And that gap is expected to grow significantly as technology and manufacturing methods improve in the next five years.

But while LEDS make economic and environmental sense, persuading consumers to try something new and different–again–won’t be easy. Sticker shock remains an issue. But a Cree 9.5-Watt dimmable LED bulb, which is the equivalent of a 60-watt incandescent, retails for $12.97 at Home Depot. A 6-pack of GE 60-watt incandescent bulbs sells for $3.97.

Of course, they are simply not equivalent products. LED bulbs use 80% or more less energy and last 25 times longer than incandescents, as CREE’s marketing message says:

Cree Burn Out OOH


Most experts believe that CREE and the other leading LED makers will eventually be able to overcome those obstacles and drive sales. Prices of the bulbs are falling–some sell for less than $10–and the light quality is fine. CREE sent me a few sample bulbs a few weeks ago and I’m satisfied, so far. They turn on instantly, and they are dimmable. Consumer Reports said recently that its initial tests of Cree and Phillips bulbs priced between $13 and $15 showed promising results.

Earlier this year, Gerard Wynn, a market analyst for Reuters, wrote:

The LED lighting industry is set to dominate the global market more than a century after its discovery, benefitting from a widespread ban of conventional incandescent bulbs and as the market share of competing green replacements fade.

Let’s hope he’s right.


ABOUT THE AUTHOR: Marc Gunther is editor at large of Guardian Sustainable Business US and a contributor at FORTUNE magazine and a blogger at Marc is the author or co-author of four books, including Faith and Fortune: How Compassionate Capitalism is Transforming American Business (Crown 2004).  His newest book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

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 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 02, 2013

A Clean Energy REIT: Hannon Armstrong Sustainable Infrastructure

Tom Konrad CFA

hannon armstrong logo On April 18th, Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) IPOed on the New York Stock Exchange.  HASI is one of only two publicly traded Real Estate Investment Trusts (REITs) dedicated to sustainable infrastructure.   The other such sustainable REIT is Power REIT (NYSE:PW), which I have written about extensively.  PW is both illiquid and involved in significant litigation, two factors which may put off the conservative investors who gravitate towards REITs. 
Salisbury Solar Farm
In December, Power REIT purchased the land under the 5.7MW True North Solar Farm in Salisbury, MA. Photo Source: Power REIT

HASI, on the other hand, has market capitalization approximately ten times larger than PW, and traded over five million shares on its first day. That is about as many shares as PW trades in nine months.  HASI’s liquidity will fall as its shares enter the hands of long term investors, but the company will remain far more liquid than PW.

About Hannon Armstrong

Hannon Armstong has long been a leader in financing sustainable energy projects.  The company is a fixture at clean energy financing events, and its partners have impressed me with their level of knowledge in our conversations at such events.

By going public and converting to a REIT structure, HASI is tapping a pool of relatively low-cost capital from small investors.  Many small US investors have previously had few opportunities to invest in sustainable infrastructure.  The most comparable investments I know are solar-backed loans from Solar Mosaic, and PW.  Those few of Mosaic’s  loans available to small investors sell out quickly, and are currently limited to investors in California and New York State.  Further, these loans cannot be purchased within a retirement plan such as a self-directed IRA.  HASI will have none of these problems; I have purchased small amounts of HASI in IRAs and a brokerage Health Savings Account which I manage.  REITs are particularly suited as investments in such tax-sheltered accounts because their distributions are not “qualified dividends” and are taxed as income.  The interest on Mosaic loans (4.5% on recent offerings) is also taxed as income, but cannot be purchased in a tax-sheltered account.

Hannon Armstrong’s business is arranging finance for sustainable energy projects.  Jeffrey Eckel, the company’s  President and  CEO defines these as projects of sufficient quality which reduce carbon emissions.  Such projects include the installation of sustainable HVAC equipment as well as (potentially) clean energy generation such as solar and wind farms.  Such projects are not the typical investment which you would normally expect to find in a REIT, but there has been some ambiguity regarding how photovoltaic solar and similar infrastructure should be treated.

Private Letter Ruling

In an interview, Eckel told me that the IRS issued a private letter ruling detailing exactly what types of such infrastructure HASI will be able to invest in and maintain REIT status in July 2012.   The issue of what sorts of renewable energy projects are suitable for inclusion in a REIT is of great interest among developers and financiers over the last few months.   Joshua Sturtevant, an Associate with solar aggregator, financier, and developer Distributed Sun of Washington, DC, tells me that “based on its historic approach to issuing private letter rulings, I am skeptical that the IRS will go far enough in any of the new rulings to enable broad-based direct investment in development-stage solar projects. Some of the existing rulings could conceivably benefit certain individuals who are making requests to address specific boutique structures, but it is not likely that anything that has been issued will lead to the sea change that many in the industry are hoping for. ”

In the event, Sturtevant may have been too pessimistic.  Not only did HASI request and receive their ruling before many industry observers were even talking about the possibility, but it seems to be quite comprehensive.  Eckel has not been forthcoming about its contents: He told me, “
We’re keeping the ‘private’ in ‘private letter ruling.’” However, he did say that, while the ruling is very specific to what Hannon Armstrong does, it allows the company to continue its existing business investing in solar, wind, geothermal, and energy efficiency infrastructure as a REIT.

All that means that solar, wind, and geothermal can be suitable REIT assets.  Since Hannon Armstrong does not have to significantly change the way it structures deals and manages its portfolio, other REITs may also be able to make similar investments without a prohibitive number of convolutions.  More details of the exact requirements will emerge as more PLRs are issued, and when HASI’s ruling is published by the IRS.

HASI as an Investment

Now that the IPO is complete, HASI intends to invest the funds in eight sustainable energy projects which they have lined up and ready to go.  Eckel told me that they expect their investment mix will not change significantly now that they are a public REIT, so we can expect these new projects will roughly mirror their current portfolio of managed assets.

Roughly a third of the projects will be invested in renewable energy such as solar, wind, biogas, and geothermal, with the balance in energy efficiency projects and other sustainable infrastructure.  Because Eckel specifically mentioned “baseload renewables such as geothermal” as a sector he is particularly excited about, I would not be surprised if at least one of the eight initial projects is geothermal.

If HASI funds multiple geothermal projects over the next few years, this could be excellent news for geothermal developers with projects in the United States, such as Ormat (NYSE:ORA), Ram Power (TSX:RPG, OTC:RAMPF), and US Geothermal (NYSE:HTM).

Likely Dividend

Hannon Armstrong is still in a quiet period because of their recent IPO, so Eckel was unable to tell me anything about their likely earnings prospects or planned dividends.  We do know that the company earned $0.60 a share in 2012, and that they intend to distribute 100% of their REIT earnings as dividends to shareholders.  REIT earnings are defined by the IRS, and will differ in some respects from the GAAP earnings.  In addition, the IPO has increased HASI’s share base six-fold, meaning that the profitability of the new investments will dominate earnings going forward.

That said, the mix of HASI’s projects will not change going forward. The main difference will be that the improved ability to raise equity means that the REIT will retain a larger stake in projects it finances.  This could increase earnings per share if it allows more profitable deals which might not have gone through without HASI having skin in the game, but it could also dilute earnings if the income HASI earns by managing projects is diluted over a larger equity base invested in the projects themselves.  That said, HASI’s partners would not have taken the firm public if they thought it meant they would earn significantly less than they would have had the firm remained private.

One other factor to consider is the pricing of the IPO.  HASI priced at the low end of the $12.50 to $17.50 range in the prospectus.  Because of that, they will be able to invest less new money per share than they could have if it had priced higher, which will lead to lower earnings per share than we could have expected at a higher IPO price.  On the other hand, new investors are paying less for the earnings from HASI’s existing business.  After dilution from new equity, 2012 earnings would amount to approximately ten cents a share.  According to the April 19th prospectus update, HASI netted $9.70 per share from the IPO, after dilution of the new money and estimated expenses.   Assuming they can invest this at a yield between 5% and 8%, we can expect total earnings per share to be between $0.58 and $0.87 per share, all of which we can expect to be distributed as dividends.

At the current price of $11.25, HASI will have a dividend yield of between 5.1% and 7.7% if my assumptions are correct.  A quick survey of the top 10 holdings of the SPDR Dow Jones REIT ETF (NYSE:RWR), shows that these REITs yield between 2.6% and 4.2%, so I expect HASI will appear attractively priced in comparison to other REITs when it starts paying dividends, assuming it does not appreciate before then.  It should also be attractively priced in comparison to the green infrastructure investments I mentioned earlier: Loans from Solar Mosaic yielding 4.5% and Power REIT, which yields 3.9% at $10.20.


I can’t help but be enthusiastic about Hannon Armstrong Sustainable Infrastructure Capital.  The REIT presses all my buttons:

  • It invests in sustainable infrastructure.  
  • It has an emphasis on energy efficiency.  
  • It’s likely to pay an attractive dividend yield from long-term stable income.  

What’s not to like?

Disclosure: Long PW, HASI, HTM, RAMPF.

This article was first published on the author's blog, Green Stocks on April 22nd.

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.

April 29, 2013

Energy Efficiency Stocks Rally on Shaheen-Portman Bill

Tom Konrad CFA

Former Gov. Jeanne ShaheenRob_Portman_official_photo[1].jpg
Senator Jeanne Shaheen (Photo credit: sskennel) and Sentaor Rob Portman (official photo)

While the chance for broad energy reform to come out of our dysfunctional and divided Congress are slim,  there is one area of broad agreement across the aisle: Energy Efficiency is good for jobs, and the environment.  Much can also be done at modest or no cost to the taxpayer.

Today, Senators Jeanne Shaheen (D-NH) and Rob Portman (R-OH) are reintroducing their Energy Savings and Industrial Competitiveness Act, supported by a broad range of industry leaders, energy efficiency advocates, and environmental stakeholders.   A similar bill passed the Senate Energy and Natural Resources Committee in the 112th Congress with broad bipartisan support, but drew fire from Republicans for expanding a Department of Energy loan program.   This bill eliminates that provision, along with another revolving loan program which had been intended to fund energy efficiency upgrades.

A representative of insulation manufacturer Owens Corning (NYSE:OC) applauded the bill.   She said,”Energy efficient buildings must be a cornerstone of National Energy Policy as the building sector remains the nation’s single largest energy consumer. As the residential insulation market leader for over seven decades, we are keenly aware of the energy savings, environmental improvements, and job creation opportunities derived from strong energy efficient buildings policies and practices.”

Owens Corning’s shareholders cheered as well.  Although the broad indexes were down at mid-day, Owens Corning stock was up 0.2%.

More specialized energy efficiency companies were also rallying.  Waterfurnace International (TSX:WFI, OTC:WFIFF) rose 0.2%, while turn-key energy solution provider Ameresco (NYSE:AMRC) was up 3.7%.  Energy efficiency LED lighting players Cree (NASD:CREE)  Revolution Lighting (NASD:RVLT), and Phillips (NYSE:PHG) were also up, although broader conglomerates with a strong energy efficiency focus, such as Honeywell (NYSE:HON) and Johnson Controls (NYSE:JCI) followed the broader market down.

The Bottom Line

The bill’s success is not guaranteed, but the senators have spent months of negotiations getting buy-in from more than 200 groups and organizations, from the Union of Concerned Scientists to the U.S Chamber of Commerce.

If the Senators have or will gather enough support for a version of this bill to make it into law, expect many of the energy efficiency stocks listed above to rally further, although that is far from the only factor which will be affecting these stocks over the next several months.

Disclosure: Long AMRC, WFIFF, JCI

A previous version of this article was first published on the author's blog, Green Stocks on April 18th.

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.

April 27, 2013

The LED Gold Rush

Tom Konrad CFA

Cree bulb

Last week, a prominent display of $10 LED light bulbs from Cree, Inc. (NASD:CREE) arrested my attention as I entered a home improvement store.

These were officially launched in March, and are similar to a 40 watt-equivalent bulb I bought in 2009.  I still have that bulb, which I use for outdoor lighting, because Compact Fluorescent Lights (CFLs) take too long to warm up in the winter.  It’s still going strong.  The only problem: it cost $50, and used as much energy as a CFL for the same amount of light.

Four years later, we have a  five-fold drop in price, and the energy use is better as well: these are 6 watt bulbs (with similar light output,) while my old one was an 8-watt bulb.  Cree also has a $13, 60-watt equivalent bulb.

Cree is not alone in improving the efficiency, light output, and price of LEDs to challenge fluorescents.  On Friday, Koninklijke Philips Electronics (NYSE:PHG) launched a replacement for conventional T-12 fluorescents widely used in offices.  Because fluorescents are so efficient, previous LED replacements had to compete on other attributes – such as fewer  replacements.  While replacing a bulb is usually a trivial task for a home-owner, when you are paying maintenance workers salary and benefits to go around a building with a ladder replacing bulbs, the costs can add up.  This is especially true in hard-to-reach applications.

Phillips’ new bulbs can now compete on energy usage as well: they produce about 200 lumens of light per watt, approximately twice as much as a typical office fluorescent.  But I expect a more significant driver of adoption will be improved light quality.  Happier workers are a much bigger benefit to companies than saving a few dollars on their electric bill.


With new price points and higher efficiency, LEDs seem set for rapid growth in market share.

Not every LED stock will benefit equally, however.  Pure-play LED companies like Cree and Revolution Lighting Technologies, Inc. (NASD:RVLT) are likely to gain more than broader lighting companies like Phillips and Acuity Brands (NYSE:AYI).

Navigant Lighting Revenue

Navigant Research predicts that while logbal LED lamp sales to commercial buildings will grow by 23% per year for the next 8 years,  the longer life of LEDs will cause industry revenue from lamp sales to decline slightly over the coming decade.

All that said, I worry that LEDs today are where solar was a few years ago: in danger of chronic overcapacity as new players jump into a rapidly growing market.

I initially thought that LED equipment suppliers like Aixtron SE (NASD:AIXG) and Veeco Instruments. (NASD:VECO), as well as upstream play is Rubicon Technology, Inc. (NASD:RBCN), which sells monocrystalline sapphire for LEDs as well as radio frequency and optoelectronics.  In solar, upstream players were profitable for longer than solar manufacturers, although they, too, eventually felt the competitive heat.

Of these three upstream players, Veeco has the best exposure to LEDs.  Aixtron sells deposition equipment to the larger semiconductor and compound semiconductor industries, while Veeco makes  equipment used in the manufacture of LEDs, solar and hard disk drives.  LED equipment accounts for most of Veeco’s revenues, but only a fraction of Aixtron’s.  Rubicon is somewhere in between.

I'm not sure what the competitive situation for Rubicon is, but Aixtron and Veeco are already feeling the heat.  Taiwan's DigiTimes reported that Veeco and Aixtron had slashed prices for their equipment on April 17th.


I suspect that the $10 bulb may be the price point where consumer demand begins to take off, but if too many would-be miners join the gold rush for limited LED revenues, none of them will make any money.

In elementary school, I learned that the surest way to get rich in the California Gold Rush of the late 1840s was to sell picks and shovels to would-be miners.  It seems like even that "tried and true" method won't be enough to make money in the LED Gold Rush.  Better to stick to being the jewelery buyer, and benefit from the rapidly growing supply and falling price of LED gold.

A previous version of this article was first published on the author's blog, Green Stocks on April 17th.

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.

March 22, 2013

Misreported Revenue, Part I: Lime Energy

Tom Konrad CFA

Lime logo

In my model portfolios of ten clean energy stocks for 2013 andsix alternatives, three companies are currently delaying earnings announcements for various reasons, and at least two of the three will be restating previous results.

Many investors flee the scene at the first whiff of accounting problems: All investors rely on a company’s financial statements (directly or indirectly) to value companies.  If there is  any doubt as to the accuracy of those statements, they believe it’s better to invest elsewhere.

In contrast, I believe that we never have anything like an accurate picture of what is going on at the companies we own.  Uncertainty is always present, how much is just a matter of degree.  Even accurate financial statements are the shadows dancing on a cave wall in Plato’s cave.     Knowing I’m always operating in a climate of investment uncertainty, I’m willing to consider investing in a company with questionable accounts if the uncertainty seems limited and is more than compensated for by a low stock price.

As always in investing, the question should be, “Do you think reality is better or worse than the what the vast majority of investors assume?”  If reality is worse than it appears, you should sell.  If it’s better, you should buy or hold.  Earnings restatements can be just the tip of an iceberg of accounting troubles, or they be the rough that hides a diamond.

Below, I take a look at what’s going on at Lime Energy (NASD:LIME).

I initially intended to deal with  Maxwell Technologies (NASD:MXWL), and Ameresco, Inc. (NYSE:AMRC)  in this article as well, but the article kept growing longer.  I’ve split it up in order to publish each part as I finish it.  Here are the links to the parts about Maxwell and Ameresco.

Lime Energy (NASD:LIME)

At the start of the year when I included Lime in my list, its accounting problems were well known and ongoing.  They started with the announcement last July that the company would be delaying its second quarterly report, and that annual reports for 2010 and 2011 would have to be restated because of problems with revenue recognition.  Most worryingly, the company stated that “non-existent revenue may have been recorded.”

Timing of revenue recognition can be very subjective, and honest accountants can differ about when money flowing in to the company should be booked as sales.  However, booking non-existent revenue means that someone was attempting to present a false picture of how much money was actually flowing in.  This is not a judgement call, it’s called lying.  In that case, the only question is, “Who was lying, and who knew about it?”

As such, Lime’s are the most serious sort of accounting problem.  Most investors would sell at any price to avoid a company that had been creating sales out of thin air.  The reasons I remained invested in the company were:

  1. Large share purchases by company insiders led me to believe that upper levels of management were unaware of the chicanery.  While it was bad that their accounting controls were not sufficient to catch the problem sooner, it did not have the feel of a little Enron.
  2. The audit committee went out on a limb by stating that the believed the magnitude of the mis-reported revenue was limited to less than $15 million.
  3. The price of the stock had fallen far enough that I felt it more than accounted for $15 million of non-existent revenue.

Unfortunately, the accounting problems were much worse (at least in complexity, and possibly in magnitude) than the board initially thought.   After repeated delays in filing the corrected statements, Lime announced in December that it was broadening the  potential of restatement to include its 2009 financial statements.  Also in that announcement, they did not make any claims as to the magnitude of the potential restatements.  I take this to imply that the total size of the mis-stated or fictitious revenue may exceed $15 million.

On the encouraging side, the late expansion of the investigation lends credibility to the assumption that top management was not aware of the problems.  Also, Lime’s largest shareholder and board chairman continued to put money into the company  at prices well above the $0.56 it was trading for at the end of 2013, which is why I included it in my clean energy stock picks this year.

For now, the only information we have are announcements about  company’s continued efficiency programs run for its utility customers, and the sale of a non-core business unit.  Both of these are encouraging signs, but the only things we know for certain at this point are that the company’s books were a total mess, and Lime can be now bought for a fraction of what (supposedly informed) insiders were willing to pay a year ago.


Had I known Lime’s problems would be this bad last July, I too would have sold immediately.  Now, however, I have trouble seeing how the news could get much worse.  I believe the many delays have led the vast majority of investors to completely give up on this stock.  I consider it a gamble, but one where the odds are on my side.

For now, I’m waiting for the earnings restatements to remove the clouds of uncertainty hanging over Lime.

Disclosure: Long LIME, AMRC

This article was first published on the author's blog, Green Stocks on March 12th.

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 11, 2013

Lime Energy Sells ESCO Business to PowerSecure

Tom Konrad

Lime logo

On March first, Lime Energy (NASD:LIME) announced the sale of its Energy Service Contracting (ESCO) business to PowerSecure International, Inc. (NASD:POWR).

The deal will provide Lime with approximately $1.9 million in cash, plus the assumption of $9.9 million in liabilities associated with various ongoing projects, offset by $6.3 million in assets transferred to PowerSecure.  This makes the effective purchase price of the business approximately $5.5 million (not the $11.9 million I earlier reported).  The deal should be good news for both Lime and PowerSecure shareholders.

From Lime Energy’s Perspective

After nine months of worrying about misreported and potentially fictitious revenue, it’s easy for shareholders to forget that Lime’s strategy is to focus on its utility business and move away from more competitive ESCO services, where the company has less competitive advantage.

Although shareholders have not seen any financial data since Lime began the internal audit of its books last July, there have been numerous announcements of progress in its utility business.  Just this year, Lime has announced:

  • Exceeded their goal for  delivering energy efficiency savings in National Grid’s (NYSE:NGG) small business direct install program in upstate New York for the third consecutive year.
  • Completed their 1,000th project in their implementation of direct install program as part of New Jersey’s Clean Energy Program.
  • Exceeded their goal in the first year of implementation of Central Hudson Gas & Electric’s small and mid-sized business direct install program.

This progress in the utility businesses has not come without cost.  Lime has had to turn to its board Chairman and other boardmembers to obtain working capital in the last year, even though they entered 2012 not expecting to need to raise additional funds before achieving profitability.  Kiphart bought a one million shares at $2.55 a share and the board collectively lent the company $7.05 million in 2012, mostly in the form of convertible debt.

With the share price stuck in the $0.60 to $0.80 range, and likely to stay there until Lime is able to file audited financial statements, the sale of a non-core division should come as a relief to shareholders who have recently seen the value of their holdings diluted by the issuance of convertible notes.  The $5.5 million purchase price and $1.9 million in cash should make a significant difference to a company with a market capitalization of less than $19 million.  It should also allow Lime to focus its working capital on the growing utility business, and possibly repay some of the debt raised in 2012.

From PowerSecure’s Perspective

Given the lack of reliable financial information from Lime, it’s impossible to know the current value of its ESCO business.  On the other hand, Lime is unlikely to have been in a strong bargaining position, and from that alone we can expect PowerSecure received good value for its money.

With a $157 million market cap and $22.55 million in cash on its balance sheet, this deal will not be as significant to PowerSecure as it is to Lime.  Nevertheless, the company says that the acquisition will increase EBIITDA and earnings per share in 2013.  PowerSecure’s lower cost of capital should enable PowerSecure  to run the division more profitably than Lime has been able to.

PowerSecure’s CEO, Sidney Hinton, also expects to achieve some synergies from the division.  He said, “The addition of Lime Energy’s proven ESCO business provides additional capabilities that complement our existing best-in-class energy efficiency offerings and opens new potential channels for our LED lighting, distributed generation and utility infrastructure solutions.”


With this the sale of a non-core division raising apparently needed capital, Lime’s shareholders should not have to suffer additional dilution until the company is able to file its delinquent financial statements.  When that happens and dispels the cloud of uncertainty which has been hovering over the company, the share price should rise and Lime should be able to obtain any additional capital it needs on much more favorable terms.

PowerSecure shareholders, in turn, should benefit from the acquisition of a complementary business at what is likely to be a very reasonable price.

Disclosure: Long LIME

This article was first published on the author's blog, Green Stocks on March 1st.

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.

January 28, 2013

Trading Strategy Around Lime Energy's Possible Feb 2 Delisting

Tom Konrad

Lime logoSeveral readers have asked me if I still recommend buying Lime Energy (NASD:LIME) now that it looks like the company could be delisted from NASDAQ on February 2nd.  I won’t go into the details of why, when, or how, since John Downey has done an excellent job of covering that in the Charlotte Business Journal.

Instead, I’ll look at the various possible scenarios, and how it will likely be best to trade the stock.  To understand what will happen, we first have to decide A) will Lime’s appeal against delisting be granted? and B) Will Lime be able to file its financial reports by April 30?

Scenario 1: All’s Well (Appeal successful, on time reports)

One possibility is that everything goes as Lime management hopes.  In this case, Lime’s appeal to NASDAQ to stop delisting is granted, and Lime manages to file its delinquent reports by April 30.  As always, the time to buy will be during the period of greatest uncertainty, which will likely correspond with the stock price low and happen sometime between now and February 2nd.

Scenario 2: Late Filing or Appeal Denied

If Lime again is unable to file its reports on time (they have already been delayed repeatedly) or the stock is delisted, it’s probably best to stay away from the stock until after the reports are filed.  Even then, Lime seems unlikely to meet the standards for initial listing on NASDAQ because of its low market capitalizationI don’t know if the requirements for relisting on NASDAQ are less stringent than for initial listings (as are the requirements of continued listing.)   However, I cannot find anything related to a re-listing process, so I think it’s best to assume that Lime would have to go through the initial listing process if it wants a new NASDAQ listing.  Until such time as it is relisted, it will trade on the over the counter (OTC) markets, where most stocks typically trade at a substantial discount to similar stocks on NASDAQ.

Once Lime begins to file financial reports again, we’ll have more information, and then we may have a good buying opportunity.  Although filing reports will doubtless help the stock on the OTC market, the lack of an exchange listing will keep the price down and give investors interested in getting back in a chance to do so inexpensively.


Clearly the decision to buy now depends on the chances of the appeal being denied or of additional delays to filing financial reports.  I think the chance of not getting the reports in on time by April 30 are low, since the consequences would be so dire for Lime, and I just find it hard to believe any audit could take that long.

The chance that the appeal will be denied is harder to know.  Lime seems to be complying with the spirit of the rules, in that they are trying to file accurate financial statements, and it seems to me that NASDAQ’s panel should take that into account.  But I have no insight into this process, and investors who focus on what “should” happen often get burned.

In the end, I’m doing what I usually do when I know I don’t know what’s going to happen.  I sold some of my position, but kept most of it.    The reason for that is mostly my own psychology. By recognizing some of my losses, I’m less emotionally attached to the idea that Lime has to go up, and I should be able to look at the question more objectively, as information emerges.  However, since I still hold most of my position, I’ll still be watching the stock closely, and so will be able to react to new developments in a timely manner.

Disclosure: Long LIME

This article was first published on the author's 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.

December 30, 2012

Three Money Managers See LED Industry Shining in 2013; Their Stock Picks

Tom Konrad

Xmas LEDs.jpgLED lights on an outdoor tree. Photo by author
This is the third article in my series based on my panel of green money managers’ predictions for 2013.  The first article looked at what they expect 2013 holds for the Solar industry, and the second looked at their predictions  for the Smart Grid.  This installment focuses on the LED industry.

Jeff Cianci: Faster than Anyone Expects

Jeff Cianci is Chief Investment Officer at equity investment fund Green Science Partners.

Cianci says “The trend toward LED lighting for energy efficiency will move more quickly this year than anyone expects, driven by cost declines, regulatory incentives and rapidly increasing consumer awareness.”   He thinks the place to be is Organic LEDs (OLEDs), and thinks OLED research and intellectual property license shop Universal Display Corp. (NASD:PANL) “Could double from here.  The launch of OLED TVs will complement rapid growth in smartphone and tablet screens.  PANL is a high margin royalty play on all of this surface ‘real estate’.  Everyone will want an OLED screen as the costs come down.”

Rafael Coven: Building Momentum

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Coven expects “Stronger momentum into LED Lighting especially as the economics improve enough that it can start really challenging replacing T8, T5, and other fluorescent lighting applications.   This should help LED manufacturers such as Cree (NASD:CREE), Philips (NYSE:PHG), and component makers such as Advanced Energy Industries (NASD:AEIS) and Rubicon (NASD:RBCN) but really punish the old line lighting companies that haven’t kept up in the space such as Siemens (NYSE:SI) and General Electric (NYSE:GE), among others.”

Jan Schalkwijk: A Cyclical Bottom

Jan Schalkwijk, CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.

Schalkwijk thinks the adoption of LED lighting has yet to take off, but he sees its acceleration will help Veeco Instruments (NASD:VECO.)  Veeco makes LED manufacturing equipment tools, and he thinks it is currently cheap because “A pending reassessment of revenue timing has delayed its quarterly filing, and orders last quarter came in low. The latter I believe is more a cyclical bottoming out than an indication of poor future orders.”

He adds a note of caution, saying Veeco is volatile and “Wall Street does not always know what to make of it.”

Bottom Line

The future of LEDs is bright, and these three experts think 2013 could be the year when they really take off.  I tend to be cautious when there seems to be an investment concensus for a sector, because it means that the stocks are unlikely to be cheap.  That’s certainly true for Cianci’s pick PANL, which trades for 32 times expected 2013 earnings.  Analysts’ prediction of 25% expected growth over the next five years isn’t enough to justify that valuation.

Even while Schalkwijk’s Veeco is trading 22% off its 2012 high because of the uncertainty surrounding the stock, it’s still priced at 22 times expected 2013 earnings.  That might seem a relative bargain compared to PANL, but not if you believe analysts’ predictions that the company will shrink an average of 4.6% for each of the next five years.

To own either of these stocks, you need to believe that Cianci is right and LEDs will light up “faster than anyone expects.”  For “anyone” read “most other investors,”  and hope that the investor who sells the stock to you is one of the most surprised.

Disclosure: I have no position in any of the stocks mentioned.  Green Science Partners owns PANL and Schalkwijk and his clients own VECO.

This article was first published on the author's blog, Green Stocks on December 19th.

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.

December 21, 2012

Why I'm Selling Rockwool

Tom Konrad CFA

Photo: Cubes made of rockwool for indoor cannabis cultivation by D-Kuru/Wikimedia Commons. While some users may use Rockwool insulation to grow their highs, the recent highs in the stock price have led me to sell part of my holdings.

Earlier this year, I bought Rockwool International A/S (COP:ROCK-B, OTC:RKWBF) with the intention of holding it for the long term.

I chose Rockwool because it was expanding in the US, provides excellent international diversification, has a strong balance sheet with no net debt, and (not least) is a leader in the greenest part of the construction sector: insulation.

Most other major insulation industry players are divisions of large conglomerates like Berkshire Hathaway (NYSE:BRK-B, BRK-A), and Saint Gobain (Paris:SGO).  Berkshire Hathaway owns Johns-Manville while Sain Gobain owns CertainTeed.

US-based Owens Corning (NYSE:OC) is the only pure-play exception, but trades at a premium.  With a trailing P/E of almost 50, and a forward P/E of 17, OC is still only slightly above book value because of the slow housing sector.  With a debt to equity ratio of 60%, OC has significant although not unmanageable debt, and pays no dividend.  At the current $34/share it simply is not very attractive to a value investor.

While Rockwool was no bargain basement stock, it looked relatively attractive compared to Owens Corning this spring when I bought it.  But a recent price run-up from DKK450 to DKK620 over the last year has mosty closed the gap.  The company expects full year earnings of at least DKK700 million ($5.57/share or a forward P/E of around 19.)  The dividend yield is only 1.5% – better than nothing, but not exactly large, and the company trades at 1.6x book value, slightly higher than Owens Corning’s 1.14.


While I continue to value Rockwool for the exposure to building insulation and good international diversification, the 25% price increase since I last added to my position this spring (and consequent higher valuation and lower dividend) has led me to reduce my holdings.   It’s also been one of the best performers in my 2012 annual Clean Energy model portfolio, but I’m unlikely to include Rockwool in the portfolio for 2013.

While I think the North American housing market recovery will continue, I currently see much more attractive sector players, such as Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) and PFB Corporation (TSX:PFB, OTC:PFBOF).

Disclosure: Long RKWBF, WFIFF, PFBOF

This article was first published on the author's blog, Green Stocks on December 11th.

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.

November 19, 2012

Ameresco Revenues Fall Off Fiscal Cliff

Tom Konrad CFA


The climate of uncertainty caused by deadlock in Washington is leading to penny-wise, pound foolish behavior at all levels of government, and Ameresco, Inc. (NYSE:AMRC) felt the pain severely in the third quarter.

Framingham, MA based Ameresco helps institutions, mostly government entities, improve their energy infrastructure and reduce energy use without capital outlays or increases in energy budgets.  It does this by using the cost savings from energy efficiency to finance the capital outlays, allowing schools, hospitals, and the like to insulate or install solar panels while sticking to existing budgets, and often producing some savings.  To take three examples announced in the last month,

  • Four schools in Newton, MA will get solar panels, paying Ameresco only for the electricity generated over the next twenty years.  According to the school chief administrative officer, the schools could see cost savings over the life of the agreement.
  • Reed College in Oregon signed a comprehensive  agreement to improve energy efficiency and water savings  at the century old campus which is expected to save the college $2.7 million over the 10 year life of the agreement, compared to projected energy costs of $7.2 million over the period.
  • The city of Longview on the Columbia river in Oregon will spend $3.9 million (or $3 million after a state grant and utility incentives) to replace aging boilers, lighting, and mechanical systems in city buildings.  The remaining $3 million will be financed by a loan which will be completely paid off in 15 years solely by the energy cost savings, which are guaranteed by Ameresco.  After 15 years, the city will have paid off the debt, but the equipment will have years of life left, and will have already saved $564,000.  The city would not have been able to afford to replace the equipment without the Energy Savings Performance Contract.

These sorts of win-win contracts should make sense at any time, but are even more welcome when budgets are tight, as they are today.  But the deadlock in Washington, and worries over the possibility of drastic automatic Federal cuts caused by the fiscal cliff (or the compromise measures which may replace them) are causing Ameresco’s customers to delay signing contracts.  For an in-depth look at Ameresco’s business, see my profile of the company.

Ameresco management had already expected their quarter 2012 results to be less than 2011, but they did not see just how bad things were likely to get.  While Ameresco has continued to execute well on projects, maintaining or improving operating margins and increasing their backlog of awarded projects to a record level, third quarter revenue plunged as the climate of uncertainty and greater concerns about debt  led customers to proceed with extreme caution finalizing projects.

Total revenue was down 28% in the third quarter to $163.9 million, with operating income dropping 34.7%.  While the election may have ease some uncertainty, the uncertainty caused by the fiscal cliff will almost certainly continue through the end of the fourth quarter, and its effects are likely to persist through December.  Hence, Ameresco revised guidance sharply downward to $640-$660 million for 2012 (compared to $728 million in 2011) with a profit of $22 to $26 million (compared to $35 million in 2011.)


Unsurprisingly, Ameresco stock opened sharply lower today, and is currently down 18% at $8.70.  While I attempted to sell my holdings at $10.30, I was unsurprised that many investors had a much more bearish outlook than I do about Ameresco.

In the mid-term, Ameresco’s prospects are bright.  Obama’s election will ensure four more years of strong demand for Ameresco’s services from the Federal government, while the company’s strong backlog shows that 2012 revenue has just been delayed, not lost.  Tight budgets and improving energy efficiency and renewable energy technology can only expand the demand for the company’s services, while the current market conditions are likely to cause  some of Ameresco’s competitors (most of which are divisions of conglomerates like United Technologies (NYSE:UTX) and Chevron (NYSE:CVX)) to exit the performance contracting business.

Ameresco Biomass Cogeneration Facility at SRS

Ameresco Biomass Cogeneration Facility at (Federal government owned) Savannah River Site (Photo credit: Savannah River Site)

At the state level, Republicans have made slight gains in governors’ races, but these wins were due to “Republican governors… providing the type of results-oriented leadership that is absent in Washington, D.C.,” as Republican Governors Association chairman Bob McDonnell, governor of Virginia put it.  Results-oriented leadership and fiscal conservatism are exactly what Ameresco needs to win new customers at the state level.   Meanwhile, Democrats gained control of more state legislators, so we can expect to see more environmentally friendly policies at the state level, which will also boost the attractiveness of Amereso’s services.

With the long term bright, and the stock price looking increasingly attractive, I plan to increase my holdings of Ameresco over the next few months, after the market finishes digesting the bad news.  I’m not buying yet, however, since I would not be surprised to see Ameresco drop into the $7 range over the next few days, and fourth quarter results are also likely to be bleak.

Disclosure: Long AMRC

This article was first published on the author's blog, Green Stocks on November 8th

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.

September 25, 2012

Selling Pressure Comes Off Lime Energy

Tom Konrad CFA

Lime logoWhen Lime Energy (NASD:LIME) reported accounting problems, including the possibility of fictitious revenue on July 17th, investors abandoned the stock, unwilling to own a company in which they knew the financial statements to be misstated.   Over the next two weeks, Lime found a floor around $0.90 (down from over $2 on July 16th), as those investors who would sell at any price were replaced by those who, like me, feel that $0.90 is less than any reasonable estimate of LIME’s true value even in liquidation.

Volume then dried up and the stock traded in the $0.90-$1 range until August 21st, when Lime received a delisting notice from NASDAQ, for missing its quarterly reporting deadline.   This was expected, since LIME’s quarterly report is being delayed until the company can fully investigate the accounting difficulties, which run back to 2010.

Despite the fact that Lime has up to 180 days to regain compliance with NASDAQ reporting requirements, this triggered another, smaller wave of selling from August 21st until September 7th, with the stock trading in the $0.70 to $0.75 range.

Starting on September 10, trading volumes again dropped, and the stock price began to jump around in the $0.70 to $0.82 range as volume sellers disappeared, and even small purchases could send the price up as much as $0.10.

With the large sellers gone, I anticipate that LIME will not again dip below $0.70 unless there is more negative news before the company files its second quarter report and corrects the previous accounting filings.

In terms of possible negative news, NASDAQ could issue another delisting notice based on LIME’s failure to maintain a $1 stock price for the last 30 days,  but I expect if this were going to happen, it would have happened already.  LIME will need to get its share price over $1 a share for 10 days, but filing audited financials should take care of both problems (unless the result of the audit is much worse than I anticipate.)


Although a large cloud of uncertainty still hangs over Lime Energy as we await the results of the company’s internal investigation, it looks to me as if we are unlikely to see a stock price below $0.70.   In a worst case scenario, Lime could be liquidated for something near its tangible book value of $1 per share, so the current $0.70 to $0.85 share price range includes a substantial margin of safety.

With selling pressure abated, large investors will be unable to buy the stock without greatly increasing the current price.  On the other hand, patient small investors still have an opportunity to  benefit from a substantial upside move when the company completes its internal investigation and dispells much of the uncertainty which is currently depressing the stock price.

Disclosure: Long LIME

This article was first published on the author's blog, Green Stocks on September 16th.

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.

August 16, 2012

Energy Recovery: A "Slender" Stock

by Debra Fiakas CFA

Investors who in the small-cap sector are familiar with the profile:  a company with a great invention that ends up with a business narrowly-focused on a particular market or customer group.  If it is a public company, the stock price is equally thin  -  if it trades at all.  Energy Recovery (ERII:  Nasdaq) is one of those slender stocks.
Over the last year ERII has traded in a relatively tight range between $3.50 at the high point and $1.55 on the low side.  The stock is seemingly stranded today 29.4% off the high.  Investors have simply stayed away, barely registering 100,000 shares per day in average trading volume.  While short interest is not particularly high  -  equal to just 10% of shares not held by insiders  -  short sellers have persistently stalked Energy Recovery.

Critics of Energy Recovery had zeroed in on the risks on the desalination market.  While clearly a promising opportunity in the long-term given the shortage of potable water in the world, the desalination market is also highly focused.  Middle Eastern countries rely to a great extent on desalination, but the Arab Spring has slowed progress on new projects.  Another key desalination area, California, has out of the market for the time being by fiscal issues.  Credit for project developers has been difficult during the European debt crisis.    Thus any company that puts all its eggs into the desalination basket is vulnerable.   

All those woes have overwhelmed investors’ enthusiasm even for a product line cloaked as social redeemable.  Energy Recovery produces pressure exchangers that are installed to reduce energy consumption in desalination plants using reverse osmosis technology.  While growing in popularity  -  reverse osmosis now commands at least 40% to 45% of the desalination market  -  it is a process that requires pumping large amounts of seawater through membranes that filter out the salt.  Any process that requires the use of “large” and “pump” together will ring up a big electric bill.  Energy Recovery’s pressure exchange device recaptures energy in the waste brine stream and transfers it back into the incoming stream of seawater.  The action saves 60% of the energy requirement, significantly improving the economics of seawater desalination.

Energy Recovery also has some competition.  First, producers of reverse osmosis systems are continuously tweaking the overall design, trying to find the most energy efficient configuration.  These include IDE Technologies, Hyflux, and Doosan among others.  Producers of the membranes, which are the business end of reverse osmosis action, are also trying to improve the marketability of their membranes with at least a partial fix for energy issue.  Dow Chemical (DOW:  NYSE) leads the membrane market, followed by Nitto Denko’s Hydronautics and Toray.

There are also other types of energy recovery devices.  FlowServe Corp. (FLS:  NYSE) sells Duel Work Exchange Energy Recovery devices or DWEERs for short.  Fluid Equipment Development Company (FEDCO) is a seller of reverse osmosis equipment and has developed energy efficiency solutions.

Any company faced with the twin threats of technology obsolescence and competing products should be scrambling to dig a moat of some kind.  I cannot say Energy Recovery management actually scrambled.  However, they have moved to protect the company through diversification.  Energy Recovery acquired Pump Engineering LLC in 2009, adding turbochargers and pumps to the product line.  The addition has given the company a foot in the door of customers in the oil and gas industry.  Now Energy Recovery can market is energy solution for gas processing systems, which capitalizes on the company’s pressure exchange technology.

I think this is a significant move forward for Energy Recovery, since the oil and gas market is populated by many participants as potential customers.  It is not subject to the same capital and credit market influences that sidelined the desalination industry.  I expect sales to oil and gas customers to help drive the top-line in coming years.

Investors appear largely unimpressed with Energy Recovery’s expansion attempts.  Ever the contrarian, my firm continues to have a buy rating on ERII and our trading guide suggests aggressively adding to positions at prices below $3.00.

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

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

July 27, 2012

Lime Energy, or Lemon Energy?

Tom Konrad CFA

MATS.pngLast week, when Lime Energy (NASD:LIME) announced that an internal investigation by its audit committee had revealed up to $15 million in misreported revenue, my first instinct was to sell, especially because the misreported revenue included not only revenue assigned to the wrong period, but possibly completely fictitious revenue. 

Whenever a company reveals accounting problems, it's bad.  But there are levels of bad. As Garvin Jabusch, Cofounder and CIO of Green Alpha Advisors and manager of the Sierra Club Green Alpha Portfolio put it,

"The revelation that the company may have recorded “non-existent revenue” is a major concern. Somewhat less concerning is “Revenue being reported earlier than it should have been,” which is a violation of the matching principle, and is a relatively easy mistake to make and can be readily forgiven if properly restated. But the term “non-existent revenue” is a major red flag... There are only a couple of reasons phantom revenue could get booked, and most firms have controls in place to make sure that sources of revenue are verified before they’re booked. So at the very least, we can say that there are material weaknesses in LIME’s internal controls. At worst, some relatively senior person may have misinformed the accounting team. "
The stock had closed (after a suspicious day-end decline) at $2.03 the day before, so I put in limit orders to sell my entire position at $1.75 when the market opened.  LIME opened at $0.83, which I found shocking because the announcement also said, "[The company] currently believe[s] that the cumulative adjustment to revenue for the affected financial statements will not exceed $15 million."

I took this statement as an extremely positive sign.  When there are known accounting irregularities, usually all bets are off, and executives know that shareholder lawsuits are going to follow in short order (at least eleven such lawsuits have already been filed.)  For company and executives and the board, the risks of making a statement like "adjustment to revenue... will not exceed $15 million" are large, and one sided.  If they are wrong about the $15 million, there are guaranteed to be additional lawsuits, and, unlike the original accounting problems, they will not be able to say "we had no idea there was anything untoward going on."  So Lime's board is confident that the scope of the accounting problems is limited, and does not affect the entire company's books.

Since the $15 million in question is small (Lime's revenues over the two and a quarter year period were $233 million,) the board audit committee is saying that the problem is isolated to a small part of the company, possibly a single, lower level employee.  This is still bad for management, and particularly the CFO, Jeffry Mistarz, who should have had a system in place to verify all sales.  But it should not put the existence of company at risk, which is why I think the current $0.90 price of the stock is way too low, and why I wrote that any price below $1.25 not only conservatively values the stock, but leaves an ample safety margin to account for the current uncertainty.

To add further evidence that the accounting problems were very limited in scope, senior management and board members were all acquiring the stock, often in large quantities, for the entire period that the accounting problems were taking place.  Not only was Mistarz buying and holding on to all his incentive stock awards, but the former chairman of the board, David Asplund, whose departure from the board for "health reasons" in June raised the suspicions of some observers, also made purchases of the stock shortly before he left his job as CEO, and in March, shortly before his June departure as chairman.  It seems unlikely to me that any of these share purchases would have been made if Mistarz or Asplund had been aware of the accounting problems.

Lime or Lemon? photo via Bigstock
Making Limeade

In short, while it makes sense "to avoid corporate drama that involves unexpected resignations and unscheduled week-end board meetings," as Debra Fiakas put it, I disagree with Jabusch when he says, "until these accounting concerns are addressed - which for us means a thorough review by an auditor not previously associated with the firm and clear corrective measures of whatever the underlying problem turns out to be -  we aren’t interested at any price."

In my opinion, there is strong reason to believe that the accounting problems at Lime Energy are limited in scope, both because of the $15 million limit mentioned (6.4% of revenue over the relevant period in question), and because of the buying of stock by company insiders.  Lime's audit committee will put out a full report on the accounting problems in when they have completed their review, quite possibly with the help of an independent auditor, as Jabusch suggests.  If that report shows that the improper accounting was as limited in scope as I believe, the stock will rally strongly.  If only half of the losses associated with the current uncertainty are recouped, investors who buy the stock at toady's $0.90 price, will see an immediate gain of 74%.

That gain needs to be compared to the downside risk that the accounting problems are pervasive, and the whole company is a Ponzi scheme, and Enron writ small.  But Enron's CFO Andrew Fastow sold 687,445 Enron shares, worth $33.7 million in the three years leading up to the scandal.  He wasn't buying, like Lime's Mistarz.  Even if the problems are more pervasive that I think, the company should at least be able to be liquidated for something resembling its tangible book value of about $1 a share. 

With the stock already below $0.90, even a liquidation should not result in catastrophic losses to investors buying now.   Despite this, the current lack of information is forcing many professional money managers like Jabusch to stay away. Due to the higher standards of caution usually employed when managing client funds, Jabush says he has "no business exposing clients to companies where there is real, public possibility of accounting shenanigans," even though he "would consider buying LIME at this point for a personal account, being fully aware of the risks."

When there is more information out about what has been going on with Lime's books, the return of such cautious money has the potential to quickly boost the stock price.

Disclosure: Long LIME

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.

July 26, 2012

The Efficiency Tango: A Deeper Look at Geothermal Heat Pump Efficiency

Tom Konrad CFA

heat pump
Geothermal heat pump diagram via Bigstock

A couple weeks ago, I compared the efficiency of the two most advanced geothermal heat pumps (GHPs) recently launched by Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) and Climatemaster, as division of LSB Industries (NYSE:LXU).  Like most things in life, it turns out that heat pump efficiency is a lot more complicated than just comparing a couple numbers.

Since I concluded that Waterfurnace’s 7  Series heat pumps were slightly more efficient than Climatemaster’s Trilogy 40 pumps, one of Climatemaster’s district managers pointed me to third party efficiency ratings conducted according to standards set by the Air Conditioning, Heating, and Refrigeration Institute (AHRI).  He compared Waterfurnace’s 4 ton unit (the most efficient 7 Series) to Climatemaster’s 2.5 ton unit (the most efficient Trilogy 40), noting that the former had a 41 EER at ground loop conditions, while the latter had a 42.1 EER, according to AHRI.

He concluded that the Trilogy 40 had a slightly higher cooling efficiency than the 7 Series.

The Efficiency Tango

Had I got it wrong?

I checked with the pros.  Scott Lankhorst, President of geothermal and solar thermal installer Synergy Systems in Kingston, NY said it was “an apples to oranges comparison” between 4 ton and 2.5 ton GHPs.

Lloyd Hamilton, a Certified Geoexchange Designer at Verdae, LLC in Rhinebeck, NY, called this normal marketing.  He says that the only reliable way to compare units is to look at the operational performance data for the designed condition.  The AHRI-compliant EER and COP numbers allow comparison of two units so long as they are at the same capacity, but it does not demonstrate actual performance, “like MPG for cars. … COP, SEER, and EER become worthless when comparing different types of equipment” such as air source and ground source heat pumps, because the testing criteria are different.  He calls the act of picking an choosing GHP models and operating conditions to make your company’s GHP look more efficient the “Efficiency Tango.”

Both agree that the contractor can mess up the rated efficiency of a GHP, or even make it perform above specification, with the wrong (or right) system design and installation.

I don’t have the performance data a geoexchange designer would use, but there are a lot more publicly available efficiency numbers than I used in my last article.  I put them together in a pair of bubble charts:

T40 v 7S Cooling.png T40 v 7S Heating.png

There are three 7 Series models and two Trilogy 40 models, each of which was tested at full load and part load, under two types of conditions.  The “ground water” series are when the ground water is pumped up out of the ground for heat exchange; the liquid water helps heat transmission and results in a higher rating.  The “ground loop” series is representative of the much more common installation, when an antifreeze fluid (usually propylene glycol) is pumped through the geothermal loop, which results in relatively lower efficiency (although still much higher than other types of heating and cooling equipment.)  Even in ground loop conditions, different heat exchange fluids will result in different effective inefficiencies.  The partial-load results are the sets of two or three smaller bubbles to the right (and a little below) sets of larger bubbles of the same color.

Looking at the charts holistically, I reach the following conclusions:

  • The 7 Series is generally more efficient than the Trilogy 40 for heating.
  • The Trilogy 40 is generally more efficient than the 7 Series for cooling.
  • These units operate at dramatically (about 50%)  higher efficiency under partial load.  Two-stage heat pumps show only modest (5% to 15%) efficiency gains at partial load.  This is likely to lead to higher overall efficiency of these GHPs in practice than the numbers alone might lead you to believe.
  • The Trilogy 40 typically operates at lower fluid flow rates than the 7 Series, which should produce some energy savings from pumping.

Hence, I revise my earlier conclusion to say that, based solely on efficiency, the Climatemaster Trilogy 40 will have a definite edge over the Waterfurnace 7  Series in cooling climates, while the 7  Series has an efficiency edge in heating-dominated climates.

Efficiency Isn’t Everything

That said, for most installations, factors other than efficiency will probably dominate the decision.  As noted above, Waterfurnace expects exclusivity from its dealers, and I expect Climatemaster and its other major competitors often do the same.  This will make it nearly impossible for a residential customer to compare the two without having to weigh other factors such as their confidence in the installer who, as noted above, can make or break a geothermal installation.

Then there is the Trilogy 40′s Q-Mode.  As Dan Ellis, president of Climatemaster told me in an interview, the potential savings from using geothermal to generate hot water year round from the Trilogy’s Q-Mode are likely to dwarf the savings from a point or two of EER or a fraction of a point of COP.  In fact, Climatemaster designed the Trilogy 40 with the whole system energy savings in mind, partially at the expense of efficiency ratings.  In a residential setting, Q-Mode (which is patent-pending to Climatemaster) is likely to make the financial returns decisively favor the Trilogy 40 in a head-to-head comparison.

In commercial settings, which typically have year-round cooling requirements, Q-Mode is unlikely to be important.  Furthermore, the two largest 7 Series heat pumps have higher capacity than the larger of the two Climatemaster Trilogy 40 models.  This should also give Waterfurnace an advantage in commercial settings, which typically have larger cooling loads than residential settings.

Ellis promised to send me some data to help quantify the overall energy savings from Q-Mode, which I plan to return to in a future article.


For residential customers in warm climates, Climatemaster’s Trilogy 40 seems like it will be the better GHP value when it becomes commercially available.  In other cases, the comparison is not as clear cut, and a customer should probably focus on finding a contractor who can deliver the best system design and installation possible.  That is the only way to capture the full benefit from either of these incredibly efficient geothermal heat pumps.

Disclosure: Long LXU, WFI

This article was first published on the author's 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.

July 25, 2012

Put the LIME in the Coconut

by Debra Fiakas CFA
MATS.pngYou put the lime in the coconut and call the doctor woke him up,
I said Doctor! Is there nothing I can take,
I said Doctor! To relieve this bellyache…

-Baha Men
It is best to avoid corporate drama that involves unexpected resignations and unscheduled week-end board meetings.  At least that is my view.  However, the company soap operas can be entertaining, so I decided to tune into the Lime Energy, Inc. (LIME:  Nasdaq) saga .  Based in North Carolina, Lime provides a menu of energy-saving solutions to utilities and large-facility owners.  Lime's product and service menu includes energy efficient lighting upgrades, efficient mechanical and electrical retrofits, water conservation, building weatherization and other solutions that are aimed at reducing energy bills.

Lime has been relatively successful  -  at least its revenue growth suggests it has been capturing market share.  Reported sales were $120.1 million in the year 2011, an impressive increase over $95.7 million in 2010 and $70.8 million in 2010.  The problem: revenue is now in question.  Last week the company filed a notice with the SEC that an internal investigation determined some revenue reported in the last two years were improperly recorded.  Some revenue was non-existent and other revenue was recorded too early.

The stock dropped by 50% in the days following the announcement and the shareholder lawsuits and law firm investigations were still piling up a week later.  It is a reasonable reaction  -  reduce exposure to loss when financial reports are fraudulent.

Six weeks earlier the chairman of Lime Energy’s board of directors1 had resigned, ostensibly due to health reason.  Coupled with the revenue issue, the resignation added a bit of intrigue to the story and a hint of more wrongdoing.  So even though the amount of bogus and inaccurate revenue amounts to $15 million or less  -  that is no more than 7% of total revenue in the two-year period  -  the corrected share price reflects a far more significant problem.    

It is a matter of trust.  Lime management should all be under suspicion, especially the chief financial officer1 who has a bird’s eye view on contracts, orders, billings and collections.  The energy alternative market place is supposed to be filled with the good guys who are fighting to save the world from global warming.  Instead we find liars who misrepresent sales.  That it is only a 7% fudge makes no difference.

LIME will remain in the Efficiency Group of our Mothers of Invention Index.  The revenue question will get cleared up.  Corrected financial statements will be filed.  Perhaps there will even be changes in the management team.  Then in all probability we will call the stock oversold and investors will have a chance to pick up a good company at a cheap price.  The equity market is a wonderful place!

1EDITOR'S NOTE: For a reason to think the damage may be limited, see Tom Konrad's article on Lime Energy insiders' stock trades.

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

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

July 13, 2012

Waterfurnace 7 Series vs. Climatemaster Trilogy Geothermal Heat Pumps: The Best of the Best

UPDATE: I just looked into the 7 Series vs the Trilogy 40 in more detail here and came to a slightly different conclusion.

Tom Konrad CFA

heat pump
Geothermal heat pump diagram via Bigstock

Waterfurnace Renewable Energy (TSX:WFI, OTC:WFIFF) launched its new highly efficient 7 Series geothermal heat pumps (GHP) today.  The 7 Series commercial release beats Climatemaster’s (a division of LSB Industries (NYSE:LXU)) Trilogy 40 as the first commercially available GHP with a variable speed compressor.  The Trilogy 40 is currently available as part of a pilot program, and is expected to be commercially available later this year.  The variable speed compressor enables a significant jump in efficiency over previous two-stage compressors.

I looked at the technology behind these new heat pumps in the article Geothermal Heat Pumps: The Next Generation in May, soon after Climatemaster introduced the Trilogy.  At the time, we only knew that Waterfurnace expected the 7 Series to be “more efficient” than the Trilogy.   Now we have detailed specs, I thought I’d compare them head-to-head:

GHP Efficiency

As you can see from the chart above, Waterfurnace managed to nudge out Climatemaster in both cooling (EER) and heating (COP) efficiency ratings.  Both are on linear scales, so the Series 7 is 2.5% more efficient at cooling and 6% more efficient for heating than the Trilogy.  With top efficiency ratings, the Waterfurnace GHP will likely appeal to customers who must have “the best” of everything.

Other Factors

The efficiency of  the GHP unit is only one factor in overall system efficiency, and efficiency is only one factor in the decision of what to install.  Price will be an important factor as well, although given the likelihood that these variable speed GHPs will be priced at a significant premium, price sensitive customers will most likely install two-stage GHPs.  Waterfurnace’s Series 5 was launched in March, at a slightly lower price than the previous Envison product it replaced, while maintaining all the features and efficiency of that model.

The most important factor for installers will be dealer support and ease of install, especially for the residential market.  Both Climatemaster and Waterfurnace seem to have simplified installation with the new models, while dealer support is much more a local issue, and is determined by the installer’s relationship with their distributor.

Along with the Series 7, Waterfurnace is introducing  a new “IntelliZone2″ zone controller, which will simplify the installation and use of their Series 5 and 7 products with multiple zones.  On the other hand, Climatemaster’s Trilogy includes a propriatary “Q-mode” which allows the heat pump to create hot water year round.  Most rival heat pumps only create hot water when being used to heat or cool the building.  In new residential applications without an existing water heater, Q-mode could easily give Trilogy the edge over the 7  Series, since it would allow the contractor to dispense with a secondary hot water source.


Neither of these two GHPs is the clear winner, with the 7 Series’ edge in efficiency countered by the year-round hot water of the Trilogy’s Q-Mode.  Waterfurnace’s efficiency edge is more significant in heating-dominated climates, such as the Northern US and Canada, while Climatemaster’s Q-Mode will probably give the Trilogy an edge in new-build markets.  Existing relationships between installers and their dritributers will probably dominate both in many cases.  UPDATE: The Series 7′s earlier commercial availability will make Waterfurnace’s offering the only real choice for installations over the next few months.

The biggest winners will be consumers, who now have both cheaper versions of two-stage GHP technology available, as well as the option to enter a whole new frontier of HVAC energy efficiency.

Disclosure: Long LXU, WFIFF

This article was first published on the author's 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 27, 2012

Green Shoots for Green Building: Seven Stocks to Play the Trend

Tom Konrad CFA

Rockwool insulation (Photo: Achim Hering)

Signs of Green Building Growth

Rockwool International (COP:ROCK-B,OTC:RKWBF) recently announced the establishment of the insulation manufacturer’s first US factory, in Mississippi, about 30 miles outside Memphis, Tennessee.  The firm has been seeing double-digit annual sales growth in North America, driven by interest from do-it-yourself chains and insulating commercial buildings, and expects this growth to continue.

The company’s rock wool insulation, sustainably made from stone and recycled materials, can provide improved fire protection when compared to traditional insulation products.

Rockwool is far from the only green building company to predict growth in 2012, despite the generally depressed housing market.  Geothermal (a.k.a. Ground-Source) Heat Pump (GHP) manufacturers Waterfurnace (TSX:WFI,OTC:WFIFF) and LSB Industries (NYSE:LXU) both said they see signs of revival in demand for their green building products during their first quarter conference calls.  Insulated Concrete Form (ICF) and Structural Insulated Panel (SIP) manufacturer PFB Corporation (TSX:PFB, OTC:PFBOF) did not provide an updated outlook in the first quarter, but has seen continuous sales growth over the last several years, despite the downturn, and is expanding manufacturing in the US and has seen favorable pricing trends beginning to emerge.

With signs of growth just beginning to emerge, now seems a good time to get into green building stocks, before the trend is widely recognized.  Here are seven to consider, starting with the most-well known large capitalization companies, and moving on to the hidden gems.

1. Honeywell (NYSE:HON)

Building climate control leader Honeywell has expected earnings for 2012  of $4.51, for a forward price/earnings (P/E) ratio of 12.4.  Honeywell pays a quarterly $0.3725 dividend for an annual yield of 2.7%.  Honeywell is not a focused play on green building, having large aerospace, materials, and transportation segments.  About a third of the company’s sales come from its building automation and control segment.

2. Johnson Controls (NYSE:JCI)

Building efficiency and autoparts leader Johnson Controls has expected 2012 earnings of $2.72, for a forward P/E ratio of 10.4 at the current price of $28.23.  The company pays a $0.18 quarterly dividend, for an annual yield of 2.6%.  A little over a third of the company’s revenues come from its building efficiency segment.

3. Owens Corning (NYSE:OC)

Insulation maker Owens Corning has expected 2012 earnings of $2.08, for a forward P/E ratio of 13 at $27.13.  Although expected earnings are down slightly from 2011, strong growth is expected to resume in 2013. The company does not pay a dividend.  Although somewhat expensive compared to Honeywell and Johnson Controls, Owens Corning’s focus on the housing market means that revenues have been hurt more by the housing downturn and will benefit more from a recovery.

4. Rockwool International (COP:ROCK-B,OTC:RKWBF)

International insulation manufacturer Rockwool pays a 2% ($1.70) annual dividend, and is expected to earn $5.95 a share in 2012, for forward P/E ratio of 14.  Earnings are expected to be up 7% in 2012 over 2011, on slightly falling revenues because of uncertainty in Europe.  Rockwool is the most difficult company in the list for a North American investor to buy, since it generally must be purchased through a broker’s international trading desk.  As such, this company is only appropriate for a long term investor making a fairly substantial investment.  Like Owens Corning, Rockwool is a large cap, nearly pure-play green building company, and the difficulty of buying it is offset somewhat by the advantages of a regular dividend.

5. LSB Industries (NYSE:LXU)

Chemical and GHP manufacturer LSB is currently trading at a depressed price because of investor worries about damage from an explosion at one of its chemical facilities last month.  This investor reaction seems out of proportion to the relatively small size of the potential uninsured losses from the incident.  At $26.38 LSB has a forward price earnings ratio of 9 but does not pay a dividend.  About a third of LSB’s revenues come from its climate control business.

6. WaterFurnace Renewable Energy (TSX:WFI, OTC:WFIFF)

Waterfurnace is a leading North American manufacturer of GHPs, and managed the housing downturn well by refocusing its business away from the weak residential market and towards the more resilient commercial market.  The company pays a regular $0.24 quarterly dividend for a 5.93% annual yield at the current stock price of $16.03.  Trailing twelve month earnings are $1.20 per share, for a trailing P/E of 13.4.  Forward earnings estimates are not available for this little-followed company.  Among the pure-play green building companies in this list, Waterfurnace is currently one of the two most attractively priced, and unlike PFB (below) is easy to buy for a US-based investor.

7. PFB Corporation (TSX:PFB, OTC:PFBOF)

PFB makes green building products from expanded polystyrene, such as the SIPs and ICFs mentioned above.  The company pays a regular quarterly dividend of 6 cents a share for a 3.8% annual yield at $6.31 and has shown consistent earnings and revenue growth.  PFB’s trailing twelve month earnings were $0.54 a share, for a trailing P/E of 11.7.  Unfortunately, the stock is extremely illiquid, and so is only appropriate for very long term investors or smaller investors trading using limit orders.

Taxes on Foreign Dividends

Dividends from Rockwool, Waterfurnace, and PFB are subject to foreign withholding taxes, and so these stocks should be held in taxable brokerage accounts, where this tax can often be recovered through the federal foreign tax credit.

Disclosure: Long WFIFF, LXU, RKWBF, PFBOF

This article was first published on the author's 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 05, 2012

Geothermal Heat Pumps: The Next Generation

Tom Konrad CFA

The most efficient way to heat and cool a building just got more efficient.

Geothermal heat pump diagram via Bigstock

Climatemaster, a division of LSB Industries (NYSE:LXU), recently announced that their new Trilogy 40 geothermal heat pump (GHP) had been certified by the Air Conditioning, Heating, and Refrigeration Institute (AHRI) to exceed 40 Energy Efficiency Ratio (EER) under ground loop conditions.

EER is the ratio of effective cooling (heat removed) to the energy used, at maximal load, and is the standard measure of cooling effectiveness for geothermal heat pumps. A quick perusal of the list of Energy Star qualified GHPs shows just how big a leap this is: the highest EER rating currently available is 30, and many Energy Star qualified heat pumps have EERs as low as 17.  So the Trilogy 40 is a third again as efficient for cooling as the most efficient commercially available GHP, and more than twice as efficient as some Energy Star qualified GHPs.

Scott Lankhorst, President of Synergy Systems, a GHP installer in Kingston, NY, called the jump in efficiency “pretty amazing… 30 EER has been the max for quite a while now.”  Lankhorst says that Climatemaster hopes to have the Trilogy 40 in full production by the end of the year.

According to Barry Golsen, President and COO of LSB, the Trilogy 40 will also have improved heating performance, with a Coefficient of Performance (COP, the industry measure of heating efficiency) of 5 at ground loop conditions.  This is also a significant increase, with the best GHPs in the Energy Star list having COPs of 4.1.


In addition, they’ve added new functionality, called “Q-Mode.”  Q-Mode is the result of a collaboration between Climatemaster and Oak Ridge National Laboratory.  It allows the GHP to produce hot water even when it is not being used for space heating or cooling.  According to Chris Williams, technology evangelist at Heatspring, a provider of renewable energy and energy efficiency training and certification, producing hot water year round required additional equipment (and cost) with traditional heat pumps.

The Competition


Climatemaster is not moving into 40 EER territory unchallenged.  On GHP manufacturer Waterfurnace Renewable Energy’s (TSX:WFI, OTC:WFIFF) first quarter conference call, an analyst asked CEO Tom Huntington if Waterfurnace had an answer to efficiency breakthroughs at “a competitor.”  It does.  Huntington believes Waterfurnace’s new 7-Series GHP’s will be even more efficient than Climatemaster’s Trilogy.  Variable speed compressors (see below) are available from a number of vendors, and Huntington believes that the compressor used in the Trilogy is less efficient than the on Waterfurnace has selected for the 7-Series.

The Technology

How did they achieve these efficiency breakthroughs?  Both companies speak of “variable speed technology.”  According to Lankhorst, what they mean is variable speed compressors.  Current GHP models use two stage scroll compressors.   Variable speed blower motors and pump fields have been available for some time, although they often require the special controllers.

Variable speed compressors are new.  According to Williams, “there has been a huge amount of innovation in air source heat pumps,” and the innovations are now being applied to ground source technology.

Climatemaster’s Q-Mode a control system that integrates the GHP and components with the hot water tank, enabling the heat pump to deliver hot water year round.  Previously, year round hot water required additional components, or a back up heating source.  Q-Mode is patent pending, so it may be that it will give Climatemaster a competitive advantage if competitors like Waterfurnace are unable to duplicate the functionality without infringing patents.

ApplicationLSB logo

The integration of components and jump in efficiency should make these new systems attractive to installers in the field.  According to Lankhorst, the Trilogy may be especially cost effective in high-end residential applications, where the integrated system will eliminate several separate components.  Year round hot water is less of an advantage in commercial applications, since commercial installations operate nearly all the time in cooling mode, when free hot water is produced as a byproduct of cooling the building.

On the other hand, the spot efficiency ratings of a GHP are far from the only factor in determining the effectiveness of a GHP system.  According to Williams, proper ground loop, distribution, and system design can potentially have a greater impact on system efficiency.

Competitive Advantage

When contractors select a GHP, technology tends to be more important in commercial operations than in residential ones.  The cost of the heat pump is a small fraction of the cost of drilling the loop field, so residential installers are more interested in the level of technical support offered by the distributor, so these competitive advantages will vary from region to region.

On the other hand, if Q-Mode makes for much simpler installations, Climatemaster stands to gain residential market share unless its competitors can offer similar integration without infringing its intellectual property.


The next generation of efficient ground source heat pumps are a significant step forward in energy efficient climate control.  Nevertheless, for the next few years, I’d expect that these variable speed compressor pumps will only be used in a small fractions of installation.  Geothermal heat pumps are already so efficient that the additional savings may not be enough to justify the higher up-front cost.  Additionally, Waterfurnace introduced their new 5-Series line of GHPs with two stage compression in March, at a slightly lower price point than the Envision product it replaces.

Either way, the cost of saving energy continues to fall, and the potential customer base for geothermal heat pumps will grow as higher efficiency and lower prices make them an even more economical approach to climate control.

Disclosure: Long LXU,WFI.

This article was first published on the author's 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 04, 2012

Lime Energy Gets $2.5M to Fund Growth of Utility Business

Tom Konrad CFA


I was surprised when Lime Energy (NASD:LIME) announced that it was selling a million shares to Richard Kiphart, one of its own directors and its largest shareholder.  Last year, CEO John O’Rourke had told me that Lime  expected to reach profitability without having to raise additional capital.

What happened in the meantime?

It was the best of Limes, It was the worst of Limes

Two things had happened, one bad, one good.

The bad was that Lime’s C&I business turned in a particularly weak first quarter, cutting expected profits by a little over $1 million.  Cash reserves are always seasonally low at the end of the first quarter after the slow winter season, so liquidity was a bit tighter than usual.

I thought the earnings miss would bring a good opportunity to buy the stock, especially given that the company’s new strategy of focusing on utility contracts is paying off.

That’s the good thing that happened: four utility contracts were awarded in the first quarter.  That’s a total of seven, up from just one a year earlier.

Because of these contracts, analyst Graig Irwin at Wedbush Securities was quoted in a Charlotte Business Journal article (no online access) saying he expects the company to end the year in the black, despite the first quarter loss.

Kiphart’s Investment

To make Lime’s targets, the company will need to ramp up the new utility contracts quickly, and that takes cash.  Director Richard Kiphart, who already owned 9.6 million shares, 40% of the company, worth $24.5 million, stepped up to the plate for another $2.55 million for another million shares at the current market price.

Lime or Lemon? photo via Bigstock
Lime, not Lemon

The market’s currently treating this Lime like a lemon.  I look at this citrus and see green.  Apparently Kiphart, who knows as much as anyone can about Lime’s prospects, sees green, too.

Disclosure: Long LIME

This article was first published on the author's 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 24, 2012

Who's a Fat Cat?

Tom Konrad CFA

fat cat photo
A Fat Cat. Photo of "Cauchy" by author.

Friday, in a generally positive article about Lime Energy (NASD:LIME), I noted that the top five executives at the company seemed overpaid in comparison to one of their nearest rivals, Orion Energy Systems (NYSE:OESX).  Since this was not based on in-depth research, and is a pretty serious allegation about a company I’m otherwise enthusiastic about, I decided to do some more digging.

Who is a Fat Cat?

Using data on executive pay from Morningstar, I compared executive pay at Lime not only to Orion Energy, but to the four other energy management companies I covered in my series of executive interviews last year: World Energy Solutions (NASD:XWES), EnerNOC (NASD:ENOC), Comverge (NASD:COMV), and Ameresco (NYSE:AMRC).  The results are shown in the chart below:

Executive Pay 2009-11

The chart shows total compensation of the top five executives of each company, in millions of dollars, over the last five years.  I’ve also included the three-year total return for each stock, and the total of all three year’s pay as a percentage of the current market capitalization (since larger companies can afford larger pay packages.)

I chose to use only the last three years’ of compensation because that was the most available for Ameresco.  I included the stock price returns, since this is an indicator of how effective share option awards have been at reducing executive pay as the share price falls.  Since all these companies have had falling prices over the last three years, we would expect to also see falling pay.  Note that the return of World Energy Solutions is a one year, not a three year return, as the company got its NASDAQ listing only 2010.

Who is the Most Overpaid?

Looking at the chart, it’s clear that my initial impression that Lime executives are overpaid in comparison to Orion executives was incorrect, because it was based on only the most recent year’s compensation.  Compensation of Lime executives falls in the middle of the pack, although the generally rising trend of compensation at Lime is not what we would expect given the poor stock performance, but it could be accounted for because of various timing issues.  While the rising trend would be worth looking into if it were to continue without a stock price revival, it is not alarming when you consider that compensation fell drastically from $3.7 million in 2007 (when the stock shot up) to $1.2 and $1.15 million in 2008 and 2009 when the stock fell back.

The most overpaid executives are at Comverge and EnerNOC, both in absolute millions of dollars, and as a percentage of market capitalization.  Comverge agreed to be acquired by a private equity group H.I.G. Capital LLC in March, so I expect that this particular group of overpaid executives will be out the door soon.  EnerNOC execs should probably go the same way, but with such hefty pay packets, executives there have every incentive to hang on as long as possible, as did executives at Comverge (just ask Brad Tirpak, who led a multi-year campaign to remove them.)

Who’s a Slim Cat?

fat cat photo
A Slim Cat. Photo of "Cauchy" by author.

The best bargain for shareholders is the management team at Ameresco (NYSE:AMRC).   This might be surprising, since George Sakellaris, founder, President and CEO, has complete control of Ameresco’s board because he owns a large block of shares with superior voting rights.  But my impression from talking this slim cat (he’s a runner) is that he keeps building energy service companies in order to create something great, not to suck shareholders dry.

With Sakellaris as the driver, investors should be happy pay his quite reasonable salary and hop on for the ride.  Incidentally, Ameresco’s stock is once again looking attractive after an earnings miss on May 8th.

This article first appeared on the author's 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 20, 2012

PFB Corp Integrates Upstream, Just in Time for Green Housing Market Upturn

Tom Konrad CFA

PFBCorp_logo_img11[1].pngOn May 9, green building firm PFB Corporation (TSX:PFB, OTC:PFBOF) announced that it had signed a letter of intent with NOVA Chemicals for PFB to acquire NOVA’s Performance Styrenics business.  The all share deal will give NOVA an equity stake in PFB as well as two seats on PFB’s board.

PFB’s Plasti-Fab subsidiary currently sells Expanded Polystyrene products (EPS) such as Insulated Concrete Forms and Structural Insulated Panels into the North American green building market, and as a result is a customer for the Performance Styrenics division’s EPS resins.  Over the last few years, volatile materials costs have been a large source of uncertainly in PFB’s earnings, so the acquisition should lead to more predictable earnings at the company.

While the size of the equity stake has not been announced, I expect it will be significant given that two board seats come along with the stake.  This boost in size should be beneficial to PFB’s shareholders given the company’s current small market cap ($38 million) and low liquidity (only $4000 worth of shares trade hands on a typical day.)  The added size and revenues will allow PFB to better afford the costs of a market listing, and may enable a move to a more liquid market such as AMEX, or a wider class of investors to invest in the stock.

Although the low liquidity makes it difficult for investors to buy PFB’s stock quickly, a patient investor can acquire it at a very attractive price.  PFB typically trades between $5.50 and $6.50.  At $6 a share, PFB pays a 4% dividend, and has a trailing twelve month price earnings ratio of 11.  Book value per share was $6.72 at the end of 2011.

PFB is beginning to see its green building markets revive:  First quarter earnings per share were up 6 cents over a year ago, and sales were up 6.5%.  Other green building companies are expecting a market revival in 2012, as I wrote here about geothermal heat pump companies Waterfurnace Renewable Energy (TSX:WFI,OTC:WFIFF) and LSB Industries (NYSE:LXU).

With a great valuation and reviving market, now seems a great time to buy PFB stock.    Just use good-til-cancelled limit orders to avoid driving the price of this thinly traded stock up to more than you’re willing to pay for it.

Disclosure: Long PFB, WFI, LXU

This article first appeared on the author's 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 19, 2012

Ameresco (AMRC) Misses by 7 cents: Look to Buy on Any Sell-off

Tom Konrad CFA

Ameresco, Inc. (NYSE:AMRC) reported first quarter (Q1) earnings this morning, missing analysts’ earnings expectations by two-thirds.  While Q1 earnings were only 3 cents compared to the 10 cents expected by analysts, the company slightly beat revenue expectations by $600,000 for overall Q1 revenues of $146.6 million.

While the headline was disappointing, President and CEO George Sakellaris confidently reaffirmed revenue guidence for the rest of the year, saying that he expected 2012 revenues to be heavily back loaded.  Sakellaris predicts the second half to account for 60-62% of 2012 revenues, compared to 38%- 40% for the first half of the 2012.

Longer term, he expects Ameresco to continue its strong growth, with operating margin strengthening towards 20% over the longer term.

Strong revenue growth is coming from contract with the federal government.  While Ameresco received only $2 million worth of awards in the whole of 2011, they have already been awarded $20 worth of contracts in 2012.   Sakellaris commented that Ameresco has found it hard keeping up with federal demand so far this year.

These new contracts (up 50% over Q1 2011) helped grow Ameresco’s backlog by 10% compared to last year.   While such new contracts will not begin producing revenue until 2013 at the earliest, they should give investors confidence that Ameresco’s long term growth potential is still in place.  Ameresco’s revenues should continue to grow 20% year over year, despite the poor earnings  performance this quarter.


This mornings’ earnings miss may cause a sell-off over the next day or two.  Investors should take the opportunity to add to their positions in this sustainable company which has low exposure to expiring renewable energy subsidies.

Note: This article was first published on the author's blog on May 8th, when Ameresco was trading at $11.70.  Click here for an up-to-date quote.

Disclosure: Long AMRC.

This article first appeared on the author's 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 14, 2012

Lime Energy Strategy Validated by Award from Central Hudson

Tom Konrad CFA

Lime Energy (NASD:LIME) has been a star in the very competitive energy services space recently because of its ability to maintain margins in what has been a very competitive environment.  While competing small efficiency companies have been closing up shop in the Northeast, Lime has been growing revenues at 30% a year, while maintaining a gross margin of around 20%.

Recently, Lime sold off due to an earnings miss arising from a big write-off and less than expected revenues in the company’s Commercial and Industrial (C&I) division.  This was the buying opportunity I was waiting for since I first wrote about the Lime last October.

Central Hudson Award

The stock has not yet recovered, but today’s announcement of the award of Central Hudson’s (NYSE:CHG) direct install program may change that.

Lime anticipates that the contract will be worth up to $25 million over a four year period, which should add about 5% to the company’s 2011 revenues for the next four years.  With gross margins of approximately 20%, it should also add $500 thousand to $1 million (2 to 4 cents a share) to earnings, depending on how much extra overhead the program requires.

Lime’s Strategy

But the earnings impact is likely to be much bigger than 2 to 4 cents a share.  To understand the true impact of this announcement, you have to understand the key to how Lime has maintained margins in the current tough environment, and why they took that big write-off to restructure their C&I division.

While large C&I projects are extremely competitive, and have led to shrinking margins for most of the industry, Lime has been able to leverage their utility contracts to do follow-on business with small to mid-size C&I customers.  Most efficiency companies have trouble reaching these smaller customers because of the high acquisition costs for projects that only produce moderate revenue.

In the context of a utility program, the utility pays Lime to contact the businesses and implement a menu of energy efficiency measures.  Lime can then offer the business a number of additional efficiency measures which will be profitable to both the business and to Lime.

The recent restructuring was intended to better align Lime’s C&I business with these utility programs, and to take advantage of the selling opportunity afforded by Lime’s utility programs.

That’s why today’s announcement is big news.  The award of additional utility programs is key to Lime’s strategy.  Today’s announcement tells us that strategy is working.

Disclosure: Long LIME

This article first appeared on the author's 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.

February 29, 2012

The Spray Foam Industry: Moving to Soy?

by Scott Schnelle

As an energy consultant for home retrofits, I often have customers and acquaintances ask my opinion regarding green technologies and energy efficient products. Undoubtedly, with the recent surge of the green movement and a shift toward becoming more environmentally sustainable, now is a great time to invest in these types of products.

One product that has been getting more and more attention lately is spray foam. The product itself has been around for many years, but it has recently risen in popularity for a couple of reasons. Here, I’ll discuss spray foam briefly and then touch on some tips for investing in this market.

First, spray foam is a more environmentally efficient method of insulation as opposed to traditional fiberglass installation. Spray foam is usually several times more expensive, depending on the size of the spray foam tanks being used. Bigger tanks are cheaper per ounce. That being said, the spray foam installation is often quicker and easier, and after factoring in labor costs, spray foam can compete with fiberglass in many applications solely on price.

The product itself is a thick, foaming substance that sprays out in a thin layer but quickly begins expanding on contact. After about 60 seconds, it ceases expanding and begins to harden.

Otto Bayer developed the product in the 1930s while he was trying to develop an alternative to the rubber tire. It was also used in World War II in the German U-boats as floatation material. In the ‘60s and ‘70s, the product began infiltrating into the residential market as home insulation. In recent years, home improvement television shows have spurred a new interest in spray foam. Most customers that come to us cite these types of programs as their point of familiarity with the product.

My company highly recommends this product. It’s great for large gaps and cracks that need to be air-sealed. It also acts as a great insulator and can be used to save time in some applications like rim joists.

Because the product has been around for many years, I would not consider spray foam an “up-and-coming” product. However, I believe it is gaining quite a bit of popularity because of the green movement and the push for greater energy efficiency. I also believe that we’ll see a drop in the price of this product as more people use it and it is manufactured on a larger scale.

Currently, my company uses a spray foam product from Dow Chemical Company (DOW), though we do not necessarily endorse any one company or brand. All major industry players carry spray foam products, including Johns Manville (a subsidiary of Berkshire-Hathaway, BRK-A and BRK-B), Owens Corning (OC) and Certainteed (a subsidiary of Saint-Gobain (SGO.PA). Another company worth exploring is BioBased Technologies, LLC.

Biobased is based in Arkansas and specializes in polyurethane foam insulation products. The notable aspect about BioBased Technologies is that they use a soy-based product, which is becoming a new trend within the spray foam movement. Other soy-based insulation companies include InsulSoy, Emega Biopolymers, Urethane Soy Systems and Green Bear Innovation. Though, it is safe to say that BioBased is the industry leader in the soy-based product.  I see soy-based spray foam growing in popularity faster than traditional spray foam.

Soy based foam could even become the industry standard in residential applications in the future, most likely because traditional spray foam products are are quite toxic. We have had a few cases where employees fail to use their masks properly and subsequently report pain in their lungs and a shortness of breath. It is extremely important to wear a protective body suit along with a breathing mask if ever applying spray foam.  The soy-based product is much safer for the installer and the homeowner as well. The level of volatile organic compounds (VOCs) are much lower with the soy product, and I think as awareness about the harmful effects of VOCs becomes more widespread, more people will be seeking a safer product. Our company is currently working with distributors in the area that carry soy-based spray foam.

Though Johns Manville has a line of spray foam products, they have yet to introduce a soy-based product. The same is true for Owens Corning and Certainteed. I believe that this is because soy-based spray foam is still relatively new. Soy-based spray foam has many advocates, but it also has been the subject of some criticism. For instance, many believe that the environmental benefits are overstated, as soy-based spray foam could open up its own set of environmental problems including pesticide use and the use of genetically-modified crops. However, many agree that these potential problems still outweigh the carbon footprint and toxins associated with traditional spray foam.

About the Author:  Scott Schnelle is an energy auditor with Energy Link, a home retrofit company based out of Columbia, Missouri. EnergyLink specializes in increasing energy efficiency in homes through comfort sealing, duct renovations, insulation, heating and air and more.

Editor's Note (4/9/12):

I was contacted by a representative of BioBased Technologies (a company highlighted in the article) who felt that it was misleading regarding the safety of their product.  Here is what she had to say:

[Scott Schelle] mentions spray foam insulations that incorporate soy, and we are one of the manufacturers of these products. The main environmental benefit is that our products seal and insulate a structure so that it uses less energy for heating and cooling, but several of our products also replace a portion of the petroleum polyols with bio-based polyols (in our case soy). We’ve been able to do this and still produce an insulation product that works. But it is still a spray foam insulation. That means it is still a two-component system, one part, the A side, is the same as traditional spray foam insulations. There are still worker safety measures that must be followed during and after installation, and occupants or other workers cannot be in the structure when the product is installed. These safety measures are the same for all spray foam insulation products, regardless of whether or not they incorporate bio-based content. Those are detailed at
The bio-content in any product allows us to incorporate a rapidly renewable-based polyol for a portion of the petroleum-based polyols. This article makes it sound as if the bio-content impacts these safety measures, and it does not. We want everyone to understand that any spray foam insulation product has specific safety guidelines that must be followed.
Jennifer Wilson
Brand Manager | BioBased Technologies®

January 25, 2012

Dark Clouds Threaten German Clean Energy Ambitions

John Petersen

During the fourteen years that I've lived in Switzerland, the Germans have been the world's staunchest supporters of green power and alternative energy. Their aggressive development of wind power was breathtaking, as was their warm embrace of photovoltaic power. Over the last few weeks, however, there has been an ominous change in the mainstream German media's tone as the political class finally comes to grips with the unpleasant reality that rooftop solar panels are worthless on short, grey winter days and "For weeks now, the 1.1 million solar power systems in Germany have generated almost no electricity." Three recent and highly negative articles from Der Spiegel Online include:
As recently as last year, articles like these would have been unthinkable. Today they're viewed as reasonable discussions of critical issues as the laws of thermodynamics and economic gravity assert their absolute primacy.

The Germans have been trailblazers in all things green since the emergence of the Green Party in the 1980s. In fact, it's hard to name an alternative energy technology that Germany hasn't welcomed with open arms. When it comes to green power and alternative energy, the Germans have been on the far left of the technology adoption curve for a very long time.

1.24.12 Tech Lifecycle.png

If the tone of the recent Der Spiegel articles is a reasonable indicator of public sentiment, the innovators are getting ready to throw in the towel on green panacea solutions and get down to the serious work of conserving energy instead. They're weighing the costs and benefits, and reaching an entirely predictable conclusion that it's impossible to depend on variable and inherently unreliable power sources as the backbone of an industrial economy. As Germany goes, so goes the world.

If the world's standard-bearer for green power and alternative energy abandons the quest and chooses a more sensible path of conservation and energy efficiency, the backlash against the solar power industry will be immense and risks to the wind power industry will skyrocket. After all, it's hard to argue the merits of "One for the Price of Two" power solutions; which is exactly what you get when wind and solar power have to be fully backed up by conventional power plants. If the solar and wind power dominoes fall, they'll almost certainly take out the emerging electric vehicle industry that demands huge amounts of money and natural resources to simply substitute one fuel source for another.

Currently all eyes are on Germany as the epicenter of European efforts to restore fiscal balance in an age of profligate and unsustainable government spending. The apparent German surrender on green power and alternative energy may just be an unfortunate victim of that broader effort. Until the dark clouds dissipate and we have a clearer view of the landscape, I'd minimize my exposure to solar, wind and electric drive and focus instead on less costly energy efficiency technologies that work with the laws of thermodynamics and economic gravity instead of fighting them.

Disclosure: None

November 21, 2011

Will LED Stocks Follow Solar Stocks Over the Commoditization Cliff?

Tom Konrad CFA

One irony of green investing is that doing good (for the planet) does not always do well for investors.  Recently the rewards for do-gooders have been abysmal.  For years, I've been warning that the rapid price reductions we need to make solar mainstream are unlikely to be good for the profits of solar companies

This year a combination of subsidy cuts in Europe and photovoltaic (PV) module oversupply brought those price reductions home to roost.  Recently, PV manufactures have been scaling back expansion plans, which should help reign in module supply and the price cuts which are undermining solar manufacturer profitability.

The LED Industry

LED Headlamp. Photo by author
LED Headlamp.JPG
Light Emitting Diodes (LEDs) are widely assumed to be the lighting technology of the future.  LEDs have found their way into televisions and computer monitors, where they are much more energy efficient than the incumbent LCD and Plasma technologies.  As I discussed in my March article "Ten LED Stocks, and a Wildcard," LEDs are also just beginning to enter the consumer market as replacements for incandescent bulbs and Compact Fluorescent Lights (CFLs).  While LED based bulbs are still much more expensive than CFLs, they have generally superior performance in several ways: They turn on instantly, are fully dimmable, work well in the cold, and last much longer.  LEDs also don't come with any worries about the small amount of mercury contained in fluorescent bulbs (CFLs included.)

Although LEDs are potentially more than twice as efficient as CFLs (and ten times as efficient as conventional incandescents), my experience with replacement bulbs (I own a half dozen of various types) has been that they are only slightly more efficient per unit light output than comparable CFLs. 

LED chips currently produce 100-120 lumens per watt, and typical CFLs produce 60-70 lumens per watt.  But it's clear from the comparison chart from Phillips (PHG) below that the company's LED based bulbs produce only 48 lumens per watt.  That is likely why LED manufacturer comparison charts like the one below only reference incandescents, not CFLs.

The disappointing performance of LED screw-in bulbs is most likely because LED bulb replacements require normal household alternating current (AC) to be converted to direct current (DC), as well as to be kept cool.  These added complexities have so far prevented LED replacement bulbs from achieving their full potential efficiency. 

Dr. Roland Haitz (of the eponymous Haitz's Law-- the Moore's Law of the LED industry), quoted in a Cannacord Genuity research note, "views replacement bulbs as a bridge solution and believes that in 20-30 years there will be no more screw-in light
bulbs. He sees fixtures transitioning into more of an integrated solution."

Given the difficulties of adapting LEDs to a form-factor designed for incandescent bulbs, I'm inclined to agree that replacement bulbs will continue to struggle.  Instead, LEDs will continue to make headway in a growing number of lighting niche applications.  They already dominate flashlights and other battery powered lighting where their preference for DC current is an advantage rather than a disadvantage.  They also dominate in traffic signals, where their directional light and pure colors are an advantage.  Continued price reductions will allow them to dominate an increasing number of niches.

Like PV, LEDs have a lot of promise.  Yet like PV a couple years ago, they need to see significant price reductions in order to fully achieve that promise.  Those price reductions may cause nearly as much turmoil in the LED industry as we're currently seeing in the PV industry.


A dimmable LED downlight. Photo by author
How will the coming price drops evolve, and should investors simply avoid the industry, or will there be ports of refuge in the coming storm?  I asked three green money managers for their perspectives.

Rafael Coven, manager of the Cleantech Index which underlies the PowerShares Cleantech ETF (PZD), thinks prices for LEDs are likely to fall as fast if not faster than  solar PV due to the rapid commoditization of the product.  He thinks  that as prices fall, "LEDs will start to grab share from halogen lamps first and then decorative incandescent lamps.  Eventually LEDs will take share from compact fluorescent lamps where the need for dimming is high, but it will take much longer for LEDs to supplant CFLs because of CFLs longer lamp life/replacement cycle, and the diminished value proposition vs. replacing incandescent lamps with CFLs.  ... [A]nywhere where labor for lamp replacement is high will be excellent applications for LEDs as well."

But there are already niches where LEDs have the advantage at current prices.  Coven says, "I have already seen long-operating hour applications (e.g., Baltimore’s Mount Sinai Hospital) where LED lamps have already been effectively adapted to replace T8 fluorescent lamps with solid economic returns."

He thinks most current LED companies will not be able to survive as high volume/low cost producers, so he suggests looking for companies with strong intellectual property that can earn significant profits from licensing, or companies with superior technology which will allow them to charge higher prices.

Garvin Jabusch of Green Alpha Advisors and manager of the Sierra Club Green Alpha Portfolio, thinks that the PV and LED industries are similar in that they have "perceived oversupply issues," but also rapidly increasing demand.  He says, "The macro case for LEDs rests mainly with incandescent bulb sales being banned in the EU, US and China beginning as early as next year, and phasing to complete ban by 2016. This is significant: China alone consumes 1.07 billion incandescent bulbs per year. LEDs aren't the only alternative but they are the best one in terms of efficiency."

For ports in the storm, Jabusch points to "upstream play Aixtron AG (AIXG) which makes and sells the machines other firms use to make LEDs, and so provides a way to bet on the industry without selecting individual diode manufacturers. We also like Applied Materials (AMAT) whose LED operations include [high efficiency] LED applications for displays, LED manufacturing software designed to shorten production time, and several other tactical plays hitting multiple verticals and diverse uses. AMAT is also well diversified in other next economy sectors such as advanced materials and energy storage, so it's an all around good green economy bet."  Green Alpha Advisors and its clients are long both stocks.

Jeff Cianci, Chief Investment Officer at long-short equity fund Green Science Partners sees parallels between the two industries in that both need to drive down prices, but he also sees contrasts.  He says "solar needs to consolidate the number of players and LEDs need to consolidate the steps in the value chain for faster adoption."  Cianci thinks the winners will be those that can vertically integrate along the value chain, but they will only be relative winners.  He says, "Short term, I don’t see many places to hide."  Longer term, he expects the winners will be acquired by larger industrial technology companies." 

His picks for possible longer term winners are Cree Inc (CREE), or GT Advanced Technologies (GTAT).  While GT is a broad based, mostly upstream company like Jabusch's Aixtron pick, Cianci sees most of the value add in the industry downstream.  He thinks that attractive LED fixtures are likely to drive adoption of LEDs, not just price.

Cannacord Genuity.  As I was finishing this article, Rafael Coven forwarded me a research note from investment bank Cannacord Genuity.  Their LED Analysts believe that investors should avoid upstream names such as Aixtron AG (AIXG) and Veeco Instruments Inc. (VECO), while they have buys on downstream names Cree Inc (CREE), and Acuity Brands (AYI).  Their reasoning is that the industry will not need to greatly increase capacity (and hence not need to buy new equipment) even to achieve high penetration of the lighting market.  This is in large part due to the extremely long lifetimes of LEDs: the replacement market will be minimal.


These green money managers all agree about the coming difficulty for most LED companies... but there is little agreement about which companies, if any, will do well in the short term.   On balance, there seems to be a slight preference for downstream plays, but these stocks may just be the ones which suffer least.

Overall, I think it's currently safer to be an LED consumer than an LED stock investor.

DISCLOSURE: No Positions. 

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.

November 19, 2011

Stock Picks with a Whole Systems Approach

Tom Konrad CFA

Picking the best energy services stocks.

Fossil fuels are getting more expensive, but so are the industrial metals and other commodities used in the wind and solar farms with which we hope to replace them.   Meanwhile, government and personal budgets everywhere are under strain.  These economic imperatives make energy efficiency the one clean energy sector that may benefit despite rising denial about the existence of climate change among the US political elite and continued economic weakness.

Energy efficiency represents the sort of true win-win-win in that it saves money, reduces the use of scarce commodities and energy, spurs economic activity.  Like any spending, implementing efficiency measures gives the economy a one-off boost, but efficiency is unusual in that it continues to bring economic benefits going forward because it allows money that had formerly been spent on energy to be put to more productive economic use, even after the financing costs of the intial outlay are taken into account.

The Benefits of a Whole System Approach

The problem is that to get the most out of energy efficiency, energy users must go far beyond changing light bulbs.  Only by taking a whole system approach to energy use can all of the benefits of energy efficiency be captured.  For example, a homeowner might be interested in replacing an aging air conditioner or furnace with a more efficient model.  If they do so, they will save on energy bills and probably recoup their initial investment over a handful of years. 

An energy rater using thermal imaging. Photo by Tom Konrad
energy rater.jpg
On the other hand, if the homeowner takes the time to assess the whole home's performance with the help of an energy rater, and improves the home's shell by plugging air leakage and improving insulation, the whole thermal load of the home will be reduced.  The measures to improve the home's shell will typically pay for themselves in a few months to a year or two, and the home will be more comfortable with fewer drafts and cold or warm spots.  More importantly, the reduced heating and cooling load will allow the homeowner to replace the heating and/or cooling system with a smaller and significantly less expensive lower capacity model.

Upgrading the furnace alone might have had a five year payback, while improving the home's shell alone might have had a payback of a year or two, but doing both together allows the furnace to be upgraded at no net cost because of downsizing, making the overall payback of the combined measures quicker than undertaking either measure alone.

Energy Service Providers

Just as the homeowner requires outside expertise to identify the most advantageous combination of energy savings measures, the same is true for larger entities like companies, schools, hospitals and government complexes. 

With this in mind, the companies that help other entities achieve energy savings seem to be well placed for growth even if the economy does not rebound and energy and materials cost stay high.  There are many firms operating in this sector, including energy utilities such as Constellation Energy (NYSE:CEG), equipment providers like Johnson Controls (NYSE:JCI), and Honeywell (NYSE:HON), and IT firms such as IBM (NYSE:IBM).

There are also a number of pure-play energy service providers, both niche players and firms offering comprehensive energy services.  To get a better understanding of the whole sector, I embarked on a series of interviews with the CEOs s of publicly traded, pure-play energy services companies, and published an article after each one.

The companies covered were:
  • World Energy Solutions (NASD:XWES), which helps its clients purchase energy at the best possible price.
  •  EnerNOC (NASD:ENOC) and
  • Comverge (NASD:COMV), two companies which help clients manage energy demand in order to earn incentives from utilities, a service known as Demand Response (DR.)
  • Ameresco (NASD:AMRC) and
  • Lime Energy Co. (NASD:LIME), two companies which help clients improve energy efficiency and make the best use of renewable energy systems.
You can follow the link on each company's name to read the original article.  I learned a lot in the process, and have significantly changed my investments in the sector as a result of my research.  Going in, I owned the two DR companies Comverge and EnerNOC because the stocks looked cheap compared to their prices the previous year, and they seemed to be fairly well capitalized, while DR is one of the most cost effective ways to stabilize the electric grid.

The Commoditization of Demand Response

Unfortunately, the DR industry has become much more competitive in recent years.  Larger players like those mentioned above have been entering the space aggressively.  Electric utilities require significant customer deposits to guarantee the load reductions that DR firms contract with them to deliver.  This can strain the resources of  small firms like EnerNOC and especially Comverge, and so they have to retain a significant portion of the fee the utilities pay for DR in order to cover their costs.  In contrast, larger firms like Johnson Controls can pass on more of the fee because of their lower cost of capital, and firms like World Energy Solutions and Ameresco, which include Demand Response as part of a package of energy services, can also accept lower margins because DR is not their main profit center.

This competitive landscape along with lower-than-anticipated electricity demand because of the economic downturn, has led to rapidly falling prices for DR, and has undermined the profitability of EnerNOC and Comverge, as can be seen in the chart below.
Energy services earnings and CF.png
While it is possible that EnerNOC and Comverge might be attractive acquisitions for a better capitalized company looking to move into Demand Response, such companies seem to prefer to build up their own DR business.  While both Ameresco and World Energy have been making significant acquisitions in the energy services space, both are focused on companies which they consider strategic fits, and neither is interested in pure-play DR.

Addressing Energy Systems

Because DR is a standarized service, the industry has been fairly open to new entrants, and this has contributed to its commoditization.  In contrast, Ameresco and Lime Energy take a systems approach to managing energy for their clients, much like what I outlined in the homeowner example above, except that they serve customers with demand in the megawatts, not the single digit kilowatt demand of a typical homeowner. 

Although it produces the greatest benefits, the systems approach is very knowledge and skill intensive, making it very difficult to commoditize.  These companies' businesses are very much about the skills of their people and the customer service they deliver. 

That does not mean there is no competition, especially among Energy Service Companies (ESCOs) such as Ameresco, where equipment providers like Honeywell (NYSE:HON) and Trane, as well as utilities are active.  While these are heavy weight competitors, Ameresco has a long track record of winning and delivering on large projects, and its independence from equipment manufacturers gives clients confidence that it will use the best equipment available for the job at hand.

The competitive picture is even better for Lime Energy, whose CEO John O'Rourke told me in our interview that competition has actually decreased in the insulation business in the Northeast.

Energy Sourcing

Lastly, World Energy Solutions helps customers find the lowest possible price on energy services using a unique electronic auction platform.  They may also include some green energy, energy efficiency services, and demand response.  World Energy has recently acquired several small companies in the energy efficiency space, but their core business is getting customers the cheapest possible power, something I do not see as particularly green, so I have not been following the company since I profiled it for this series.

Energy services
Balance Sheet.png

Financial Strength

Because of their poor earnings prospect, the two Demand Response firms EnerNOC and Comverge are trading only slightly above book value, and I expect the stocks to continue to decline unless they are acquired by larger firms that can finance their operations at a lower cost of capital. 

Of the three others, the least risky is Ameresco.  The company is already profitable, and its apparently large debt load is in large part project debt which will be removed from Ameresco's balance sheet when the projects are completed and turned over to it.

World Energy would look like a safe bet because of its lack of debt and strong balance sheet, but the low earnings yield implies investors are betting on continued extremely rapid growth.  They may be right, but that's not the sort of bet I'd like to take in the current financial climate.

Lime's business is similar to Ameresco's, but since Lime does not take project debt onto its balance sheet, it's easy to see from the above chart that Lime can easily cover all its liabilities with current assets.  With Lime likely to become profitable in 2012 without the need to raise any additional outside funding, this company has the most potential upside, but only if management is able to deliver.


Of the five, I like both Ameresco (currently trading around $11) and Lime ($3.)  I acquired a significant stake in Ameresco when the stock was in the $9.50-$10.50 range, and I don't have plans to buy more unless the stock falls to $9.  I've been buying Lime near current prices, but given the unsettled state of the current market, I'm not in a rush to build up a large position.

While I currently don't like the prospects of EnerNOC and Comverge, the reason I'm staying away from World Energy is different: the company is not a green enough investment for my taste.  The company might be a great buy at current prices or it might not: I simply have not looked into it.

This article was first published on


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.

November 07, 2011

Lime Energy: Delivering Energy Efficiency

Tom Konrad CFA

The high upfront cost of efficient buildings (and efficiency in general) is more than offset by the significant long term rewards, as you can see from the McKinsey chart below.

Despite the long term benefits, the upfront cost is often a barrier, especially to government entities in today's tight budgetary environment.

Performance contracting offers them a way to square the circle between the long term budget benefits of efficient buildings and the often significant capital cost. This works by funding the capital improvement with debt secured by future energy savings. An Energy Service Company (ESCO) guarantees a certain level of energy savings and performance (hence the term Performance Contracting.)

Yet performance contracting comes at a cost.  No ESCO puts its balance sheet behind a promise of energy savings solely out of a desire to green the economy.  That ESCO has a cost of funds just like everyone else, and in the case of a performance contract, this cost of funds is built into the contract price.  Entities which understand what needs to be done and can borrow at reasonable interest rates or have cash can wring greater savings out of energy efficiency services by avoiding performance contracts.

ESCO Business

That's where Lime Energy Co (NASD:LIME) comes in.  Lime (a name derived from "Less Is More Efficient") has been providing energy efficiency services for 20 years, both directly to clients and also as a subcontractor to ESCOs. Lime does not have the balance sheet to guarantee performance contracts itself, but it does have significant expertise in delivering the energy efficiency services that make performance contracts work.

In a recent interview, Lime CEO John O'Rourke told me that his current ESCO clients include Johnson Controls (NYSE:JCI), Honeywell (NYSE:HON), Constellation Energy(NYSE:CEG), Clark Energy, and PEPCO (NYSE:POM).  According to O'Rourke, Ameresco (NYSE: AMRC), the publicly traded pure-play ESCO firm that was profiled in the most recent part of this series, "would probably never use us," because of overlap in certain in-house capabilities and (I suspect) a bit of inter-company rivalry.

In its 20 years of business, Lime has worked with many ESCOs and directly with public sector or institutional customers which do not need performance contracts.  One such example is the United States Postal Service (USPS), which issued competitive solicitations for multiple regions where the USPS financed the work directly instead of a traditional performance contract. Lime was awarded several of these IDIQ contracts with achieved savings in excess of 30 million kWh per year.

While the ESCO business is becoming more competitive, the business of actually delivering energy efficiency has become somewhat less competitive. In Lime's core Northeastern market, several energy efficiency contractors have recently gone out of business or shrunk their operations significantly. These businesses were unable to weather the trough that the ESPC industry experienced over the last three years. Lime survived by re-directing their focus to other areas, and found growth opportunities in the private sector.

Utility Business

Lime has carved out a niche for itself managing Demand Side Management (DSM) programs for utilities.  This is the fastest growing part of Lime's business, which O'Rourke expects to reach about 40% of revenues in 2011.  Part of the reason for the rapid growth is likely Lime's track record, in which the company has "blown savings goals out of the water" over the last three years. 

Utility DSM targets tend to be conservative, since the utility itself usually plays a very large role in setting the regulatory process, and utilities have a vested interest in setting targets low to keep them easily achievable, so Lime's track record may not be as impressive as O'Rourke makes it sound. On the other hand, targets for delivered savings have increased dramatically over the last few years, and utilities face penalties for failure to meet these goals.

The urgency and market opportunity vary widely between utilities and state regulators, but according to O'Rourke, utility spending on DSM programs is increasing consistently by over 20% per year, and he's not exaggerating. I checked O'Rourke's numbers with Howard Geller, the Executive Director of the Southwest Energy Efficiency Project, and he told me that “Based on data collected by the Consortium for Energy Efficiency, utility spending on programs that help their customers save electricity and natural gas has been increasing by more than 25% per year in recent years.”

In addition to this rapid growth, the utility business brings two main benefits to Lime.  First, it is a source of earnings stability, since contracts tend to be multi-year and not seasonal like much of Lime's energy efficiency business. (The energy efficiency business is back-loaded towards the end of the year when many commercial and industrial (C&I) clients decide if they should go forward with energy efficiency projects depending on budget constraints.) The second benefit of the utility business is as a way to reach new C&I clients. Lime may initially contact a C&I client as part of a DSM program, but then go on to provide energy efficiency measures for the client beyond those in the utility program.

Current utility clients include the Long Island Power Authority and National Grid (NYSE:NGG), but O'Rourke hopes to win additional contracts this year.


Finally, Lime has recently introduced a new division (called Lime Energy Asset Development, or LEAD) to develop its own energy projects in-house. These projects involve the development, design and construction of larger alternative energy projects where the clients purchase the energy produced, rather than the asset itself. These larger projects will be limited by Lime's ability to finance them, but doing project development in-house should allow Lime to maintain strong margins on the projects, and Lime need only undertake them when it will not put undue pressure on Lime's balance sheet.

Financial Metrics

Lime is not yet profitable, but O'Rourke says the company has enough capital to grow 30% for the next two years and achieve profitability in 2012 without raising additional capital “anytime soon.” Analyst consensus earnings are for a loss of 8 cents a share this year, and a profit of 21 cents next. The company has $6 million in net cash on the books, no net debt, and a free cash flow of negative $9 million over the last 12 months. Since the third and fourth quarters tend to be the most profitable, cash should increase over the next two quarters, and so O'Rourke is probably right that current assets and credit lines should be sufficient to bring Lime to consistent profitability.

With the stock currently trading at $3, and expected earnings of $0.21 next year, Lime seems quite reasonably valued for a company growing at 30% a year. However, given the current climate of uncertainty, the back-loaded C&I business may turn out to be a little disappointing this year, and possible earnings misses caused by C&I clients deferring energy efficiency projects in order to conserve cash may lead to a somewhat lower stock price in the next few months. The C&I business has been falling as a percentage of revenue, so any such earnings misses are unlikely to be dramatic, but investors are taking any excuse to sell alternative energy stocks in the current climate.


I like Lime's business, and think the company is fundamentally strong, and the valuation is quite conservative. However, I expect the current stock market rally to be short-lived. A renewed market decline, along with a possible earnings miss caused by C&I clients hoarding cash in the climate of uncertainty could easily lead to a lower stock price in the coming months. I'll be watching the stock closely and buying cautiously if either of these comes to pass.

DISCLOSURE: Long AMRC. No position in LIME, but I may initiate one at any time.

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.

September 23, 2011

Two High Yield Energy Efficiency Stocks with a Free Call Option on Housing

Tom Konrad CFA

It's no secret that the housing market is in the doldrums.  New housing starts in August fell to an annual rate of 571,000, and fewer homes were under construction since record keeping began in 1970.  This has taken a toll on energy efficiency stocks in the housing sector, leading to some very attractive pricing in two of my favorites.
Waterfurnace Renewable Energy (WFI.TO / WFIFF.PK)

I've long been fan of Waterfurnace, an Indiana-based manufacturer of ground source and water-source heat pumps.  A note from a reader Wednesday prompted me to poll my list of green money managers to see what they thought about the stock when it was trading at $17.50, since I could see little reason for the decline beyond the general cleantech sell-off and Waterfurnace's low liquidity.  I'm glad I did, as the company promptly fell another $2 on Thursday.


While heat pumps have traditionally mostly been used in new construction, the company has done a "very good job shifting to the replacement market," according to Brad Tirpak of Locke Partners.  Tirpak sees Waterfurnace as a high yield stock with a "free call option on housing," meaning that if housing does recover, we can expect to see significant price appreciation.  

Waterfurnace has also been cushioned from the housing downturn by its "deals to provide systems to the military and other larger entities, partially through its partnership with Johnson Controls (JCI)," according to Garvin Jabusch, chief investment officer at Green Alpha® Advisors. He also likes the company's international distribution and the vertical integration of its systems and controls.

There are downsides for this company though.  Rafael Coven, the manager of the Cleantech Index which includes Waterfurnace as a component (about 0.55% of the index), sees problems in the highly competitive nature of the industry, the stocks poor liquidity, the prospect of reduced subsidies for energy efficiency, and narrow geographic scope (Waterfurnace sells almost exclusively in the US and Canada.)  Coven thinks the company "would be a much better fit inside a bigger HVAC or water heating manufacturer, such as Electrolux, or AO Smith."

All that said, I was buying aggressively on Thursday because of the over 5% dividend which is still covered by earnings and cash flow despite the horrible housing market.  While a cut in Federal subsidies for energy efficiency would certainly hurt the stock, energy efficiency subsidies tend to gain much more bipartisan support than renewable energy subsidies because conservative arguments that renewable energy is too expensive simply do not apply to energy efficiency measures such as ground source heat pumps.

PFB Corporation (PFB.TO/ PFBOF.PK)

If anything, PFB Corporation is even more closely tied to the North American housing market than Waterfurnace.  The vertically-integrated manufacturer of insulating building products such as Structural Insulated Panels (SIPs) and Insulating Concrete Forms (ICFs) sells mostly to the green building market in the US and Canada.  I profiled the company in detail here. The downturn has cut PFB's revenues, with Sales having dropped from a peak of $83 million in 2007 to $66 million in 2009 and 2010.  Despite this drop, PFB has managed to remain profitable with enough income and cash flow to support the C$0.06 quarterly dividend, which makes for a dividend yield of just under 5%.


Part of PFB's resilience has been its presence in the green building and high end sector of the housing market, both of which have been relatively robust during the downturn.  The company's large presence in Canada has also helped, as Canada's housing market has borne up better than that in the US. 

Earlier this year, PFB used their strong financial position to expand its market share by acquiring Idaho-based Precision Craft Homes, positioning the combined firm for rapid growth when the housing market eventually picks up.

In addition to the dividend, PFB  has an ongoing share buyback program funded with the company's cash from operations.  In the first six months of 2011, the company purchased 7250 shares for an average price of $6.07.  While these purchases remain small, they have increased in the third quarter, most likely in response to the fall in the company's share price to well below book value of $6.37.  The company's purchases of stock should help provide a floor for the share price near current levels.
Data From Yahoo! Finance, Waterfurnace & PFB Corp financial statements
Key Statistics
Waterfurnace PFB Corp
Share Price $15.62 $5.15
Dividend per share
$0.88 $0.24
Trailing 12 month EPS
$1.16 $0.29
Operating Cash Flow/share $1.09 $0.40
Free Cash Flow/share $0.96 $0.28
Book/share $3.08 $6.37
Debt/Equity 24% 22%


I find both of these stock to be extremely attractive at current prices, given the large dividend streams, low debt, and the potential for significant gains when the housing market eventually begins to recover.  That said, both stocks are very illiquid.  This liquidity probably contributed significantly to the current buying opportunities, but it also means that buyers should be cautious about bidding, and stick to limit orders to ensure that they get the prices they expect.


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.

September 01, 2011

Ameresco (AMRC): Clean Energy One-Stop Shop

Tom Konrad CFA

Contrary to common belief, the greatest barrier to the adoption of clean energy is not the cost.  In many cases, cost is not a barrier at all: it's an advantage.  That's because energy efficiency measures are usually so cost-effective that they not only pay for themselves, they can often pay for the addition of flashier clean energy technologies such as solar and wind.

For institutions in the Federal and MUSH (Municipalities, Universities, Schools, and Hospitals) sectors, the main barriers are lack of capital and expertise.  Lack of capital arises because such institutions traditionally consider energy to be an operating expense, not a capital expense, while clean energy projects usually require an initial capital expenditure in return for ongoing energy savings.  Lack of expertise arises simply because finding the best energy solutions is far from simple.  Although there are many simple measures that an interested amateur can take, the greatest savings come from considering buildings and other facilities as integrated systems, not as collections of isolated measures.

Energy Service Companies

Ameresco, Inc. (NYSE:AMRC) was founded in 2000 as an independent, one-stop shop to help Federal and MUSH institutions overcome these barriers.  Last week, I interviewed Ameresco President and CEO George Sakellaris as part of my series of articles on energy service stocks.  Sakellaris pioneered this Energy Service Company (ESCO) model while working for New England Electric System to help industrial customers reduce their power usage in 1979.  Before founding Ameresco, he founded another leading ESCO, Noresco in 1989, which is currently owned by Carrier, a division of United Technologies (NYSE:UTX).

I first became interested in the ESCO model (also known as performance contracting) in 2007, when I heard about it as part of a Western Governor's Association Workshop on Efficient Buildings.  Then, as now, most ESCOs are arms of larger technology companies, like Noresco mentioned above, or are part of energy companies and utilities.  Other publicly traded companies with ESCO arms include AECOM (NYSE:ACM), Honeywell (NYSE:HON), Chevron (NYSE:CVX), Consolidated Edison (NYSE:ED), Constellation (NYSE:CEG), Eaton (NYSE:ETN), NextEra (NYSE:NEE), Johnson Controls(NYSE:JCI), Schneider Electric (Paris:SU.PA/SBGSF.PK), and Ingersoll-Rand (NYSE:IR).

In contrast, Ameresco is independent of any equipment manufacturer or energy company, leaving them technology-agnostic and able to approach the solution from the customer's perspective.  This independence, along with previous customer satisfaction and Ameresco's wide expertise allows the company to win bids such as the $795 million contract to build biomass cogeneration and heating facilities at the Department of Energy's Savannah River Site in South Carolina over the course of 19 years.  According to Sakellaris, Ameresco won this contract (the largest renewable energy performance contract so far in the United States) without being the lowest cost bidder because of their expertise and independence.   He also says Ameresco can compete on price because of low overhead.

Financial Results

The combination of a strong brand and expertise along with low overhead have contributed to strong results.  Annual revenue has grown steadily from $278 million in 2006 to $618 million in 2010, with second quarter revenue up 17% on a year earlier, matching the last five year's compound annual growth rate (CAGR).  Over the same period, earnings per share have risen at a 21% CAGR.  At the current stock price of $10.34, AMRC has a trailing P/E ratio of 14.35, which is modest considering the consensus 20% long term expected growth rate.

Ameresco also has good liquidity, with a current ratio over two.  I would normally consider its Debt to Equity ratio of 1.3 a problem, but much of this debt is project debt which will be transferred to project lenders upon project completion and acceptance by the Federal government.  If this project-related debt is removed from the calculation, the Debt to Equity ratio falls to a quite conservative 0.37.

Although multiple analysts reduced their price targets for Ameresco after the last conference call, the reason they gave was not any deterioration of Ameresco's business, but rather a decline in price of most companies in the sector, meaning that most investors are no longer willing to pay as much for a dollar of earnings or revenue than they were just a few months ago. 

Growth Strategy

Sakellaris told me that he plans to grow using only internal resources without taking on any more debt or issuing additional equity.  Ameresco has and will continue to grow both organically and by acquisition using funds provided by operations. 

In general, it makes sense to be wary of growth by acquisition in public companies, since it often leads to a lack of focus and can distract management from the core business.  That seems not to be the case for Ameresco, which takes a very strategic approach to acquisitions, and only acquires firms that either can expand the range of expertise the company can offer to clients, or allow the company to enter new geographic markets, such as their recent purchase of Applied Energy Group, which allowed them to expand their offering to utility customers.

One type of company Sakellaris says they will never acquire is equipment manufacturing firms, in order to maintain the advantage of being an independent integrator of technologies from all suppliers.  Nor is he interested in buying Demand Response (DR) providers such as Comverge (NASD: COMV) and Enernoc (NASD: ENOC), both of which were previously covered in this series, and whose stocks have fallen enough to look like attractive acquisition targets.  Although Ameresco does provide DR as part of their offerings, it's not a driver for their business.  He sees a "conflict between energy efficiency and demand response" because properly implemented energy efficiency measures reduce the scope for DR.  As he puts it, "More effective air conditioning is better than cycling air conditioning."  To be able to cycle an air conditioner off during peak times without significant thermal storage, the unit will have to be over-sized for its purpose in order to bring the building back to the expected level after the demand event is over, and over-sized units cool less efficiently.

When the company has cash but lacks acquisition targets that meet these criteria, they invest it in renewable energy projects, such as landfill gas, where they extract landfill gas, clean it, and deliver it to local customers for heat and electricity generation.  These projects typically pay back the invested equity in three or four years.

Governmental entities accounted for about 86% of Ameresco's revenues in 2009 and 2010.  Sakellaris is confident that the whole ESCO industry has only penetrated about 20% of the opportunity in the sector, citing a McKinsey study which estimated the potential of this market at $520 billion of performance contracts by 2020, and the market continues to expand as new technology leads to new energy saving opportunities.  The ESCO industry is doing only about six to seven billion dollars worth of contracts a year, leaving plenty of room for growth. 

Company Structure

One worry I had about the company was the company's governance.  Sakellaris completely controls the company through his ownership of all of the company's class B shares, which have privileged voting rights, as well as through his posts as President, CEO, and Chairman of the board.  Purchasers of this stock are buying into Sakellaris' vision for the company.  While the board has an independent nominating committee, which Sakellaris is not on, and he says he obeys the directions of the board and would not block a candidate put forward by the nominating committee, shareholders are essentially putting faith in his self-restraint.

I came away from my conversation with Sakellaris feeling that he is a dedicated entrepreneur who wants nothing more than to make his company an extremely "successful and sustainable enterprise", and that he was being honest when he told me that he kept voting control of the company when he took it public last year in order to be able to negotiate the best possible price in case the company is sold. 

But the company will not be lost without him.  Although he is 65, he is still healthy, but that has not stopped him from making sure the board has an adequate succession plan.  While Ameresco has grown through acquisition, it held on to the leaders of many of the acquired companies, several of whom now run Ameresco's divisions, and four of whom Sakellaris believes would be able to run Ameresco in his absence.  Their continued presence at Ameresco does a lot to ease my worries not only about succession issues, but also gives me some assurance that Sakellaris is a good leader, since such capable people would not have stayed if he were a tyrant.


Ameresco seems to be a well run and sustainable company.  In the short term, the ESCO business may be hurt by government spending cuts, but in the long term, budget pressure will make Ameresco's services all the more necessary.  The ESCO business model is also helped by current low interest rates, because the lower the interest rate, the more energy efficiency and renewable energy measures become economic, and the more business Ameresco can do for a single client. 

Although Ameresco is not nearly as cheap in terms of assets as some of the other energy services firms covered in this series, it is more profitable, and a decent value given its earnings and growth prospects.  I recently bought shares in the low $10 range, and will be looking to acquire more if the broad market implosion makes this current good value an absolute bargain.

Thanks to Rafael Coven of the Cleantech Index, Jeff Cianci of Green Science Partners, and Garvin Jabusch of Green Alpha Advisors, for contributing to my research for this article.


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.

July 11, 2011

Saviors and Saboteurs in Alternative Energy

John Petersen

Last week Societe Generale published a thematic research report titled "A new world order, when demand overtakes supply" which examines the macro-economic and demographic trends that will transform the global economy over the next 20 years. It mirrored the theme of Jeremy Grantham's April 2011 quarterly letter titled "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever" and did a great job of summarizing an issue I touched on in "How PHEVs and EVs Will Sabotage America's Drive For Energy Independence."

In the words of Societe Generale:

"So, while up until now less than one billion people have accounted for three-quarters of global consumption, over the course of the next two decades, the new Chinese, Indian, Indonesian, Latin American and African middle classes will bring an additional two billion consumers with similar needs and aspirations as today's North American, European and Japanese consumers." (Page 12)

"Beyond growth in demand for finished products, the most spectacular effect likely to be brought about by the stronger development of the emerging economies will be the enormous rise in demand for raw materials." (Page 14)

"A structural increase in raw materials prices is in fact an inevitable consequence of chronic resource insufficiencies, whether we're talking about industrial, energy or agricultural resources." (Page 19)

The following table from Mr. Grantham's quarterly letter summarizes China's current consumption of key energy, industrial and agricultural commodities as a percentage of total global consumption and drives the point home with the subtle clarity of a sledge-hammer.

7.10.11 China.png

If we've seen this kind of demand dislocation as a result of a few decades of growth in China, what's going to happen when the surging middle class populations of India, Indonesia, Latin America and Africa decide to show up for the dinner party? The answer, of course, is that we'll be thoroughly screwed unless we stop wasting time, money and materials on pipe dreams, toys and panacea solutions, and focus instead on finding relevant scale solutions to persistent global shortages of water, energy, food and every commodity you can imagine. We all face a clear, present and persistent danger that can’t even be addressed until we accept the entire ugly reality with all its vulgar implications!

One of the most disturbing conclusions in the Societe Generale report is that while per capita energy demand in advanced economies will remain stable at 5,463 kg of oil equivalent, or maybe even decline to 5,000 kg per person by 2030, global average demand will increase from current levels of 1,818 kg per person to 3,312 kg per person in the low case and 4,228 kg per person in the high case. All of the increased demand will come from emerging and developing economies.

Our fundamental problem is that per capita global production of energy resources is 100 to 200 times greater than per capita global production of the technology metals that underlie all alternative energy schemes. To make things worse, all of those metal resources have critical competing uses that cannot be set aside or ignored in the name of advocacy. At a recent grid-based energy storage conference in Brussels I used the following table to emphasize the point. The orange highlight quantifies available energy resources while the green highlight quantifies technology metal resources.

7.10.11 Energy vs Metals.png

The mathematically challenged optimists in our midst earnestly believe we can solve our energy problems with cool toys like wind turbines, solar panels, electric cars and other materials intensive energy schemes that fire the imagination but can never be sustainable. These aren’t solutions! They’re the energy and transportation equivalent of graphic novels and just a half-step removed from warp drive. In the final analysis, the dreamers who want to waste metals and other natural resources in the name of conserving coal, oil and natural gas are not saviors. They're unwitting saboteurs who can only make the problems worse!

Whether we like it or not, the only technology that has a prayer of generating enough new energy to satisfy even a small fraction of anticipated global demand is nuclear, a point that was forcibly driven home by Bill Gates in a recent interview at the WIRED Business Conference 2011. The naive idea that we can cut hydrocarbon consumption for the laudable goal of saving the planet is sophistry. Given a choice between freezing in the dark and burning hydrocarbons human beings will always choose the later because immediate personal need will always trump long term societal goals, especially fuzzy green goals.

I'm an unrelenting critic of obscene raw materials users like Tesla Motors (TSLA), A123 Systems (AONE), Ener1 (HEV) and Valence Technologies (VLNC) that want to build a future out of making toys for our emerging eco-royalty because I've read about the French Revolution and remember how 'Madame Le Guillotine' put a uniquely sharp edge on popular discontent over conspicuous consumption. These business models are doomed to fail because they're diametrically opposed the needs of society.

The only alternative energy investments that stand a chance of survival, much less profitability, are basic efficiency technologies that slash waste and deliver real savings for every ounce of natural resource inputs. Nuclear power, idle elimination, fuel efficiency, demand response, building efficiency, ebikes, recycling and a host of other technologies that do more with less are the only possible future. Wind turbines, solar panels, electric cars and all of the other feel-good graphic novel schemes are merely pleasant distractions, a bit like Nero's fiddle.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock because Axion's disruptive third generation lead-acid-carbon battery technology uses 30% less lead to deliver impressive gains in power, cycle-life, charge acceptance and overall real world utility.

July 09, 2011

The Sector Information Technology Forgot

Tom Konrad CFA

Information technology has mostly passed the energy sector by... but for how long?

Information Technology revolutionized the way we buy things (Amazon, eBay), how we get information (Google, Wikipedia, the decline of newspapers), and how we interact with out peers (Facebook, Twitter, LinkedIn.)  Yet so far, it has had little, if any transformative impact on energy.  Tim Healy, CEO of EnerNOC (ENOC), the world's largest  third party provider of Demand Response to utilities and grid operators, thinks that's about to change.

Demand Response (DR) began decades ago with Interruptible loads and Interruptible rates, driven by simple economics.  It 's much cheaper to pay users to temporarily curtail usage during peak periods than is is to build new capacity.  Under Interruptible loads and rate, utilities give large customers favorable electricity prices in return for an agreement that the utility can turn off certain parts of their equipment (interruptible loads) or their entire power supply (interruptible rates) for a few hours per year in the event there is not enough spare generation capacity to meet demand.  My first encounter with DR came as far back as the late 1980's, when I was an undergraduate at Harvey Mudd College in Southern California.  At the time, the college was on an interruptible rate plan.  I don't recall any power outages because of the interruptible rate, most likely because I was not on campus at the time.  For an institution where most students and faculty are away during the hottest months of the year when Southern California energy demand peaks, an interruptible rate must have made a lot of financial sense.

But interruptible rates are limited in their application.  Most businesses and institutions are less able to compromise on power reliability.  That's where Information Technology (IT) comes in.  By selectively controlling machinery, lighting, and HVAC equipment, modern DR providers such as EnerNOC can wring better coordinated and targeted power reductions from facilities without disrupting mission-critical operations. 

Because types of energy use are so varied across institutional, commercial, industrial, and government sectors, there are few cross-cutting DR measures that apply everywhere.  Instead, EnerNOC works with each facility or business owner individually to identify the energy services they can do without for short periods of time, and connects those devices to monitor/controllers that feed into a central Network Operations Center (the NOC in EnerNOC) where aggregate load can be controlled as easily as any power plant.  One way to look at DR is as a virtual power plant, that can substitute for new supply-side resources such as gas turbines.  Such virtual power plants can not only shave peak loads, but improve grid stability in other ways as well.

Despite DR's long history, energy consulting firm KEMA estimated in 2007 that only 21% economic DR market was then operational, with the market potential growing along with overall load growth.  Different definitions of market sizing lead to different market penetrations, but all put market penetration at well below half.  The low market penetration arises from the idiosyncratic nature of different industries.  Demand Response at a supermarket chain looks a lot different from DR of agricultural irrigation.  EnerNOC recently purchased M2M Communications specifically because M2M's technology allowed EnerNOC into a novel and mostly un-penetrated market: agricultural irrigation operations. 

Data Driven Energy Efficiency

Although EnerNOC sees DR as their core product; DR also forms a strong platform to sell other energy services to clients.  Using IT to crunch the same data that are necessary for automated Demand Response can help pinpoint opportunities for cost-effective energy efficiency improvements.  That data can also be used to understand normal energy usage and negotiate the most favorable deal with energy providers, or help evaluate a company's carbon footprint.  These data-driven efficiency services help broaden margins, since they do not require that EnerNOC share the revenue they get from utilities with the facility owners.  According to Healy, pure play DR providers usually have gross margins in the mid 20s, while EnerNOC's are in the mid-40's. 

The World Scene

In sharp contrast to the vast majority of clean energy technologies, the United States has by far the most developed DR market, and EnerNOC is the leading player in that market.  While both Europe and Japan have been aggressive in promoting solar and wind power, they have much less demand response capacity, and now they are waking up to its advantages.  My colleague John Petersen recently returned from the Grid-Scale Energy Storage Conference in Brussels, and told me by email that the utility representatives "made it clear that the only economic grid storage in their view [is] pumped hydro" and that they spoke "casually as you please about 'load shedding' as a solution for variability." 

"Load-shedding" is utility-speak for temporarily cutting off power to certain lines.  If they are seriously considering load shedding just to cope with variability, they will want to sign up as many customers as possible for interruptible rates.  From there, it is only a small step to pursue full scale Demand Response, and since European utilities have little experience with this, it makes sense to call in a third party vendor such as EnerNOC.  Indeed, EnerNOC is beginning to expand internationally already.  In the first quarter of 2011, international revenues were 15% of total revenues, compared to less than 1% the previous year.  The majority of these revenues came from Canada, but other revenue outside North America grew from only $13K in Q1 2010 to almost $5M in Q1 2011.

To cope with the loss of power from nuclear generators shut down after the Japanese earthquake and tsunami, Japanese citizens have shown remarkable willingness to do without some electric services for the greater good.  While TEPCO has managed to bring more new supply online than initially anticipated, that still leaves the anticipated summer shortfall at between 3 and 4.3 GW.  Most of this will be met by conservation from Japanese residential and commercial users, and I expect the experience of manually turning down power consumption for the greater good will help prime the technophilic Japanese for more automated ways to control energy use, such as DR and other Smart Grid technologies.

Leading Vendor

Although many utilities pursue their own DR programs, those that choose (or are asked by regulators) to consider third party solutions seem likely to prefer a one-stop shop from a well established vendor to a collection of specific solutions from smaller vendors.  EnerNOC's current leading position and strategy of acquiring new technologies by acquisition as they become available seem likely to continue to be a source of strength going forward.  Their strong balance sheet with no net debt and positive cash flow and earnings not only give them the resources to continue to acquire new technologies to supplement their existing capabilities, but also give utilities confidence that they will be able to fulfill their obligations as a DR vendor.


As Germany and Japan come to grips with the reality of trying to quickly phase out nuclear power and replace it with variable resources such as wind and solar, they will also have a rapidly growing need for dispatchable resources to manage the variability of the new resources.  The application of IT to energy allows Demand Response and other IT-enabled Smart Grid technologies to deploy more quickly and cheaply than even natural gas turbines.  I expect EnerNOC to be among the leaders in this last wave of the IT revolution.

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 24, 2011

The Alternative Energy Fallacy

John Petersen

In 2009, the world produced some 13.2 billion metric tons of hydrocarbons, or about 4,200 pounds for every man, woman and child on the planet. Burning those hydrocarbons poured roughly 31.3 billion metric tons of CO2 into our atmosphere. The basic premise of alternative energy is that widespread deployments of wind turbines, solar panels and electric vehicles will slash hydrocarbon consumption, reduce CO2 emissions and give us a cleaner, greener and healthier planet. That premise, however, is fatally flawed because our planet cannot produce enough non-ferrous industrial metals to make a meaningful difference and the prices of those metals are even more volatile than the prices of the hydrocarbons that alternative energy hopes to supplant.

The ugly but undeniable reality is that aggregate global production of non-ferrous industrial metals including aluminum, chromium, copper, zinc, manganese, nickel, lead and a host of lesser metals is about 35 pounds for every man, woman and child on the planet. All of those metals are already being used to provide the basic necessities and minor luxuries of modern life. There are no significant unused supplies of industrial metals that can be used for large-scale energy substitution. Even if there were, the following graph that compares the Dow Jones UBS Industrial Metals Index (^DJUBSIN) with the Amex Oil Index (^XOI) shows that industrial metal prices are more volatile and climbing faster than hydrocarbon prices, which means that most alternative energy schemes are like jumping out of the frying pan and into the fire.

6.23.11 Metals vs Oil.png

For all their alleged virtues and perceived benefits, most alternative energy technologies are prodigious consumers of industrial metals. The suggestion that humanity can find enough slop in 35 pounds of per capita industrial metals production to make a meaningful dent in 4,200 pounds of per capita hydrocarbon production is absurd beyond reckoning. It just can't happen at a relevant scale.

I'm a relentless critic of vehicle electrification schemes like Tesla Motors (TSLA) because they're the most egregious offenders and doomed to fail when EV hype goes careening off the industrial metals cliff at 120 mph. Let's get real here. Tesla carries a market capitalization of $2.8 billion and has a net worth of less than $400 million, so its stock price is 86% air – a bubble in search of a pin. Tesla plans to become a global leader in the development of new electric drive technologies that will use immense amounts of industrial metals to conserve irrelevant amounts of hydrocarbons. Even if Tesla achieves its lofty technological goals it must fail as a business. Investors who chase the EV dream without considering the natural resource realities are doomed to suffer immense losses. Tesla can't possibly succeed. Its fair market value is zero. The stock is a perfect short.

I won't even get into the sophistry of wind turbines and solar panels.

Next on my list of investment catastrophes in the making are the lithium-ion battery developers like A123 Systems (AONE), Ener1 (HEV), Valence Technologies (VLNC) and Altair Nanotechnologies (ALTI) that plan to use prodigious quantities of industrial metals as fuel tank substitutes, or worse yet for grid-connected systems that will smooth the power output from inherently variable wind and solar power facilities that also use prodigious quantities of industrial metals as hydrocarbon substitutes. Talk about compounding the foolishness.

I can only identify one emerging battery technology that has a significant potential to reduce hydrocarbon consumption and industrial metal consumption at the same time while offering better performance. That technology is the PbC® Battery from Axion Power International (AXPW.OB), a third generation lead-acid-carbon battery that uses 30% less industrial metals to deliver all of the performance and five to ten times the cycle life. There may be other examples, but I'll have to rely on my readers to identify them.

Humanity cannot reduce its consumption of hydrocarbons by increasing its consumption of industrial metals. The only way to reduce hydrocarbon consumption is to use less and waste less.  There are a world of sensible and economic fuel efficiency technologies that can help us achieve the frequently conflicting long-term goals of reduced hydrocarbon consumption and increased industrial metals sustainability. They include but are not limited to:
  • Better buiding design and insulation;
  • Smarter power management systems;
  • Telecommuting;
  • Denser cities with shorter commutes;
  • Smart transportation management to reduce congestion;
  • Buses and carpooling;
  • Bicycles and ebikes;
  • Shifting freight to rail from trucks;
  • Smaller vehicles that use lightweight composites to replace industrial metals;
  • Deploying solar and wind with battery backup for remote power and in developing countries;
  • Shipping efficiency technologies, such as better hull coatings, slow steaming, etc.; and
  • Recycling, recycling and recycling
My colleague Tom Konrad wrote a 28 part series on "The Best Peak Oil Investments." While I'm skeptical about the future of biofuels after suffering major losses in the biodiesel business, Tom's work provides an exhaustive overview of the energy efficiency space and a wide variety of investment ideas that have the potential to make a real difference. Since we can't simply take a couple of giant leaps into the future, we'll just have to get out of our current mess the same way we got into it – one step at a time.

We live in a cruel world. There is no fairy godmother that can miraculously accommodate the substitution of scarce industrial metals for hydrocarbons that are a hundred times more plentiful. We can and we must do better, but we can't solve humanity's problems until we accept the harsh realities of global resource constraints without the filters of political ideology and wishful thinking.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and owns a substantial long position in its common stock.

June 22, 2011

A Guide to Geothermal Heat Pump (GHP) Investing, Part II

Chris Williams

In the previous post on understanding the geothermal heat pump industry, we addressed (1) what’s driving the growth in the GHP industry, (2) the advantages of GHPs and (3) what market segments are adopting the technology the fastest. In this article we will continue the discussion and address: 

4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

4. Bottlenecks: There are two major things holding back the GHP industry.

1. Technical knowledge. IGSHPA, The International Ground Source Heat Pump Association, has created a training certification to help spread the knowledge. HeatSpring Learning Institute, along with a number of other private and public education providers, is using the IGSHPA certification to build the base of industry professionals who can install geothermal.
2. Financing. Similar to the solar industry, the large amount of money upfront needed to install geothermal has impeded growth. Until the industry can figure out the financing, like the solar industry has with the PPA, growth will not be rapid. LVestus is a New Hampshire based company that is now offering a TPA, a thermal purchase agreement, and is addressing the financing issue.

If these two items are addressed, the growth of the GHP industry will be much faster than the 30% it has been for the last couple years.

5. How can you invest in this growth? Where is the opportunity in the GHP Industry?

In the solar industry, although it’s very volatile, it’s very easy to find a place to invest. There are a number of large, publicly traded manufactures that are pure plays FSLR, TSL, STP, just to name a few. There’s also a wide range of ETFs, or Exchange-Traded Funds.

The GHP industry is showing strong growth, it’s a sizable market, it’s based on solid technology, and demand will only increase over the next 30 years as our nation invests in upgrading our building infrastructure

With that said, let’s take a look at the products and services provided in every geothermal installation to see where the opportunities exist for investment.

Products and Services

  • Heat Pumps - HVAC condensing/evaporate units
  • Ducting Installation - Sheet metal and duct seal to deliver hot/cool air to the conditioned space from the heat pump
  • Grout - Cement or bentonite based compounds used in the installation of the ground loop
  • Pump Package - Standard pumps reconfigured for geothermal use to move water from the ground loop to the heat pump
  • Ground Loop - Simple high-density polyethylene (HPDE) plastic installed in th ground to extract or deposit BTUs from or to the heat pump
  • Design Software - Used for design of all sizes of systems
  • Drill Rig – Required for drilling and installing vertical ground loops

Other than the heat pumps, the rest of the products are nearly impossible to invest in because they are:
1. Very small companies that are not large enough to become public. This pertains to most design and installation firms as well as software companies. Loop Link Geothermal design software is a great example of this--they have great software used by many in the industry to design residential and light commercial systems, but it’s a niche play so the company remains small.
2. Commodity products. It is difficult to distinguish a commodity product’s use in geothermal applications versus other applications. For example, ducting and pump packages are used for hundreds of other HVAC applications, and it’s impossible to find a company that just sells “geothermal” ducting or pump packages--they do not exist.
6. The only opportunity to invest in GHP is in the heat pumps themselves.

Here is a review of the top heat pump manufacturers in the USA

After a review of GHP manufacturers, there are only three that are public and accessible. UTX and LXU are both large corporations where GHP probably represents less than 10% of yearly revenue. While UTX’s main business units are comprised of defense and aerospace, a minority interest is in the building industry through Carrier, where it has a stake in GHP manufacturing. LXU is less diversified than UTX and has two main business units--climate control and chemicals. The climate control group designs and manufactures a range of HVAC products including ground source heat pumps. WFI is the only pure play on the GHP industry.

Here’s a review of some basic metrics as of June 8th, 2011.



Stock Price




Market Cap



83.24 USD







43.71 USD







22.69 CAD





In the end, I’d suggest that LXU and WFI are the only access routes to the GHP industry in public equities. Both ClimateMaster (LXU) and WaterFurance (WFI) are respected manufacturers within the industry and provide quality products.

After completing the analysis and looking at direct access to the GHP industry, I was surprised how decentralized the industry is for every product within the supply chain. Based on the number of products that go into every GHP installation, I would have thought it would be easier to invest in the industry. However, if you use Porter’s five forces analysis it becomes clear why the GHP industry is structure is so different from solar.  The GHP industry as a whole is highly competitive, very price sensitive, and built around commodities instead of proprietary technology or manufacturing techniques like we see in the solar industry.

If you’re really interested in taking advantage of the GHP industry, WFI and LXU seem to be your best options. While UTX is also possible, it’s much more of a defense/aerospace play than a GHP investment.

Chris Williams is an IGSHPA certified geothermal installed and  works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at or in the twitterverse @topherwilliams

June 21, 2011

A Guide to Geothermal Heat Pump (GHP) Investing, Part I

Chris Williams

According to the Solar Energy Industry Association (SEIA), in 2010 solar was the fastest growing industry in the US, growing at 67%. The geothermal heat pump (GHP) industry still grew quickly compared to the whole economy, but it only grew at a modest 32% compared to solar.

According to Solar Buzz, at the end of 2009, the global solar market was $38.5 billion with the US installing nearly 8% solar, or $3.1 billion of the world market.

PV Segmentation by Region
Source: Solarbuzz 2010

According to PMGO, an industry research firm,

“The total market for U.S. GHPs in 2009 is estimated to be about $3.7 billion dollars, including equipment and installation cost (and not reduced by government or other incentives). The dealer who sells the equipment typically installs it. PMG expects a growth rate of 32% to continue for a few years. By 2013, PMG projects the U.S. geothermal heat pump market to be in excess of $10 billion.”

The solar market and the geothermal heat pump market in 2009 were essentially the same size; however, while the solar PV industry is growing much quicker, both have strong positive outlooks.

Will the growth of the geothermal industry continue for the next 10, 15, 20 years, and can we invest in public equities like we can in the solar pv industry to benefit from this growth?

In this article, I will walk through an analysis of
1. What is driving the growth if the GHP industry
2. Why property owners and utilities are adopting GHPs
3. The market segments that are adopting geothermal the fastest
4. The bottleneck’s to GHP continued and faster growth
5. Possible Investment targets within GHP
6. The 2 best opportunities for investment in public equities.

For today’s article, we’ll focus on section 1 through 3.

1. What’s driving the GHP industry?

As good investors, let’s walk through a little industry analysis to get a sense for the geothermal heat pump space.

Geothermal is a reliable energy source and a solid investment that is more broadly applicable than solar because the technology is not susceptible to state policy, like solar pv. Put another way, the financial return that a GHP system provides to property owners is based more on the fundamental technology and the fuel it is displacing rather than government incentives. I’d suggest this means it is less volatile from an investment perspective than the solar pv industry.  

Geothermal heat pump HVAC systems are attractive because the technology is fundamentally sound and super efficient. A typical system is between 300% to 500% efficient--meaning for every unit of energy you put in, you harvest 3 to 5 more units. To understand more, download the Geothermal Survival Kit, written by Kevin Rafferty who co-authored the ASHRAE publication, “Ground-Source Heat Pumps” - Design of Geothermal Systems for Commercial and Institutional Buildings. The Department of Energy also has some great geothermal heat pump resources. ASHRAE is an “international technical society organized to advance the arts and sciences of heating, ventilation, air-conditioning and refrigeration.” (

2. Here’s what you need to know about customer adoption of GHP as an investor:

Geothermal heat pumps offer a number of advantages over traditional heating and cooling methods to property owners, namely they offer the following:

  • Highly Reliable
  • Combustion Free
  • Virtually Zero Emissions
  • No On-Site Contribution to Global Warming
  • Local Availability (no fuel or transportation expense)
  • Electric utilities generally favor GHPs because they provide a stable base demand all year
  • Geothermal HVAC also very useful in gaining LEED certification all types of properties. Green building demand has been skyrocketing in recent years and GHPs can provide a significant number of points in the rating system. Learn more about Geo and LEED in this whitepaper: Let Geo LEED The Way

3. GHP Are Becoming the Norm in Some Applications

All day long at HeatSpring, we’re talking to contractors, HVAC professionals and drillers who are taking our IGSPHA geothermal training program because more and more of their customers are asking about geothermal. Many of our alumni have weathered the recession by investing in training and moving their business into this new segment. The residential market is the strongest in new construction, where the systems can be financed from day one. However, the retrofit market is still strong, especially if the building has an old furnace or leaky building envelope. Also, with large commercial or government projects, geothermal is becoming the norm because upfront costs are less of a consideration (like with residential customers) and lifetime savings and NPV are more important.

Chris Williams is an IGSHPA certified geothermal installed and  works with HeatSpring Learning Institute delivering world-class IGSHPA Geothermal Training, NABCEP Solar Training, and BPI Certification training to professionals who are installing, designing or selling renewable energy systems. Sign up for their newsletter here. Chris can be reached directly at or in the twitterverse @topherwilliams

Continue reading A Guide to Geothermal Heat Pump (GHP) Investing, Part II.

May 27, 2011

GE’s big bet on natural gas

Marc Gunther

General Electric Co. (GE) is betting big on natural gas.

The $150-billion a year company, whose power plants generate about one-fourth of the world’s electricity, today announced a new natural-gas power plant that it says is more efficient and flexible than any other in the market.

By phone from Paris, where the announcement was made, Steve Bolze, president of GE Power & Water, told me:  “This is about transforming the industry over the next five or 10 years.”

GEEnergyLogoGE says it invested more than $500 million in the new plant development. It will be manufactured in France and sold first in Europe and Asia, and then later in the U.S.

One key selling point of the new plant is its unprecedented flexibility: It can ramp up and down rapidly, and thus be easily combined with wind and solar power plants that generate electricity intermittently.

It’s also efficient enough to work as a generator of baseload power, Bolze said. Here’s a GE webpage describing the plant and its operation.

The new GE plant—dubbed the FlexEfficiency 50–is rated at 510 megawatts and offers fuel efficiency greater than 61 percent.  Competing plants burn natural gas at efficiency rates of 57 or 58 percent, Bolze said. Each percentage point of improved efficiency saves a utility about $2 million a year, he said. Capital costs are projected to be CapitaCosts should be somewhere “north of $450 million.” he said.

What this tells you is that, all other things being equal, natural gas has become the fuel of choice for the global electricity business. Wind and solar power can’t compete with cheap gas without government mandates, subsidies or a price on carbon. Nuclear is expensive and it is deemed riskier than ever, for better or worse, after Fukushima. Coal is low cost but dirty and, as a result, politically unpopular in western Europe and the U.S.

Speaking last week at a conference, GE’s CEO, Jeff Immelt, said : “It appears like we’re entering into a natural-gas cycle.”

GE didn’t announce any customers for the plants. The businesses that comprise GE Energy—GE Power & Water, GE Energy Services and GE Oil & Gas—employ about 90,000 people and generated $38 billion in revenues last year. GE is continuing to invest in wind and solar power, the company said.

GE FlexEfficiency50 Combined Cycle Plant


Marc Gunther is a contributing editor at FORTUNE magazine, a senior writer at and a blogger at

April 11, 2011

Canadian Insulation Companies Likely to Benefit from Next Budget

Tom Konrad CFA

On March 22, the Conservative Canadian federal government released its proposed 2011 budget. The biggest news about the budget is not what is in it, but the fact that it is likely to lead to a no-confidence motion in Parliament, and bring about a new election. 

One provision of the conservative budget is the C$400 million ecoEnergy Retrofit program was included in the budget as a sop to lure support from the New Democrat party, but proved insufficient to gain their support.

Canadian insulation manufacturers hailed the inclusion of the home insulation program in the budget. Stephen Koch, Executive Director of the insulation industry association, NAIMA Canada, said, “We are pleased to see the renewal of the ecoENERGY program. It is an important tool that will help with economic growth and recovery in Canada.”

I followed up with Koch about the prospects for ecoENERGY in the next budget after the election.  He replied,

"I would be highly surprised if the next federal government did not reintroduce something like the ecoEnergy program. The Conservatives are saying that if that are elected, they would introduce the same budget.  The Liberals have also revealed a platform supporting a similar program, and the NDP also supports it.

"The only concern I see is the length of the program. I believe it must
be at least two years minimium and the requirement of mandatory label of
the energy efficiency of a home be mandated as disclosue to the buyer
should be implemented after the two years."

All the major Canadian parties support the program because Energy efficiency measures help economic growth twice. Like any expenditure, they create economic activity, but they also have the added benefit of saving homeowners more money than they cost on energy bills. This money can then be spent on other goods and services, providing a second boost to the economy.

Canadian Insulation Stocks

When ecoENERGY (or a similar) reinstated, Canadian insulation companies should get a boost along with the economy, although that boost will be limited if the program is for only a year.

The five members of NAIMA Canada are CertainTeed Corp., Johns Manville, Knauf Insulation, Owens Corning, and Roxul, Inc. Knauf is privately held, while Johns Manville and CertainTeed are divisions of the much larger conglomerates Berkshire Hathaway (BRKA) and Saint-Gobain (CODGF.PK), respectively.

For green investors looking at insulation as an energy efficiency play, the two stocks to know are pure-play insulation manufacturers Owens Corning (OC) and Rockwool International (RKWBF.PK), the Danish parent company of Roxul.

Owens Corning is well known in North America for its ubiquitous pink fiberglass insulation, but also makes a wide range of insulation and roofing products.

Rockwool was founded in 1909 number 10 on Forbes’ list of the world’s most respected global companies in 2007. Rockwool makes a range of insulation for buildings as well as marine and offshore environments,

One other company which benefited from ecoENERGY last time around was Waterfurance Renewable Energy (WFI.TO/WFIFF.PK). In Waterfurnaces's 2010 annual report, the company specifically mentioned the end of the ecoRNERGY retrofit program in 2009 as one factor leading to slow sales growth in 2010.
Unless extended for more than a year, Canada’s ecoENERGY program will probably not make more than a few percent of difference to either company’s bottom line, but its inclusion by a conservative party in Canada’s deficit-fighting budget, and its support across the political spectrum demonstrates that insulation is one green measure that makes both political and economic sense even when budgets are tight.

More energy highlights of the Canadian budget are here.


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.

April 05, 2011

FLIR: Another Dividend-Paying Energy Efficiency Stock

Tom Konrad CFA

FLIR Systems' (FLIR) IR cameras save energy not just by spotting leaks, but by spotting intruders in the dark.

When I published my list of dividend paying energy efficiency stocks in January, I missed one, and it is a long-time favorite.  FLIR Systems (FLIR) business is focused around thermography, and I picked FLIR as a stock likely to benefit from the stimulus in March 2009 because FLIR's cameras are used by energy raters.

 FLIR weekly
FLIR did benefit from the stimulus, rising 56% by the end of 2009 from the $21 price when I made my call, but the stock has been basically flat since then, despite continued earnings and cash flow growth, and the declaration of a $0.06 (0.8% annual) dividend which was first paid in February, just two weeks too late to be included in my dividend paying energy efficiency stocks list.  The dividend corresponds to a 13% payout ratio, meaning that 87% of the company's earnings will be retained for continued acquisitions, stock buybacks, and investing in the business. 
Capital Flows


I first became interested in FLIR in 2007, when I expected the use of thermography to grow rapidly in the likewise growing business of energy rating.  Given that stimulus funding for energy rating will be running out this year, it seems likely that growth from this end of the business will slow, at least in the near term.  Over the longer term, I expect the energy efficiency side of the business to remain robust because falling prices and better resolution will rapidly open new markets, and thermography remains one of the most effective ways to help the non-professional understand the importance of heat loss. FLIR missing insulation.png It's one thing to tell a homeowner that their insulation is poorly installed.  It's quite another to show them in an image like the one to the right.

Nor is thermographic imaging solely a tool for convincing homeowners that there is a problem.  By simplifying the detection and diagnosis of not only problems with insulation, but a long list of residential, commercial, and industrial systems, much time, money, and often energy is saved in fixing those problems. 

One unique application of thermography is FLIR's Gas imaging cameras.  These can help detect leaks of powerful greenhouse gasses such as Sulfur Hexaflouride (used in electric transformers) natural gas, and several other dangerous and expensive industrial chemicals.


FLIR's major competitor in thermal cameras is Fluke, a division of Danaher (DHR).  I talked to representatives of both Fluke and FLIR at Building Energy 11 in Boston on March 9th and 10th. (I went to conduct a workshop on clean energy investing.)  I asked both of them the same question: If I were an energy rater, why should I buy Fluke's camera over FLIR's, or vice versa?  The Fluke rep's line was that Fluke "builds tools" and that I could expect a Fluke camera to be more rugged and not break, and this is something I should be willing to pay a little more for.  The FLIR rep said simply that their camera offers better resolution at a lower price point, and comes with a 2 year warranty. 

I found FLIR's sales pitch far more convincing than Fluke's.   That's one of two reasons this article is about FLIR, not both FLIR and Fluke.  The other reason is that thermography is such a tiny part of Danaher's business that it's not material from an investing perspective.

Commercial Vision Systems

I used to think that the main reason for energy efficiency investors to be interested in FLIR was the company's Thermography division (26% of 2010 revenues,) but discovered another application while talking to the FLIR representative.  The company's Commercial Vision Systems division (21% of 2010 revenues) is promoting their security cameras for cost-effective intruder detectionSecurity camera image.  Because the cameras use thermal imaging, they don't require lighting to spot the body heat of intruders at night, which is where the energy savings come in.  The ability to eliminate security lighting allows FLIR's security cameras to be installed at comparable costs with conventional systems, while saving the electricity which would otherwise be used to light unoccupied areas, as well as reducing light pollution.

The commercial division also supplies cameras for traffic monitoring, a service which fits well into my "Smart Transportation" peak oil investment theme.

Government Systems

Despite the many energy saving applications of FLIR's products, socially responsible investors may have a problem with investing in the company because slightly over half of FLIR's revenue comes from their government systems division, which provides vision systems for military and homeland security applications.  It's unlikely that FLIR's products are going to kill anyone, but they help aim, and it should be acknowledged that military customers are a significant source of revenue.

Moral objections aside, FLIR's military business is healthy and growing much faster than Defense budgets in general.  I'm certainly not a defense expert when it comes to stock analysis, but it seems to me that as defense budgets are slimmed, the trend to use more and more sensor and reconnaissance technology should continue, in order to better target the firepower which is still in the budget.  So while this part of FLIR's business may not be environmentally green, it should continue to add green to the bottom line.


The consensus for FLIR's expected growth over the next five years has fallen to 15% per annum, compared to 25% annual growth over the last five years.  That's still a respectable growth rate, but makes the trailing P/E of 21 and the forward P/E of 16 seem a little high at the current stock price of $32.  I'd like to see the price in the high 20's before I'd be completely comfortable buying the stock, but that would not require much of a pullback.  At the right price, FLIR will be a valuable addition to a green (if not socially responsible) portfolio.

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.

April 01, 2011


Tom Konrad, CFA

Apple takes on Google in Silicon Valley rivalry to save the world... first.
Recently appointed Apple (NASD:AAPL) senior VP of Energy Lester Coulson is unimpressed by Google's (GOOG) efforts to solve climate change. 

"Google has been trying to make renewable energy cheaper than coal for more than three years now, and we haven't even seen a Beta version!" Coulson admonishes.  "Sure, they've made a few headlines by investing in EGS and planning to string wires up and down the Atlantic coast, but after investing $100 million, is renewable energy cheaper than coal (RE<C) yet?  No, and it will be years before it will be if Google is the only Silicon Valley company working on it.  We at Apple believe that the world's energy problems are too severe, and the threat of climate change too acute to be left to the likes of Google to solve."

Apple's plan, instantly dubbed "EE=C", is to make energy efficiency cool.  "It's all about the interface," explains Coulson. "Google is a software firm, but Google is attempting to fix renewable energy.  Renewable energy is a hardware problem, and that's why it takes so long to fix.  We at Apple know better.  We're going to apply our unique skills to solve the problem of climate change though software, in the way that only Apple can.  Unlike renewable energy, energy efficiency is already cheaper than coal.  The problem is, people find energy efficiency unsexy or confusing, or maybe they don't like those twisty light bulbs, so they don't adopt it even when it could save them money.  We have an App for that."

"iEnergy won't just be cool, it will be easy."

How is Apple going to change people's attitudes about energy efficiency?  They claim their software will allow people, companies, and even governments to manage their energy use with a slick graphical user interface (GUI).  Saving energy will be as easy as downloading a hit single from iTunes... and twice as addictive.  "Our interface and Apps are going to make energy efficiency cool," Coulson raves. "First, we're going to rename energy efficiency: We're calling it iEnergy.  That should double its popularity overnight.

"iEnergy won't just be cool, it will be easy.  Saving energy used to require all sorts of dirty engineering and crawling into dark corners with an insulation blower or a caulk gun.  We've changed that: With Apple iEnergy, you can cut your energy use by as much as 50% with a simple, graceful stroke of your finger on your iPhone or iPad.  Finally, we're going to raise the price.  Our studies show that people think of energy efficiency as cheap, and cheap is definitely uncool.  With Apple iEnergy, the more energy you save, the more we charge.  How cool is that?"

Google is taking the threat seriously.  A Google insider, who spoke on condition of anonymity, said: "Apple has really stepped over the line with this one.  Saving the world is Google's turf, and we're not going to take this incursion lightly.  People should think carefully about letting Apple manage their energy use.  Have you tried using an iPod with music from anywhere but iTunes?  Or changing the battery?  I hate to think what might happen if someone using Apple's software tries to install solar panels or even a light bulb bought anywhere other than the Apple Store."

Furthermore, Google takes their own (if no one else's) intellectual property rights seriously.   Google's lawyers have sent Apple a cease-and-desist order regarding the name "EE=C" claiming it is a transparent attempt to profit from Google's branding of "RE<C". 

Apple shares were up 3.1% in aftermarket trading.  Google shares traded flat.

March 21, 2011

Autodesk and the Future of Sustainable Design

Joel Makower

If you start with the premise that many of the solutions to our global sustainability challenges require smart design and systems thinking, it doesn’t take long before you find your way to Autodesk (ADSK). The 29-year-old design software company has made a series of impressive moves into the sustainability realm over the past few years. It’s one of those largely unheralded companies creating the tools used by architects, designers, manufacturers, and — most recently — cleantech entrepreneurs to produce the next generation of greener, cleaner, more efficient products.

Over the past year or so, I've had the opportunity to meet with or interview several members of Autodesk's sustainability team as well as its CEO, Carl Bass, on a number of occasions. Along the way, I have become increasingly impressed with how the company hasn’t merely expanded its offerings to help design professionals achieve sustainability goals, but has also set out to elevate the sustainability knowledge and capabilities of design students and professionals, from high schoolers to seasoned engineers.

Autodesk makes a suite of 2D and 3D design software tools commonly known as CAD, for computer-aided design. Its flagship product, AutoCAD, along with the more advanced tools that integrate with AutoCAD, is the standard design software in architecture, engineering, and construction firms; manufacturing environments, such as industrial machinery, tool and die, automotive, and consumer products; and media and entertainment companies. (Autodesk software has been used in the special effects of dozens of movies, from “Alice in Wonderland” to “X-Men.”)

Starting a few years ago, as green building grew from the margins to the mainstream, Autodesk began integrating components to help architects, engineers, and designers perform “whole building” analysis, optimize energy efficiency, even aim for carbon neutrality. It developed Building Information Modeling, or BIM, software, which allows architects, engineers, construction professionals, facility managers, and owners to break down barriers and bridge communication between design and construction teams, with the goal of optimizing buildings and creating predictable outcomes. Autodesk began using its own facilities as a living laboratory to gain real-world experience. “The idea is to use our own operations as a testing ground for prototyping new products, new features, new workflows that would serve our customers and rapidly green, in this case, existing buildings,” Emma Stewart, senior program lead for the Autodesk Sustainability Initiative, told me.

No Green Button. Those efforts created a gateway into sustainability for Autodesk that has spread beyond buildings to designing everything from products to cities.

Sarah Krasley, a product manager in Autodesk’s Manufacturing Industry Group, works with the company’s industrial customers to help embed sustainability. “We have customers in building products,” she explains. “We have customers who are designing apparel. We have customers that are designing consumer packaged goods. The myriad of sustainable design objectives across those industries is vast, and we realize that there is no green button. That is, there’s not one simple sustainability tool that you can put into a CAD system and solve everybody’s problems. So we’re doing a lot of exploration at where sustainable design comes up in the workflow, and where it’s most meaningful.”

One outcome of that exploration was a partnership announced last fall with Granta Design, a developer of materials databases, that combines Autodesk's Digital Prototyping technology with Granta's materials information technology to enable industrial designers, mechanical engineers, and others to more easily create products through sustainable design.

At the other end of the spectrum is a partnership with CDP Cities, a project of the Carbon Disclosure Project, which has worked to standardize carbon reporting and risk management. Now CDP is working to do the same with municipalities, from Beijing to New York. Autodesk partnered with CDP to standardize the software platform for how cities are tracking, managing, and reducing their carbon risk over the next 40 years, explains Stewart. “So all of a sudden, Mayor Bloomberg and his team are able to look out at New York City and understand the resource flows of energy, waste, water in a way they’ve never done before, and map that against the way sea level will rise over the next 40 years, and then make financial decisions accordingly.”

Class Acts. The city-level partnership exemplifies one of the things I find most interesting about Autodesk: It invests in educating the marketplace, seeding future customers with free or low-cost versions of its software. This isn’t unique to the sustainability space, but sustainability may be where it’s needed most. To limit sustainable design to the relatively small population of engineers, designers, and architects who already “get it” misses a vast opportunity for both the company and the planet.

Autodesk has more than 1.5 million students in its Education Community, which allows students, both undergrads and grads, to download and test-drive free software and other tools. The idea is that students learn their craft using Autodesk software and, of course, want to use it in their professional lives, too.

Those students, it seems, hadn't been learning much about sustainability in their studies. “The thing that kept coming up as we made new software innovations is that there are a lot of people who are not even familiar with the terminology around sustainable design, and are not familiar with how to take these high-level concepts and break them down into steps that are actionable,” Dawn Danby, Sustainable Design Program Manager at Autodesk, explains. “If we’re going to start building new solutions for doing all kinds of energy analysis or materials analysis, people need to understand why this stuff matters and have a context for it. We’re very aware that the hundreds of thousands of mechanical engineers every year who are being released into the marketplace are about to make very significant resource decisions.”

In response, Danby and her team last year launched the Autodesk Sustainability Workshop, a series of free online instructional videos. They’re short, clever works, produced by Free Range Graphics, the team that created Annie Leonard’s wildly popular viral video, The Story of Stuff, and its growing spinoff projects. Danby herself stars in the segment on Whole Systems Design, with sustainability education guru Jeremy Faludi leading most of the others. It’s a terrific public service and a fun way to learn, even for us non-designer types. (Autodesk also sponsored, a free portal for architects, designers, and engineers on bio-inspired design, produced by the Biomimicry Institute, on whose board I sit.)

Seeding the Market. And then there’s the company’s Clean Tech Partner Program, which aims to pretty much give away suites of software — about $50,000 worth — to hundreds of cleantech start-ups. Entrepreneurs submit an application, explain what they’re doing, and get a complete suite of Autodesk software for a nominal fee. The program started two years ago in the U.S., then spread to Europe and, most recently, to Japan. Again, the idea is to seed these startups with Autodesk tools, with the hopes that they’ll become paying customers as they grow.

“In the short term, [sustainability] is the most pressing problem we face as a society, and I think it's important that we do things to help solve the problem,” Autodesk CEO Carl Bass told me recently. “And I think a lot of the innovation is going to come from small companies.” Along the way, Bass has become a frequent speaker at cleantech conferences and an articulate advocate for cleantech entrepreneurs. (You can watch excerpts from an interview I did with Bass, below. I’ll be interviewing him again, onstage at the Green:Net 2011 conference in San Francisco, on April 21.)

As I said, much of these activities remain unheralded in the wider world of green business; Autodesk isn’t typically one of the companies that springs to mind when people name sustainability leaders. In some ways, that’s what I like most about Autodesk: a company that quietly is building the foundation for a sustainable future, creating tools and partnerships that are fundamentally changing the way things are designed and built. We may never see buildings or products that boast anything along the lines of “Autodesk Inside,” but in some respects, our sustainable future could well be labeled exactly that.

For more than 20 years, Joel Makower has been a well-respected voice on business, the environment, and the bottom line.  He has been called "The guru of green business practices."  This article was first published on his blog, and is reprinted with permission. 

March 14, 2011

Ten LED Stocks, and a Wildcard

Tom Konrad CFA

Clean Edge says the
phase-out of incandescent light bulbs is opening the way for low-cost LEDs.  These are the stocks to know.

Federal regulations are flipping the switch on our love affair with incandescent light bulbs.  Research firm Clean Edge's just-released Clean Energy Trends 2011 says this opens the way for a clean energy trend to watch: With compact-fluorescent light (CFL) bulbs the only legal competition in much of the world, Light-Emitting Diode (LED) bulbs need only the arrival of an affordable replacement for the standard 60 watt bulb in order to be met with "an immediate rush of policy-driven demand."

What is an "affordable" 60 watt replacement? Lighting Science Group (LSCG.OB) began providing a 40-watt replacement LED bulb through Home Depot for $20 in May.  Netherlands based Lemnis offers a 60-watt dimmable replacement for $25 online.  That's still high.  With CFLs selling for $3 or less each, the many advantages of LEDs (instant on, no mercury, cold tolerance, dimmability, and slightly better energy efficiency) are not enough to overcome the high first cost barrier.  Clean Edge quotes Lemnis CEO Warner Phillips, who thinks large chunks of the market will start shifting at $15, and the entire mass market will start to shift at the psychologically critical $10 price point.  He expects to see these prices in the next one to three years.  Lighting giant Philips (PHG) is predicting that LEDs will take 50% of the lighting market by 2015.

One to three years is about the right time frame for a stock market investment based on predicted future trends.  Getting in sooner often means your money is tied up longer than it needs to be, while investors who wait too long often find that others have bought first and already driven up the stock price.  I personally think the $10 LED bulb that can truly produce as much light as a 60 watt incandescent will take much closer to three years than one, and 50% by 2015 seems a bit optimistic to me as well.  I'm not rushing to get in, but I think the time to get in will be soon. 

Here are the stocks I'll be considering:
  • Lighting Science Group (LSCG.OB), mentioned above, has the advantage of selling retail products, and so may also have the advantage of capturing retail investor attention quickly.  They also retrofitted every Starbucks in California with LEDs last year.
  • Aixtron AG (AIXG) produces the equipment used for creating LEDs, meaning that the company's sales should lead those of LED bulbs.
  • Cree Inc (CREE) was a pioneer with early high-efficiency white LEDs.  Recently the company has been struggling with strong competition from Asian semiconductor manufacturers, but some observers think the stock has fallen far enough to look attractive again.
  • Epistar Corporation (2448.TW), is a Taiwan based manufacturer of LED chips and wafers that partners with customer to produce LEDs customized to their specific applications..
  • Neo-Neon Holdings ( calls itself the world's largest traditional and LED decorative lighting manufacturer, and considers itself a front-runner in white LED manufacturing.
  • Nexxus Lighting (NEXS) is an LED integrator producing LED fixtures, and other lighting products for a wide range of specialized applications.
  • Philips (PHG), a diversified electronics giant with a strong presence in LEDs and efficient lighting which they augmented when they bought LED company Color Kinetics in 2007.
  • Rubicon Technology Inc (RBCN) makes monocrystalline sapphire and other crystalline products for light-emitting diodes and other applications.
  • Veeco Instruments Inc. (VECO) produces customized LED and solar process equipment.
  • Universal Display Corp. (PANL) makes organic light emitting diodes (OLEDs) for the display and lighting industries.  OLEDs are much less expensive than standard LEDs, although they cannot yet acheive comparable brightness.  We're unlikely to see OLED 60w bulb replacements any time soon, but they are behind the most energy efficienct TVs and monitors.  I'm writing this article using an [O]LED display from LG which I believe contains PANL's technology.  It's amazingly thin, and has great performance in terms of sharpness, response time, viewing angle, and contrast.
  • Vu1 (VUOC.OB) produces not LEDs, but a rival highly-efficient, mercury free lighting technology called Electron Stimulated Luminescence.  I include them as a wild card, since they also stand to benefit from the phase-out of the incandescent bulb.
Which are the best buys?  If you're betting on a rapid take off of LED manufacturing, I think the equipment suppliers are probably the most attractive stocks in this sector, so take a look at Aixtron and Veeco.

UPDATE: I just came across a new LED company that I missed.  SemiLEDs Corporation (LEDS) went public last December.  The company makes blue, green, and ultraviolet LED chips.

DISCLOSURE: No Positions. 

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 17, 2011

When Contrary Pays

Debra Fiakas

Power One (PWER) looks like a promising contrarian play.

It is a scenario that has plays out quarter after quarter.  A leading company in popular sector reports decent results, but surprises investors with guidance below the prevailing consensus.  Then the stock price crashes as sell-side analysts cut estimates, price targets and ratings.  It is a situation that many investors fear as they see once profitable stock positions lose value.

Not the contrarian investor!  There are potential profits to be made for the obstinate, but fearless investors willing to do their homework.   

This very situation is playing out in shares of Power One, Inc.  (PWER:  Nasdaq), a leading supplier of power conversion and management solutions for renewable energy systems, particularly the solar industry.  The company posted revenue and earnings results for the fiscal fourth quarter ending January 2, 2011, above the prevailing consensus estimate of $352.5 million in sales but a nickel below the EPS estimate.  Power One had consistently beat the consensus EPS estimate in each of the last four quarters.

If those mixed results were not disquieting enough, investors appeared unnerved by management’s guidance for the March 2011 quarter.  Unfortunately, Power One management guided for sales in a range of $260 million to $290 million, well below the prevailing view on Power One’s prospects.  According to Thomson-Reuters analysts had published estimates for sales in a range of $281.6 million to $360.4 million in sales and earnings per shares in a range of $0.28 to $35 for the March 2011 quarter.  This produces a consensus estimate of $0.31 EPS on $313 million in sales.  

Shares of Power One sold off 21.2% in the first day of trading following management’s bombshell.  This may be a bit of an overreaction given that guidance for the March 2011 quarter was in part based on poor weather conditions impacting near-term customer order patterns.  Management did cite a reduction in feed-in-tariffs in European markets and excess inventory in its distribution channels as factors impacting demand in the long-term.  Nonetheless, guidance for sales in 2011 appears to support the prevailing consensus estimate of $1.3 million in total sales for 2011.

Clearly things are not as rosy as analysts had projected.  However, that is not to suggest Power One is going out of business.  The company still appears to have a strong competitive position in both its renewable energy solutions and power solutions segments.  Recent results are not yet available for most of its competitors such as Lineage Power, Delta Electronics, or SMA Solar TechnologyEmerson Electric Co. (EMR:  NYSE) reported sales and earnings in-line with expectations for the December 2010 quarter.  Emerson experienced growth and margin compression in its power segment similar to Power One’s report.

The stock price pullback provides a compelling entry point for investors with the patience to wait out the time it take for the dust to settle on this single quarter report.  The stock is now trading at 9.6 times trailing earnings.  Assuming analysts trim estimates for 2011 by the same margin as they missed in the fourth quarter, we expect the consensus estimate for 2011 to drop to $1.10 (from $1.26).  The implied forward price earnings multiple would then be 8.4 times  -  a compelling deal for the contrary investor.

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

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. PWER is included in Crystal Equity Research’s The Mother’s of Invention Index in the Efficiency Group.

February 16, 2011

Alternative Energy Technologies and the Origin of Specious

John Petersen

Thanks to a recent comment from JLBR, I've found a new hero in Dr. Peter Z. Grossman, an economics professor from Butler University who cogently argues that government attempts to force alternative energy technologies into an R&D model that was created for the Manhattan Project and refined for the Space Program will always result in commercial disaster because "the goal of the Apollo Program was the demonstration of engineering prowess while any alternative energy technology must succeed in the marketplace." In a recent article titled "The Apollo Fallacy and its Effect on U.S. Energy Policy" Dr. Grossman summarized the problem as follows:

"The Apollo fallacy has been detrimental to the development of effective energy policies in the US [and] instead of asking what kinds of programs might be useful, the government holds out the promise of a technological panacea to be delivered simply by an act of Congress. The prospect of an energy panacea actually has some political benefits. It allows politicians to claim that they can provide simultaneously the two outcomes most Americans seek from energy policy: low energy prices and energy independence. In fact, with conventional resources these goals are mutually exclusive. To get low prices, the government should provide incentives to drill for oil and gas not just in the US but also in places where they might be exploited more cheaply – of course making the nation more dependent on outside sources. To lessen dependence (true energy autarky is not a feasible goal) on foreign resources, the only method government can use with conventional resources is to raise prices through taxes. But a new technology presumably can to both at once: provide cheap, US-made energy. Unfortunately, the history of energy programs argues that the pursuit of a technological-commercial panacea will fail."

In a 2008 white paper titled "The History of U.S. Alternative Energy Development Programs: A Study of Government Failure," Dr. Grossman started with the Eisenhower Administration's wildly optimistic plans to commercialize nuclear fission reactors for civilian electricity and offered a brief history of serial energy policy failures including:
  • The Nixon and Ford Administrations' support for synthetic fuels from coal and oil shale;
  • The Carter Administration's support for synthetic fuels, nuclear fusion and ethanol; and
  • The Clinton Administration's "Partnership for a New Generation of Vehicles" that failed miserably while privately funded initiatives from Toyota and Honda were remarkably successful.
My additions to Dr. Grossman's list would include Bush the Younger's support for fuel cells, the hydrogen economy and corn ethanol, and the Obama Administration's support for vehicle electrification and alternative energy in general.

These ambitious energy policies all shared three fatal flaws:
  • An inability to distinguish between the technologically possible and the economically desirable;
  • A belief that intervention can force innovation and overcome technical challenges on time and within budget; and
  • A failure to recognize that generous subsidies invariably lead to increased demand for more generous subsidies.
The end result has always been grandiose, unrealistic and extravagant mandates that resulted in catastrophic losses for naive and credulous investors who bought the hopium.

For over sixty years, the government has consistently and predictably failed to understand that industrial revolutions arise from technologies that are perfected by entrepreneurs and prove their value in a free market. The government can accelerate advances in basic science and engineering when cost is not an object, but it can't make technologies cost-effective or ignore the realities of a resource-constrained world. The following cartoon from Jan Darasz appears in the most recent issue of Batteries International Magazine and may overstate the problem a bit, but only a tiny bit.

2.16.11 Daraz Cartoon.png

During the "Sputnik moment" discourse in his recent State of the Union Address, President Obama promised to spend billions of taxpayer dollars to put a million plug-in vehicles on the road by 2015. Back in the business world, Johnson Controls (JCI) and Exide Technologies (XIDE) are spending their own money, together with a $34 million ARRA battery manufacturing grant, to build factories that will make AGM batteries for 14.7 million micro-hybrids a year by 2014. The President's plan will save up to 400 million gallons of gas per year by 2015. The 56 million micro-hybrids that will be built during the same time frame using AGM batteries from JCI and Exide will save 1.6 billion gallons of gas per year. Last time I checked, spending millions to save billions of gallons of gasoline was more sensible than the inverse.

I've frequently argued "Alternative Energy Storage Needs to Take Baby Steps Before it Can Run." A favorite quote from William Martin's novel "The Lost Constitution" says it all – "In America we get up in the morning, we go to work and we solve our problems." Unfortunately government programs never use the tools that are readily available to do the work. Instead they impede sensible actions like using compressed natural gas instead of gasoline and let urgent problems fester while new, exotic and politically popular technologies are invented and refined, but never commercialized. A cynic might suggest that it's a great way for a politician to kick the can down the road while deferring blowback from policy failures and unintended consequences until his successor takes the oath of office.

We have 60 years of experience that proves well intentioned but ill-conceived government alternative energy technology initiatives aren't doing the job. Investing $46 of capital to save a gallon of gasoline with a plug-in vehicle is foolish when you can save that same gallon of gasoline with a $24 capital investment in an HEV. Taxing Peter to underwrite the cost of Paul's new car will impoverish the masses instead of empowering them. Using imported metals to make non-recyclable batteries for the purpose of conserving more plentiful petroleum has all the intellectual integrity and economic appeal of using cocaine as a weight loss supplement.

There are solid growth opportunities in the domestic energy storage sector. JCI and Enersys (ENS) both trade at about eighteen times earnings while Exide trades at about twelve times earnings. In the more speculative small company space, Axion Power International (AXPW.OB), ZBB Energy (ZBB) and Beacon Power (BCON) all present intriguing value propositions as they emerge from the trough of disillusionment and begin to build industry relationships and revenue by proving the value of their products one baby step at a time.

I'm convinced that every manufacturer of energy storage devices that brings a cost-effective product to market will have more business than it can handle as dwindling global energy supplies make storage more cost-effective than waste. That conviction, however, does not extend to market darlings like Tesla Motors (TSLA), A123 Systems (AONE) and Ener1 (HEV) who owe their high profiles and huge swaths of their balance sheets to government largess and glittering promises of an all-electric future once they prove that their wonder products work in the hands of normal consumers and learn how to manufacture better than Toyota Motors (TM), Sony (SNE), Panasonic (PC) and a host of lesser industrial luminaries that have proven their capabilities with decades of successful execution.

Over the last several months I've become convinced that a transition from gasoline to compressed natural gas may be one of the great opportunities of our age. Natural gas is abundant and clean, and an easy domestic substitute for imported oil. While I don't know as much as I'd like to about fiscal multipliers, I have to believe a massive shift from imported oil to domestic natural gas would reduce energy costs to consumers, slash CO2 emissions, generate trillions in additional GDP and go a long way toward ameliorating the looming deficit spending crisis many observers predict.

Just yesterday, the 2011 Honda Civic GX, a conventional vehicle with a CNG fuel system, tied with the all-electric Nissan Leaf for top honors in the American Council for an Energy-Efficient Economy's list of the Greenest Vehicles of 2011, a position it's held for eight years in a row. The Toyota Prius came in fourth, well ahead of the GM Volt, which came in seventh. I can only imagine what the ACEEE ratings would look like if Honda added a hybrid drive to the Civic GX or Toyota added a CNG fuel system to the Prius.

Mark Twain observed that "history doesn't repeat itself but it does rhyme." When it comes to specious and ill-conceived alternative energy technology initiatives that originate on the banks of the Potomac and rapidly mutate into bad investments, I can't help but wonder whether we're just hearing another chorus from the same old song – 99 Bottles of Energy on the Wall.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its common stock.

February 02, 2011

Power Integrations: Profiting from Efficient Electronics

Tom Konrad, CFA

With new climate legislation or a renewable portfolio standard unlikely now that Republicans control the US House of Representatives, progress on clean energy is likely to come mostly from action at the state level, and from regulation at agencies such as the EPA, rather than national legislation. 

Why Energy Efficiency Standards Make Economic Sense

One type of regulation that is fairly uncontroversial is improving energy efficiency standards, that is regulation of the amount of energy an appliance or other device can consume during normal use.  In an efficient market, regulation might bring non-financial benefits, but those benefits would come at a the cost of making the market less efficient.  However, if a market is not efficient, then regulation not only has the potential to bring non-financial benefits, it can also bring financial gains by making the market more efficient.  This is the case with efficiency standards: they not only save energy, they come with a net economic benefit.

For example, when you acquired your last mobile phone, it's extremely unlikely that the energy use of the wall charger even crossed your mind as a factor in you decision of which phone to buy.  Even if you had considered it, you probably would not have been able to determine what any given charger's usage profile was, and the amount of time and effort you put into determining your charger's energy use would have been prohibitive.  Your time would probably have been much more valuable than the energy you might save by buying a phone with an efficient charger.

For all these reasons, the free market does not provide an incentive to makers of phone chargers to expend any effort or money making sure their chargers are efficient.  Even if one cent of added cost to a phone charger would save the owner $1 a year in electricity, the rational manufacturer would choose not to spend that extra cent, because it would bring no benefit in terms of additional sales.

This is where regulation can bring a net benefit. While $1/year might not be a lot of money for an individual cell phone user, the number of cell phones sold each year is enormous, and the collective savings for society are substantial.  Business-minded conservatives can support energy efficiency standards because of the economic benefit, while environmentally minded liberals can support the energy savings and associated reduction in CO2 and other pollution. 

These facts have not been lost on regulators and legislators.  Congress passed the first National appliance standards in 1987, with several pieces of additional legislation passed by both Democratic and Republican controlled legislatures since then.  Currently more than 50 products are covered by a variety of highly cost effective federal standards, most of which were based on existing state standards.  Economic studies by non-partisan economic researchers have established the cost effectiveness of these standards to be at least 2.7 to 1 [source, pdf]. 

For every dollar spent complying with an efficiency standard, there has been a net benefit of at least $2.70.  From an economics standpoint, there is a strong case for tightening existing standards until the marginal benefit only slightly exceeds the cost of more rigorous standards, and also for expanding efficiency standards to other energy consuming devices.

Power Integrations (NASD:POWI)

A significant beneficiary of any trend towards increasingly efficient electronics will be Power Integrations, which I decided to take another look at after it showed up in my search for dividend-paying energy efficiency stocks.  The company is a leading supplier of high-voltage integrated-circuit (IC) based power conversion devices, with about 80% of the market for the most highly integrated power supplies. 

Historically, most power conversion was done with linear transformers.  Linear transformers, which convert power with coils of copper wire, are not only bulkier than IC transformers, they are considerably less efficient.  Typically, half of the power is lost in conversion, and sometimes as much as 80%.  With IC transformers, as little as 20% may be lost, at only about 30% in additional cost.  As copper prices rise and volumes increase, the cost advantage of linear transformers should decrease.  (Most of this information is from an article at The Economist.)

It's not just cell phones that require DC current to operate: nearly all electronics require some DC conversion.  Computers, DVD players, LCD televisions, microwaves, the list is practically endless.  That means there is plenty of scope to expand the market for efficient IC transformers as prices fall and regulators apply efficiency standards to more devices.  LED lighting also requires compact, efficient, power conversion, and Power Integrations highly integrated transformers are particularly well placed for this fast-growing market where space is often at a premium.  (Incidentally, the growth of the market for LEDs is driven not only by lighting efficiency standards, but also by the rapidly falling cost of LEDs.)


The problem with all this growth potential is that the market already knows about it.  Over the last 5 years, revenues have grown at a 23% compound annual rate.  Going forward, the consensus prediction is 15% compound annual growth.  The most dangerous time to own a growth stock is when growth begins to slow, because not only do earnings repeatedly fail to meet expectations, but investors begin to re-evaluate lofty P/E ratios as their expectations of future growth fall.

Although Power Integrations has a commendably strong balance sheet, with no debt and a stratospheric current ratio of 6, it trades at a 22 trailing and 20 forward P/E ratio, and 3.5 times revenues (at the $37.32 close on Feb 1).  That's not bad at the historical 23% growth rate, but does not look so good if you're only expecting 15% growth going forward. 

Overall, I like the business, but this seems like a company to watch and buy after a negative earnings surprise or two (the last two quarters beat estimates by 15% and 8%.)  The long term fundamentals of the business are sound, so it makes sense to wait until other investors are depressed about the short term.

The company is expected to release quarterly earnings tomorrow.  If they miss the consensus estimate of $0.41 earnings and $70.2M revenue, I'd wait a couple weeks for the news to sink in, since the market tends to react more slowly to bad news than good.  If they beat estimates, which is more likely given the strong economy last quarter, I plan to just sit back and wait another three months.

Power Integrations: Profiting from Efficient Electronics was written for

DISCLOSURE:  No position.

DISCLAIMER: The information and trades provided here and in the comments 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.

January 30, 2011

Dividend-Paying Energy Efficiency Stocks

Tom Konrad CFA

Clean energy investing is not on for growth investors, traders, and speculators.  Conservative income investors can invest in green companies as well, and dividend paying energy efficiency stocks deserve pride of place in their portfolios.

In my clean energy investing workshops, I tell attendees that investing in clean energy stocks does not have to be riskier than investing in any other sector.  The key to investing in clean energy with a low risk profile is the same as low risk investing in any other sector: find stable, profitable companies selling at reasonable valuations.

Identifying stable, profitable companies is not always easy.  Even if a company is profitable today, rising competition, the falling price of alternatives, or changing technology can rapidly undermine business models and profits.  A rapidly changing legal, regulatory, and cultural landscape further complicates the search.   All of these factors apply in clean energy, but much more in rapidly evolving technology and incentive driven sectors such as solar PV and cellulosic ethanol than in more staid sectors such as energy efficiency and conservation.

The Economics of Energy Efficiency

Energy efficiency stocks lack the sex appeal of solar stocks or smart grid stocks, but that very dowdiness makes them much more stable than most other alternative energy sectors.  Further, unlike most renewable energy, much energy efficiency makes economic sense without incentives, so the companies are less dependent on the government to drive sales.  If Google (GOOG) had chosen to make energy efficiency cheaper than coal ("EE<C"), rather than renewable energy cheaper than coal (RE<C) they'd have been done before they started. 

One reason firms pay dividends is because it's a way to signal to investors that management is confident about their ability to pay that level of dividend far into the future.  Dividend cuts are embarrassing to management, and even worse for a company's stock price, so companies that pay dividends tend to believe that they will be able to remain profitable and keep on paying that dividend.

Safer Clean Energy Stocks

Given this, dividend paying energy efficiency stocks are a great place to start when looking for relatively stable clean energy investments.  The list that follows is simply a result of me going through our list of energy efficiency stocks and pulling out the ones that pay a dividend.  I plan to look more deeply into many of these companies in future articles.

Company (Ticker)
notes / articles
Aixtron AG (AIXG) 0.3%
Cabot Corp (CBT) 1.8%
green building
Eaga PLC (EAGA.L) 5.0%**
UK residential energy efficiency
General Electric (GE) 2.8%
A little of everything
Honeywell (HON) 2.2%
HVAC, building controls
Johnson Controls (JCI) 1.6%
Building controls
Kingspan Group, PLC (KGSPF.PK) 0.6%**
Green Building
Linear Technology Corp. (LLTC) 2.7%
Efficient power conversion
Neo-Neon Holdings ( 1.5%**
PFB Corporation (PFB.TO) 5.0%
Green Building /
Philips (PHG) 2.5%
Power Integrations (POWI) 0.5%

Waterfurance Renewable Energy (WFI.TO) 3.5%
Geothermal Heat Pumps

*The dividend rates were as of January 28, 2010, and may have changed due to changes in the stock price or dividend policy since then.

**These London and Hong Kong listed companies follow the European practice of declaring a final and interim dividend that varies much more than the typical US-based dividend, so the dividend may be less of an indicator of earnings stability.

If you know of any dividend paying efficiency stocks I've missed, please let me know in a comment.


DISCLAIMER: The information and trades provided here and in the comments 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.

January 09, 2011

You Call This Cleantech?

David Gold

Invest in a solar, biofuels, or LED lighting company, and nobody will question the company’s cleantech pedigree.  Invest in a manufacturer of network switch upgrades for telephone companies, then call it “cleantech” and you’ll see a lot of raised eyebrows.  I know, because we did just that.

We are investors in Aztek Networks, a company that makes replacements for the TDM switches that handle much of the phone traffic from standard landline phones.  Telecom companies are excited about Aztek’s product because it enables them, for the first time, to incrementally switch out their old TDM switches rather than doing an extremely expensive complete system overlay. Aztek’s technology also enables them to provide IP-based functionality.  Aztek’s switches are IP-based but can co-exist in the network architecture with both IP-based and “old world” GR303-based switches.  Our cleantech company, Aztek, is enabling telecom companies to accelerate their entry into modern IP-based technology.

Eyebrows raised yet?  Now, for the rest of the story… 

Aztek’s switches also reduce energy consumption by 90%.  How big of a deal is that?  The roughly 16,000 TDM switches in the U.S. and Canada alone consume about 15,000 gigawatt-hours each year – roughly 0.4% of all electricity used in those two countries.  Given that these switches run 24/7/365, they are a base load draw.  That means that burning fossil fuels produces the vast majority of electricity utilized by them.  The result is over 8 trillion tons of carbon emitted every year.

To put that in perspective replacing the aging TDM switches with Aztek’s technology is equivalent to installing over 42 million square meters of solar panels in Arizona where insolation is extraordinary (assumes insolation of 6.5 kwh/m2/day and 15% overall system efficiency).  That would be almost 20 times the amount of electricity produced by all solar power in the U.S. in 2009.

What’s even more compelling about Aztek’s technology is that it also provides a phenomenal economic return to its customers.  As an example, in California eliminating a pound of carbon emissions per year with solar costs roughly $3.50 or about $1.80 with all federal and state tax credits.  Aztek eliminates a pound of carbon emissions each year for an equivalent cost of less than 50 cents per pound – without any tax credits.  As much as 60% of the operating costs incurred by telecom companies for their TDM switches are from energy costs.  With Aztek that cost is reduced by 90%.  On top of this, those old TDM switches are huge and require extensive maintenance.  Aztek’s technology is 90% smaller, yielding large real estate savings, and requires about 30% less maintenance.  The overall payback on the technology can be as little as one year.  And without Aztek’s technology, telecom companies would not be able to move as fast to replace TDM switches because of the complexities and costs of doing complete network overlays. 

Now that’s what I call turning Green into Gold! Aztek is a cleantech company and the best kind at that – one that also delivers a huge return on investment to customers without any government subsidy.  Our bet is that Aztek’s environmental impact will exceed many companies in more stereotypical cleantech segments.  And that will raise some eyebrows as well. 

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (  This article was first published on his blog,

October 17, 2010

The Rodney Dangerfield of Cleantech

David Gold

Wind turbines stand tall and mesmerize with their motion. Solar cells bask in the sparkling sun.  Meanwhile, hidden down in the dark dirty underworld, a compelling technology sits quietly and gets no respect.  Once installed it largely goes unseen and, it seems, it’s equally invisible in the world of clean technology press, venture funding and government R&D funding.  Yet this technology provides some of the most intriguing economic returns available for reducing a building’s net energy consumption and I would welcome the right opportunity to fund an exciting business in this category.

What is this Rodney Dangerfield of cleantech?  Geothermal heat pumps, also referred to as ground source heat pumps or geoexchange.  Anyone who has gone down a hundred feet or so in a cave on a hot day probably noticed how nice and cool it was down there.  That is because in most geology, a zone of nearly constant 55-degree Fahrenheit temperature exists 50-200 feet below the ground we walk on.  Even at shallower depths the temperature hovers within a much narrower range than on the surface. Geoexchange is technology that uses the constant temperature and huge heat sink that the earth represents to generate heat in the wintertime and to cool in the summer time.  They leverage technology inside the house that has similarities to your refrigerator (which is, itself, a heat pump).  (more detailed explanation of geoexchange here).  

Much like solar and wind, this is not a new technology; it’s been around and used for decades.  Although the economics of a geoexchange system vary from location to location based on geology, local energy rates, and the need for heating/cooling, in most places the payback on a geoexchange system for a home or commercial building beats solar or small-scale wind -- usually sizably.  Whereas solar or wind generate electricity, geoexchange reduces the consumption of energy for space heating and cooling and also can be utilized to generate hot water. It has near year-round benefit, working when the sun doesn’t shine and when the wind doesn’t blow.  It is “base load” energy savings for a building.  A $1,000-$2,500 annual savings in energy costs for a middle class home is fairly typical, and the CO2 reduction is roughly equal to taking two cars off the road – permanently.

(Table from Climate Master)

In many markets, a geoexchange system can be installed with paybacks of 10-15 years without any government incentives. By comparison, except in the best markets (high sun, high electricity cost and high state tax incentives on top of federal incentives), solar still struggles today to provide 10-15 year paybacks with government subsidies. 

And here’s where it get’s really exciting:  The cost of installing the technology can pay itself back in as little as three years.  A geoexchange system isn’t like that of a solar or small-scale wind system, which almost always has a 100% incremental cost because no existing system is being replaced.  In most climates, buildings need either heat or air conditioning to be usable 365 days a year, and in many climates they need both.  Those systems age and need to be replaced (a 20-year lifetime is typical).  So for a building needing new HVAC equipment, the relevant cost is the incremental cost of the geoexchange system.  Netting out the cost that would have been spent on traditional HVAC replacement equipment in most cases drops the payback calculation down to six-12 years.  Add the current federal 30% tax rebate off the full system cost, and the buyers payback can be an incredible three to six years. 

 (Source: Cleantech Consulting Services)

27 Case Studies of Residential Ground Source Heat Pump Paybacks

(Oregon Institute of Technology)

So why is it that solar has received about 33% of all venture capital investment in cleantech and around $1B in government R&D funding over the past ten years while virtually no federal funding or venture capital has gone to geoexchange?  There are several contributing factors:

·      Each geoexchange installation is an “art” project. This is a challenge that the solar industry used to face, when every system required fairly extensive design, engineering and coordination of a potpourri of vendors.  Solar has largely overcome this by better productizing their offerings and streamlining installation; at the same time, the number of solar-focused installation companies has proliferated. Geoexchange has yet to mature in this manner, and many of the companies in the space are largely traditional HVAC vendors that can do geoexchange. 

·      Out of sight, out of mind.  One might think this is a good thing, but I suspect that it hurts geoexchange.  Your neighbor who spent $25k on his solar system is proud to have it on his roof, advertising that he’s green.  But no one knows about the neighbor who invested in a geoexchange; after the drilling rigs leave, nobody can see the good deed being done for the environment. 

·      Fragmented, unfocused installers.  Geoexchange systems are installed by a hodgepodge of mostly small HVAC contractors.  Because most don’t focus exclusively on geoexchange, there isn’t a strong marketing and sales engine to streamline the sales and installation process. 

·      A misconception that geoexchange is “low tech.” What technology advancement could there be in putting pipes into trenches or holes to capture or dissipate heat?  The common view is “not much.”  But the process of heat transfer is a complex engineering challenge that could include advanced materials, fluids and designs to enable increased efficiencies, reduced materials and reduced installation costs for a given performance level.  I believe that technological advancements and economies of scale could result in a reduction in geoexchange system costs of 20-50% with a directly corresponding drop in payback time. 

On the last point, it is truly a shame that there isn’t any federal R&D spending going to innovative technologies in this area.  I would love to find an innovative geoexchange company with compelling technology advantages, innovative financing tools and a great management team that could build a large national business to invest in.  If you know of any, send them my way.  I promise I’ll show them some respect even if I can’t promise that we’ll invest in them.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (  This article was first published on his blog,

Related Article:  Geothermal Heat Pump Stocks

August 13, 2010

PFB Corporation (PFB.TO,PFBOF.PK)

Tom Konrad, CFA

PFB Corporation is a manufacturer of energy efficient building materials, including SIPD and ICFs, based on expanded polystyrene.  The company's sales have fallen in response to the housing downturn, but less so than most of the housing industry, despite a strong balance sheet and cash flow.  I consider the stock a buy below C$6.

NOTE: I'm taking a break in order to take a trip to California for some vacation and to moderate a panel at the San Francisco Moneyshow.  This article was written in January 2010, but I delayed publication for seven months because the company is very thinly traded, and I was still adding to my position.  In July and early August, the stock fell decisively below C$6, due to losses caused by the moribund market for new homes in the first half of 2010.   I saw these losses as providing the opportunity I needed to complete my planned purchases of this very thinly traded stock.

When Bill Paul called PFB Corporation (PFB.TO/PRBOF.PK) an "energy efficiency play" whose managers have the "demonstrated ability to control costs (and maintain the regular 6-cent-a-share divided payout) in tough economic times," he instantly had my attention.  Pure energy efficiency companies are rare, and managers' ability to control costs is priceless.  Any energy efficiency stock which has managed to maintain liquidity (not to mention a dividend) in the current downturn is worth a look.

I look for four things in a stock:

  1. A good business. 
  2. A strong balance sheet and cash flow that can allow the company to continue executing its business model when external financing is scarce. 
  3. Competent and honest management with both an understanding of the business and a record of straightforwardness with shareholders and analysts. 
  4. A good value for the money.

The Business

PFB manufactures products based on Expanded Polystyrene (a.k.a. Styrofoam, or EPS,) including Structural Insulated Panels (SIPs) and Insulated Concrete Forms (ICFs) for the green building market.  I first heard of both SIPs and ICFs in a course on homebuilding I took in 2003, and I left the class confident that I would use one or the other if I ever designed my own home.  

For new buildings, SIPs and ICFs are among the simplest and most practical ways to erect a well-insulated building quickly.  SIPs easily achieve high R-Values with minimal air leakage, while ICFs have many of the same advantages as walls, but have the additional advantage of being fireproof and extremely strong.

With a green building code improving the baseline, and green buildings taking a larger market share, PFB's products are in the right place in the housing industry, even if the housing industry is not the best industry to be in.  While neither SIPs nor ICFs are exclusive to PFB, the company has invested in making sure that their products are listed in many local building codes in North America.

I like the business, despite the fact that the market for EPS products, including SIPs and ICFs are competitive, and the company is vulnerable to continued weakness in the North American building industry.  

Balance Sheet and Cash Flow

The company carries little debt, which it has reduced slightly since the onset of the financial crisis, despite a decline in revenues.  It has strong cash flow from operations and current ratio of current assets to current liabilities.  It has a small (relative to the size of the company) pension deficit.  This deficit worsened by the 2008 market crash, but it remains small compared to cash flow.  Furthermore, the last evaluation of the pension deficit was conducted on March 31, 2009, near the stock market bottom.  I anticipate that the next evaluation will show a reduction in the pension deficit due to improved market conditions.  Although the company has relatively little debt, it has extended its credit facilities during the year, although these facilities remain mostly unused.  This should provide them with an additional cushion in case building industry conditions worsen.

Profits are sensitive to input costs, which are mostly denominated in dollars, as well as oil and gas prices, which are major components of cost of goods.  Declining energy prices in 2009 have meant that the company has been much more profitable in 2009 than in 2008, despite a 16% decline in sales.  About 4/5 of PFB's sales are in Canada, which helped insulate the company from the more severe housing downturn in the United States.  

My back of the envelope estimate is that the company would be close to break even if energy prices returned to 2008 levels without any increase in sales volume.  I don't expect this scenario to occur, and so expect the company to remain profitable in 2010, with a good chance of improving profitability.  Although higher energy prices may hurt the company in the short term, over the long term high energy prices will increase demand for green building products as a share of building materials, which will in turn help PFB.

For US investors, the company's sensitivity to the dollar is an advantage.  PFB's profits increase with a falling dollar, which means that gains in PFB's stock price may somewhat offset losses in the investor's purchasing power that result from a declining dollar, and if the company is hurt by a strong dollar, the US investor will be better able to bear any losses because of his general increase in purchasing power.


With a small company such as PFB with little management coverage, it is often difficult to get an accurate idea of management quality.  That said, those indications that I do have are good.  One sign I look for is complex financial structures or excessive related party transactions when reading the annual reports.  I found both the 2008 annual report and the most recent quarterly report (Q3 2009) commendably straightforward and easy to understand.

I was also pleasantly surprised that although all outstanding employee incentive options are considerably out of the money (weighted average execution price C$8.45) the company has not felt the need to revalue these options downward or issue new options at lower strike prices, despite the decline of the stock price from C$12 in 2006 to C$8 in 2008 to below C$6 today.  Option based compensation is charged as an expense against income based on a Black-Scholes valuation at the time of issuance, which, due to the decline in the stock price since options were last issued most likely overstates the value of the options and in turn depresses income.

I recently read Dan Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions.  It contains a chapter towards the end on how we actually end up making moral decisions, and it's rather depressing reading for any of us who want to think the best of our fellow man, any company's management, or ourselves.  But one conclusion he draws is that nearly everyone acts much more responsibly when they've recently been thinking about morality, in any form.  With this in mind, I think it's worth noting that PFB displays their corporate Code of Business Conduct and Ethical Policy fairly prominently on the website.  Just having such a code does not necessarily mean much, but the fact that they have one puts them a big step ahead of the many small companies that don't.

Value for Money

The company has a C$0.06 quarterly dividend which I expect it to maintain for the foreseeable future, which translates into a healthy dividend yield of about 4.5% at the C$5.35 price at which I bought most of my shares.  Given the uncertain future of the housing industry, I'm uncomfortable predicting future earnings, but I expect the company to be able to survive a sustained downturn, which would improve its competitive position in the industry.  If the housing market remains stable or recovers slightly without outsized increases in oil and natural gas prices, the company should be able to maintain earnings of C$0.30 to C$0.45 per share, giving a P/E ratio in the 12-20 range, and allow the company to maintain a share price in the $4-$6 range.  Rosier scenarios should produce large increases in profits, which ranged from C$0.60 to C$0.92 per share during the 2005-7 housing boom.  Those levels of profitability need not require a return to the housing boom since a growing market share for green building is likely to increase the market of PFB's products even in a flat housing market.


The biggest negative for PFB is the company's liquidity.  Less than $10,000 worth of shares trade on a typical day.  This means that even one investor with a decent amount of money to invest could significantly raise the price of the stock (or drop it when selling.)  Because of this, I decided to leave PFB out of my Ten Green Energy Stocks for 2010, even though I think it's a better value (at C$6 or less) than the three energy efficiency stocks in the list. The problem is, very few readers will be able to buy this stock at that price, and my annual list is so widely followed that most readers would have ended up overpaying. 

I decided to sneak this article in with a bit less fanfare, to let my most loyal readers get the first chance.  But be careful!  With a stock this thinly traded, you should almost certainly use limit orders to avoid overpaying.


Positives: Energy Efficiency business.  Profitable, decent cash flow, minimal debt.  Reasonable valuation.  C$0.24 annual dividend (4% at C$6).  

Negatives: Very thinly traded.  Housing industry.

Recommendation: Buy below C$6.00, unless homebuilding gets even worse than it is now.

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 31, 2010

The Pure Technologies Takeover of Pressure Pipe Inspection Company

Tom Konrad CFA

In February, I published an interview with Sam Healey portfolio manager at Lamassu Holdings about Pure Technologies (PUR.V, PPEHF.PK), a company that can find and repair leaks in water systems without shutting down the system. Last week, Pure Technologies announced that it intended to acquire Pressure Pipe Inspection Company for cash and stock worth as much as C$34.9 million.  The market's reaction was initially positive with PUR.V gaining C$0.29 on Wednesday, the day following the announcement, but most of these gains were given back on Thursday and Friday.

My initial feeling is that this will be a good merger for Pure Technologies, but since Sam Healey follows the company much more closely than I, I thought I'd ask for his take, and also share it with you.  He was kind enough to share his thoughts even though he was on vacation.  Here is what Sam had to say:

The biggest plus of the PPIC acquisition is that they were PUR largest competitor and were active in Markets that PUR wanted to increase share in.  NA, mostly.  Also, PPIC would have provided an easy entrance into the space for larger competitors looking to expand into the space.  Thus, PUR has effectively increased their "moat".

PPIC did not sell any products, they functioned as a service company which means they ran at higher margins and thus the acquisition will not hurt PUR margins going forward.  The earn out (over 20 MM C$) suggests that annual revs will be in that neighborhood, up from 14.6 MM C$ last year, a 30% growth rate, which is encouraging.

What I am most excited about here is that there may be very large cross selling opportunities for PUR to sell its AFO permanent monitoring product to PPIC existing customers.  PPIC customers rely on PPIC for service related to inspection of large diameter pipe.  Many of these customers would benefit greatly from a permanent monitoring system, AFO, and given the success AFO has demonstrated in DC (recently announced - June I think - do not have my notes here) I suspect the sale will not be difficult should there be customer demand.  If that were to materialize it would result in both a nice ramp in product sales and recurring revenue at high margins for monitoring services.  That is the potential home run here.

That all makes sense to me.  The cross-selling opportunities can be especially important for a company like Pure Technologies which is creating a market for a new technology.

You can read the original Pure Technologies article here.

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 02, 2010

Cleantech is a Bunch of Hot Air!

David Gold

While renewable energy often captures most of the cleantech headlines, if anyone doubts why energy efficiency must play a significant part in the cleantech effort – as significant, if not more so, than the role of renewable energy -- just examine the energy flow graphic developed by McCall and Bassett and reprinted in the June edition of Technology Review.  At least half of U.S. energy consumption goes to nothing more than creation of hot air through waste heat.  And, when one realizes that much of the 13.9% of electricity output from power plants shown in the graphic also ends up as hot air from our computers, lights, etc., the portion of energy consumption going up in hot air is actually greater than 50%.

Couple this with the following facts… According to the Energy Information Administration (EIA), on a worldwide basis renewable energy currently supplies roughly 10% of the energy consumed.   Over the next 25 years the EIA forecasts worldwide energy consumption to grow by more than 50%. They also forecast a 100% increase over that period in the supply of renewable energy, which, in isolation sounds modestly impressive.  But this would equate to less than 15% of all energy being consumed because consumption would have increased 50%.   Worldwide renewable energy production would have to increase upwards of four fold to equal just about 25% of the energy consumption forecasted for 25 years from now.  Meanwhile, with 50% growth in consumption, the other 75%, representing fossil fuel consumption, would still equal more fossil fuel than the world consumes annually today!

Energy efficiency not only saves on total energy consumption today but also is magnified as consumption increases because the additional devices consuming energy will consume less if they are more efficient.  For example, increasing the average efficiency of all vehicles on the road an average of 50% (e.g., from 20 mpg to 30 mpg…not such a high hurdle) would reduce overall U.S. energy consumption by over 9%...that’s 9% of today’s consumption and tomorrow’s increased consumption because all the additional miles forecast to be driven would also be in more fuel efficient vehicles.  To achieve that same impact with renewable energy would require about a 150% increase in U.S. renewable energy production and about a 225% increase to achieve the same offset in 25 years.

I’m not diminishing the role of renewable energy as an important piece of the long-term equation.  Disruptive development of cost effective renewable energy sources will need to be a key piece of the long-term equation for removing our addiction to fossil fuels.  However, energy efficiency often doesn’t receive as much press as renewable energy because it isn’t as sexy.  Yet, energy efficiency provides leverage that renewable energy does not because the benefits automatically scale as consumption increases.  To say it another way, if we can figure out how to clear up some of the hot air, we can have a tremendous impact on of fossil fuel consumption! 

  (See Larger Image)

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners (  This article was first published on his blog,

June 14, 2010

Baldor Electric (BEZ): Efficient Motors Drive Profits

Tom Konrad, CFA

Baldor Electric Company stands to benefit from new Federal energy efficiency standards and other efforts to improve industrial energy efficiency.

One of the lesser-known provisions of the 2007 Energy Independence and Security Act (EISA) will be to require efficiency standards for the majority of industrial electric motors.  This will be a boon for motor manufacturers when EISA comes into effect in December 2010: efficient motors require higher quality materials and manufacturing, and so can be sold for higher margins. 

Baldor logoA major beneficiary of this transition will be Baldor Electric (NYSE:BEZ).  Baldor is the market leader for industrial electric motors in the United States.  Almost two-thirds of Baldor's sales are electric motors (the balance comes from power transmissions, drives, and generators,) and Baldor claims to have more motor types that are in compliance with the EISA standards than any other company in the world.

EISA Effect on motor sales
In addition to gains from selling more premium efficient motors, Baldor has opportunities to benefit from shifts towards energy efficient products, such as replacing single-speed motors and gearboxes with variable speed motors, producing both energy and maintenance savings.  Their motors are also used in hybrid commercial trucks.

Financial Strength and Valuation

Baldor has more net debt than I like, but at about 8 times the last three year's average operating cash flow, it looks manageable.  The debt was mostly acquired in the purchase of another electric motor company at the start of 2007, and Baldor has been payed it down a quarter of it over the last three years.  The company has good liquidity, with a current assets over three times current liabilities, even after last year's very slow sales.

Baldor pays a $0.68 annual dividend, which management has said will not be raised until they have made more progress paying down their debt in order to comply with debt covenants.  With the share price at $38.03 on June 9, the dividend yield was 1.8%.  Compared to depressed 2009 earnings, the P/E is an extremely expensive 45, but I agree with the consensus that earnings are likely to rise significantly in 2010 and 2011, bringing the P/E to a more reasonable 15 or so. 


Given my current bearish outlook on the stock market, I'd wait for a pullback to $25 before purchasing BEZ.  I'd be surprised if the company achieves consensus 50% five year annual growth, mainly because I'm less optimistic about the overall economy than most analysts.  Baldor has great growth potential, but industrial equipment is a very cyclical industry.  Time the cycle right, and the stock will be a great addition to a clean energy portfolio.

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.

June 10, 2010

Wal-Mart Goes Green: The World's First Quintuple Play

Jim Fitzpatrick

Watching baseball's first quadruple play was strange. Seeing Wal-Mart (WMT) go green is stranger still.

First the baseball: The scene was a game of T-Ball, where everyone bats every inning, regardless of the number of outs.

The bases were loaded when a line drive ended up in the glove of the pitcher. While he wondered how it got there, all the runners took off without tagging up. The pitcher ran to third, then second, then first.

We kept counting the number of outs and they did not add up. First in our heads: That doesn't make sense. Then on our hand: That's crazy. Then our other hand: It kept adding up to four outs.

It took us a while to believe what we saw right in front of us.

And now Wal-Mart, the original Black Hat, is going green. Or better said, sustainable. Let that sink in because it is true. Big time.

So much so that says it "could end up being one of the biggest motivators to make truly 'green' products ever."

As in history of the world.

Wal-Mart has made believers out of not just the biggest environmental organizations in the world -- like the Environmental Defense Fund and the World Wildlife Federation -- but also Wal-Mart's suppliers.

It started five years ago when Wal-Mart announced three goals: 1) 100 percent renewable energy; 2) Zero waste; 3) Sustainable products.

Wal-Mart stores have already gone sustainable on dozens of fronts from shipping to selling to storing to recycling. Last year, Wal-Mart saved 4.8 billion plastic shopping bags.

That's how they roll in Bentonville: Big.

Even the combined efforts of 8400 stores with two million associates doing $400 billion in sales every year was not enough: Wal-Mart figured out 90 percent of the carbon was coming from its supply chain. So it reached down to all its 100,000 vendors -- and their vendors and their vendors -- and told them that reducing carbon footprints -- reducing energy -- will save money.

Everyone knows that is what Wal-Mart is all about.

"And vendors are listening," said Tom Rooney, CEO of SPG Solar in Novato, California, one of the largest solar installers in the country. "We are seeing renewed and intense interest in industrial- and commerical-scale solar because of Wal-Mart and Proctor and Gamble and other companies are showing their suppliers how to change their shipping, packaging, storing, selling, heating, cooling, disposing,
recycling and other practices to squeeze energy out of the supply chain and save money. And solar is a big part of that."

Not that many need much coaxing: Financial incentives for solar today are so strong that many companies are essentially getting free energy -- and more -- by buying a new solar array from the money they will save from lower energy bills. And having a big chunk left over.

Now on top of that, the largest companies in the world are saying solar and other renewables have to be a part of their supply chain. By some estimates, 1 in 3 dollars worldwide is associated with a company that does business with Walmart. So, if you shift Walmart and its suppliers, the global economy shifts with it, says R. Paul Herman at Or as the New York Times puts it: "because of its size and power, Wal-Mart usually gets what it wants."

And Wal-Mart wants renewable energy.

Earlier this year, Wal-Mart sent its vendors a 15 part questionnaire to determine what their companies were doing to become more sustainable. Also leading the effort is Wal-Mart's "Sustainabilty Index."

Scholars from around the world are gathering at the Universities of Arizona and Arkansas to create this new measure of the energy created -- and wasted -- during the life cycle of a product found at Wal-Mart.

It won't be ready for at least anothear year. "But that doesn't matter," says Rooney. "No one is fighting Wal-Mart or complaining about the reporting that this new index requires. Just the opposite: They are
racing to out do each other, and surpass Wal-Mart's expectations. Right now. Not next year. "

And why not:

In May, the world's largest consumer product company, Proctor and Gamble (PG), announced its own, similar, sustainability program for its vendors. Joining IBM, GE, and other corporate giants on the sustainability train.

The results are already showing up on the bottom line:

"Perhaps more than any other company, Wal-Mart has pursued this approach" said the Harvard Business Review of Wal-Mart's new vision of sustainability. "The payoffs are already showing up: One of the Sustainable Value Networks, tasked with fleet logistics, came up with a transportation strategy that improved efficiency by 38%, saving Wal-Mart more than $200 million annually and cutting its greenhouse
gas emissions by 200,000 tons per year."

Wal-Mart: Not just for beating up anymore. Or maybe we are just seeing the world's first quintuple play.

Jim Fitzpatrick is a retired civil engineer and solar entusiast living in Delaware.

May 03, 2010

How to Build a Cleantech Company Without Huge Investment Capital: A Case Study

David Gold

While many cleantech companies require very large amounts of capital in order to get to market, there is a quiet group of cleantech companies bucking that trend.  Companies like Heartland Biocomposites (Green Building Materials), RealTech (Water Testing) and TerraLUX  (LED Lighting) all built significant and growing businesses with compelling intellectual property and did so initially without multi-millions in capital from venture funds (let alone tens or hundreds of millions). Because TerraLUX is one of our portfolio companies and I therefore know them best, their story is one I am able to share.

TerraLUX boasts customers like Cooper Lighting, Phillips (PHG), GE Healthcare (GE), Snap-On Tools and many others.  It has six awarded patents and eight more filed.  Dr. Anthony Catalano founded the company in 2003 and, with exceptional technology smarts, creative boot-strapping and some of his own capital, he built a business with significant revenues, exciting gross margins and deep intellectual property – all without a penny of outside investment capital.   And now, only after all those accomplishments, has TerraLUX closed a $5.6M financing from Emerald Technology Ventures and Access Venture Partners.

How did TerraLUX pull this off?  The story starts with an entrepreneur focused first and foremost on how to create revenues.  Catalano, who has a PhD from Brown in physical chemistry and is a previous director of the NREL Photovoltaic (solar cell) Division, had the technical acumen to create a business in a number of cleantech sectors but he wisely chose the LED market. He did so because he saw the industry’s explosive growth.  His dream was to create LED lighting for buildings that could have a disruptive impact on lighting energy consumption.  But Catalano realized he couldn’t just create a science project; he had to be able to sell innovative products quickly to create cash flow. 

Seeing that in 2003 the cost/benefits of LED’s were not yet compelling for the large general lighting market he knew he had to turn to a more ready market – portable lighting.  While this market is an order of magnitude smaller than general lighting, it is still a multi-billion dollar market and, most importantly, the benefits of higher brightness, extended lifetime and increased durability have premium value for users of products like flashlights, work lights and surgical lights. The portable lighting market was (and is) willing to pay a premium for those benefits and, as a result, even with the high cost of LED chips in 2003, TerraLUX was able to create real products and real customers.

I suspect some entrepreneurs would have turned up their noses at the thought of launching a flashlight business when their goal was the much bigger general lighting market.  But Catalano didn’t let his ego get in the way of doing what was needed to do to get the business off the ground.  Instead, he went to market with LED drop-in replacements for existing flashlight bulbs and was soon off and running.  From there the company grew into multiple portable lighting product lines and well beyond just flashlights.  As it turned out, creating high-performing portable LED products is, in many ways, more challenging than designing for general lighting.  Limited space, challenging heat sink options, and a non-constant power source (e.g. batteries) create a plethora of challenges.  But Catalano together with his VP-engineering, Dan Harrison (brilliant Caltech guy), used their considerable technical talent to create innovations to solve these problems.  The result has been the creation of a deep intellectual property portfolio around temperature control, optics and circuitry, and the ability of TerraLUX to deliver LED products with unparalleled performance.

Success begets success, and TerraLUX’s flashlight products created awareness in the market.  A few years later, TerraLUX’s phone began ringing with calls from other portable lighting manufacturing companies desiring to create LED versions of their lighting products. These companies needed something they could plug or screw into their existing products to turn them into high-performing LED versions.  TerraLUX was one of the few companies that could deliver such results, and virtually no competitors could do so with the brightness, lifetime and light quality that they were able to achieve. The company responded to this market demand by leveraging its core intellectual property to create LED Embedded Light Modules (self-contained modules that can be screwed or plugged into other manufacturers’ products) on an OEM basis for manufacturers of a variety of portable lighting products.

As the years progressed, LED chip prices compared to their performance continued to drop rapidly and began to open up the potential in the general lighting market.  TerraLUX then got the call it had wanted for years. A key executive at a large general lighting company had bought a TerraLUX flashlight retrofit kit and was impressed with its performance and extremely compact size.  That company had obtained LED products from numerous potential suppliers, but none could meet TerraLUX’s brightness, consistency and quality requirements.  TerraLUX’s intellectual property around thermal controls, circuitry and optics that grew out of the portable lighting business gave them a fantastic edge. Since TerraLUX already had years of experience manufacturing LED Embedded Light Modules (albeit for portable lighting), the general lighting company had confidence in TerraLUX’s ability to deliver.  And, with that, TerraLUX became the general lighting company that Catalano dreamed of when he founded the company. 

Now TerraLUX was in a position to explode into the general lighting market. Although the company had built a growing business with compelling intellectual property, it lacked the polish that venture capitalists typically look for.  At Access Venture Partners we have a soft spot for entrepreneurs that build companies by finding customers. We like to work with companies that have the foundation of a great business, but may have a few rough edges, to help them get to the next level. In late 2008, we saw the potential that TerraLUX had as a business and worked with Catalano to define the things that were needed to enable TerraLUX to raise the capital it now could use to further accelerate its growth.  These included refining the go to market strategy, enhancing company operations, enabling professional accounting, implementing the company’s first financial plan and recruiting Jim Miller, (formerly VP-sales, Global Geographic Regions for Phillips Lumileds), to join the company as CEO. The last item was a step taken with Catalano’s full support, and he remains a key member of the management team as Chief Technology Officer and a member of the board. To accomplish this we made a modest bridge investment and with those tweaks, TerraLUX was in a position to raise a meaningful round of venture capital to even further accelerate its growth and did just that.

Now with $5.6M in growth capital, TerraLUX is able to invest in the sales, marketing and R&D that will enable it to take a strong growing business with deep intellectual property and grow it even faster.  But this growth comes from a foundation built without the large sums of venture capital that get much of the cleantech press that we read about.  Building a company by bootstrapping may not be as sexy as raising a large venture round right out of the shoot.  But the discipline it instills to focus on customers and revenues can create some of the most exciting real businesses in the long run.

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners ( This article was first published on his blog,

February 23, 2010

Pure Technologies: Making Water Systems More Efficient

Tom Konrad, CFA

A reader caught my attention with his description of Pure Technologies (PUR.V, PPEHF.PK), a company that can find leaks in water systems without shutting down the system.  Since I was intrigued, I thought my readers might be as well.  Here's what he has to say.  I've asked him to monitor the comments if you have follow-up questions of your own.

Tom Konrad:
Tell us a little about yourself and your involvement in environmental investing.

Sam Healey: I invest largely in the cleantech sector. I look for companies solving problems that already exist, rather than companies attempting to create new markets.  I'm particularly focused on energy technologies and conservation.  I see a lot of money going into new systems when the cheaper and more effective use of those same dollars would be to improve the existing systems.   

TK: You contacted me regarding a water leak detection company that I found interesting.  Which is it, and why do you think that company would be interesting to my readers?

SH: The company is Pure Technologies out of Calgary, it trades on the TSX venture exchange under the ticker PUR.V or by extension as PPEHF on the pink sheets.  It is a closely held business at this time, run essentially by two brothers, Peter Paulson who heads the R&D and is the CEO, and his brother James who is the chairman and face of the company.  They have never sold a share, but have offered some of their holdings as part of the green shoe associated with the secondary offering just completed

Pure Technologies has its roots in the structure monitoring businesses, primarily bridges and large buildings.  The technology enables them to see weakness in the structures before they fail, thus avoiding disaster.  They still participate in this market to the tune of 20-25% of their current revenue.  However, their technology is also capable of monitoring the water infrastructure systems, .  That is the direction they are now heading.  They address the market in two ways.  The first is through product sales. The main product they sell is a leak detecting system called the smart ball which they can send through water pipes without taking the pipes out of service.  In 2009 they made an acquisition of a new robotic technology that will let them bring a similar service to the waste water market. 

The other part of the business is the inspecting, consulting and monitoring business, which generates the majority of their recurring revenue is.  With their technology, which they call Soundprint AFO and P-Wave electromagnetics, they lay fiber cable into a pipe which can take a snap shot of the pipe to find weak spots (P wave) or can continually monitor the integrity of the pipe (Soundprint AFO) so that weak sections can be identified and breaks can be prevented before they occur.  Current World Bank estimates are that 45MM cubic meters of water are lost a day through leaks, and they estimate the total cost to water utilities by water loss at more than 14 Billion dollars.  So I would say these products meet a large addressable and identifiable market.

TK: Why do they have such strong revenue visibility, and what revenue growth do you expect?

SH: They have the advantage that one product ends up creating a market for the other product.  Smart ball serves as a wonderful introduction for the monitoring business.  Smart ball demonstrations projects almost always result in orders.  The fact that the Smart ball can do its work without taking the pipe out of service makes it very attractive.  Most water systems have leaks, and finding them without discontinuing service is very attractive.  Smart ball then provides the introduction of the Pure team and its P wave products and monitoring business.  Often these products are sold into large multi year projects that have large recurring revenues, leading to a high level of visibility for annual revenue.  Despite seasonality and lumpiness on a quarterly basis, annually I believe they feel confident in their projections.  As far as revenue growth, I forecast 30 MM in 2009, 40 MM in 2010 and north of 50 in 2011.  I'm hopeful that the recurring revenue portion will increase as a share of total revenue over that same period.

TK: What's their profitability?

SH: Pure has reported profits for the last two years and 2009 will be no exception.  I estimate the potential of 3MM in EBIT (in US dollars, they report in C$'s) in 2009 increasing to an optimistic number of 6MM in 2010.  Current share count in about 33MM increasing to 40 MM with the recent secondary offering, so you can do the math.  However these numbers are subject to exchange rate (forex) adjustments because they report in Canadian dollars which will hurt them in 2009.  In 2009 the forex adjustment will be over a negative number of over 1 MM which will hurt the final reported EPS  However, the 2009 forex loss will essentially result in reversing a 2008 forex gain.  The revenue level is not high enough to justify an aggressive hedging program, especially considering that their revenues are global and so many currencies would be involved.  Because I generally focus on the business and its development rather than forex effects I prefer to look at the EBIT per share which effectively smooths out forex adjustments rather than the lumpy EPS.  By this metric the company is executing very well, a trend I expect to continue. 

TK: How is the company funding its operations? 

SH: For the last several years they have funded themselves with cash flow from operations, however in order to continue to expand their reach globally and add a few tuck in acquisitions they have announced and are in the process of closing (on February 23rd) a secondary offering for C$30MM. 

This is a perfect example of "raising money for the right reasons", they are producing cash flow already, and the proceeds from the offering will be directed at further geographical expansion and tuck in acquisitions.   Associated with this transaction may be a move to a bigger exchange in Canada.  They meet all of the listing requirement presently but have not made the move.  One of the issues with the stock is that it is very illiquid.  To the extent that moving to bigger exchange in Canada resulted in a larger daily trading volume, I would consider it a positive for investors and potential investors.  Moving would allow them to potentially be included in some of the water indexes.  At this point I am not aware of any potential listing on a US exchange.

TK: Do you have a price target for the company?

SH: For now I would say $7.00 US but this is very much a moving target.  I think the 7$ is reasonable for the projects they have solid viability on right now.  For example, in 2009 the recurring revenue piece of the business will be in the 3.5MM range.  The project they have in Libya will net 5 MM recurring revenue in 2011 by itself.  As each of the current projects ramps up they achieve higher levels of profitability 7 dollars seems about right.  However, with the recent robotics acquisition enabling them to move into waste water systems monitoring and the expansion into South America and East Asia just beginning, I am hopeful that I will find myself raising the target before we get to it.  That will depend entirely on execution going forward.

TK: How competitive is the leak detecting space?  Are there any competitors with similar products?

SH: Leak detection is a competitive space in the sense that it is a major problem for all water and wastewater systems.  However I am unaware of anybody that has the technology to address these problems without taking the lines out of service.  I am also not aware of anyone competing in the pipe monitoring business with a comparable technology.

TK: How dependent is Pure Technologies on a growing economy?

SH: I would say it isn't.  In the emerging markets the growth is such that need for water and leak detections system is massive and Pure has gained considerable traction in emerging markets.  Pure's customers are generally utilities or governments, so they are not dependent on consumer spending.  Moving into the realm of speculation, I'd guess that difficulties in the ability of utilities and municipalities to float bonds for spending on water system projects could potentially hurt business.  That said, I expect 2009 revenue to be double 2007 revenue, despite the interim lack of economic growth.

TK: Do you own shares of the company in your fund or your own account?

SH: I own shares of the company in my fund.

TK: Thanks for sharing your research.  Water and energy are intimately linked, but I hesitate to spread myself into more areas than I already have.

SH: It's been a pleasure.

DISCLOSURE: None, but I'm considering buying.

DISCLAIMER: The information and trades provided here and in the comments 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 17, 2010

Investors: Concentrate on This Alternative Energy Sector and You Should Make a Lot of $$$$$

Bill Paul

For my money, energy efficiency (aka, the “fifth fuel”) is the best alternative energy sector for investors because it’s primarily about saving money, only secondarily about saving the planet.

The energy services industry reportedly has grown by more than 20% per year every year since 2004 and efficiency service providers now pull in an estimated $5.6 billion a year just on U.S. commercial buildings. Pike Research says there is a reservoir of untapped projects worth $400 billion. “There’s this huge untapped potential” for energy efficiency, a U.S. Environmental Protection Agency spokesperson was recently quoted as saying. Indeed, of the approximately 70 billion square feet of U.S. office space, only about one billion is believed to have undergone retrofits.

Although Washington can be as dull as a 40-watt light bulb, eventually DC is going to figure out that energy efficiency is the best way to create green jobs here in the U.S., unlike all those other green jobs – like making solar and wind components – that are going to China and Europe. When that finally happens, look for Goldman Sachs (Symbol GS), Morgan Stanley (Symbol MS) or some other big outfit to put out a report that wakes the world up to energy efficiency’s tremendous potential.

By then, investors should have already taken action. Like so much in energy, the bigger the company, the more likely it is to pull in big-buck contracts, so it may be worth laying a few bob on the leaders of the energy efficiency services industry, namely: Johnson Controls (Symbol JCI), United Technologies (Symbol UTX), IBM (Symbol IBM) and my personal favorite: Siemens (Symbol SI). (For more on Siemens, please see If I Could Own Only One Alternative Energy Stock, It Would Be . . ..)

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of

January 19, 2010

This 'Green' Sector May Grow 573% to $37.7 Billion by 2020 - And the Big Winners Will Be . . .

Bill Paul

Nobody knows the alternative energy landscape better than Clint Wheelock, whose firm, Pike Research, generates in-depth research on everything from smart meters to carbon capture and sequestration.

Now here’s a forecast deserving of far wider attention than it has so far received: by 2020 total revenue generated by energy services companies (ESCOs) could hit $37.7 billion, up a monstrous 573% over 2009’s $5.6 billion. At a minimum, Wheelock expects ESCOs’ revenue to hit $19.9 billion by 2020, a 255% increase.

In an exclusive interview last week, Wheelock explained that as much as demand is already growing for services that cut a commercial building’s energy and operating costs, he’s starting to see what he called a “shift in mindset” by building owners that promises to send ESCO demand into the stratosphere.

Building owners are starting to “see energy as an asset to be managed, not as a cost,” Wheelock said. They’re starting to realize that improving lighting, HVAC and other energy-consuming building systems both decreases operating costs and, in an ever more eco-conscious society, increases the value of the building. “A big difference,” Wheelock added, is that building owners are increasingly willing to accept a two-to-three-year payback on their efficiency investments, compared with only 12 to 18 months previously.

To be sure, Wheelock’s 573% ESCO revenue growth forecast comes with caveats, most notably that the still-nascent trend of counties and other government entities selling bonds that help pay for energy-efficiency improvements in buildings catches on, which he thinks will happen over the next few years. Right now, he said, ESCO demand is concentrated in single-tenant buildings owned by government, educational institutions, etc. With so-called PACE financing (short for property-assessed clean energy), Wheelock sees ESCO demand spreading throughout the commercial sector and even penetrating the residential sector.

And so we come to the drum roll: if Clint’s new forecast is spot on, which companies could give investors the most bang for their buck?

He agreed with me on the usual suspects, namely: Johnson Controls (Symbol JCI), Honeywell International (Symbol HON) and Siemens (Symbol SI). (Click here for more on Siemens)

Then, citing the growing interconnect between energy efficiency and information and communications technology, Wheelock offered up three untraditional “green” choices: Cisco Systems (Symbol CSCO), IBM (Symbol IBM), and General Electric (Symbol GE).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of

January 18, 2010

Is Cree, Inc. (CREE) Likely to Burn Out?

Tom Konrad, CFA

Pioneering light-emitting diode (LED) maker Cree, Inc. looks overvalued.

Light-Emitting Diodes, or LEDs, can be made to shine more brightly by increasing the power to them.  This has the unfortunate effect of overheating the leads and shortening the lifespan of the LED.  A similar effect may soon hit the stock of LED maker, Cree, Inc. (CREE.)

Since I began the tradition, Cree has been a mainstay of my annual portfolio of ten stocks for the next year, published each January (See the 2008 and 2009 lists.  The Cree-free 2010 list is here.)  LEDs have been among my favorite alternative energy technologies even longer.

While the S&P 500 fell 22%, and the Powershares Wilderhill Clean Energy Index (PBW) fell 60%, Cree rose over 210%.  Despite my conviction that energy efficiency stocks should be a mainstay of a clean energy portfolio, the company's current valuation makes me think the company has come too far, too fast.  At $55, the company is trading at a 109 trailing P/E ratio, and 39 forward P/E based on analysts' consensus estimates.

LEDs, in other words, have become sexy, and cautious investors stay away from sexy investments because they know that you often have to pay too much for them.

LED Overcapacity in 2011?

In addition to overvaluation, there is the additional problem of rapidly growing capacity in LED production.   Many LED manufacturers raised money to build new capacity in 2009, and most of that capacity will come on line in 2011, possibly setting the stage for a shake-out like the one we have recently seen in the market for solar polysilicon, according to Canaccord Adams.  Cree's valuation can only be justified by several years of extremely strong earnings growth, and an industry shake-out would slash Cree's profits.  If investors begin to expect such a shake-out, the stock will have to fall.

Cree is still a good company.  With no debt, it is likely to survive any such shake out, and may emerge stronger because of it.  Investors, however, will probably do better by taking their profits and waiting to get back in at a lower price.  Ten Clean Energy Stocks for 2012, perhaps?

DISCLOSURE: No Position.

DISCLAIMER: The information and trades provided here and in the comments 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.

January 09, 2010

If I Could Own Only One Alternative Energy Stock, It Would Be . . .

Bill Paul

My friend Consuelo Mack, host of "Consuelo Mack's Wealthtrack" on PBS TV, asks her guests for their "one investment pick." What's my one alternative energy stock pick?

A year ago on Consuelo's show, I recommended LED lighting developer Cree Inc. (Symbol CREE), because the LED lighting market (part of the burgeoning energy efficiency sector) is expected to hit upwards of $5 billion by 2013 v. $600 million in 2008, according to investment banking firm Merriman, Curhan, Ford, and because Cree was then an attractive takeover candidate. It still is; however, since the stock has since risen something like 300% and its price-to-earnings ratio is now north of 100, it no longer warrants being my "one" investment pick, though it's still well worth having in a broad portfolio of alternative energy stocks that I think every investor should have.

If I were inclined to pick a stock I think could duplicate Cree's performance in 2010, it would be Ocean Power Technologies Inc. (Symbol OPTT). In my mind, wave and tidal power is the most overlooked, underrated green energy sector in the world. Pike Research said last summer that by 2015 wave and tidal power could be generating 2.7 gigawatts of electricity worldwide vs. just 264 megawatts in 2009.

Ocean Power is virtually the only publicly-traded firm in this sub-sector. (Look for a number of European firms to go public over the next couple of years.) The company is on the cusp of commercial operation and has a partnership with Lockheed Martin (Symbol LMT) that would seem to guarantee deep-enough pockets to survive any growing pains. And, like Cree, I see Ocean Power as a takeover candidate.

But while Ocean Power is also well worth having in a broad-based portfolio, since it still faces possible regulatory and other issues, it's just not enough of a sure thing to be my "one" pick. The same situation is true for wind and solar stocks, though for different reasons. Wind has an enormous future and several wind firms belong in your green portfolio. But the giant turbine manufacturers and wind-farm developers are becoming commodity firms; there's no obvious top pick right now. Solar too has an enormous future, but the technology is developing too quickly for any solar firm to be a sure thing right now, not even much vaunted First Solar (Symbol FSLR), though it too belongs in your green portfolio.

For my one investment pick, I choose a company without which solar and wind's potential can't be realized. It's also a company without which the energy-saving, blackout-avoiding potential of the "smart" grid can't be realized. The same company is spearheading monumental construction projects that will bring into Europe huge amounts of solar power from North Africa and wind power from the North Sea. The same company is developing rapid recharge infrastructure for electric vehicles and is quickly becoming a leader in demand response and energy management services. This company also is a - if not the - global leader in building and rebuilding thousands of miles of electric transmission lines around the world, a business that will require annual expenditures of $33 billion by 2014 vs. $12 billion in 2008, according to NextGen Research.

In January 2010, my one alternative energy investment pick is Siemens AG (Symbol SI).

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of

December 10, 2009

Feel-Good Government Grants Leading Cleantech Astray

David Gold

Grants for smart grid projects. Grants for battery manufacturing lines. Loan guarantees for renewable energy project development. Grants to private companies for energy efficiency projects. And with each it seems that the cleantech world cheers. Yet for all our desire to create sustainability in our consumption and use of energy, this model of getting us there is not only unsustainable but is of questionable value.

I want to emphasize that I am speaking about government grants to the private sector where the government is not the end customer and where the grants are for implementation of projects that businesses may (or may not) have done otherwise as opposed to grants to conduct basic R&D. Projects like smart grid implementations, battery manufacturing lines, biofuels plants or industrial energy efficiency implementations that have represented the bulk of cleantech grants to the private sector this year. Instead of focusing on cultivating businesses that can sustain themselves via customers, government handouts have focused company time and money on lobbyists and grant writers. And if you haven’t noticed, the handouts are huge, with many in the tens of millions and even hundreds of millions of dollars for a single award. Some award winners, like ECOtality, are honest enough to admit that their efforts to secure government funding directly attributed to a drop in their revenues. For every company that wins a cleantech grant, there are as many as 10 times the companies that applied and lost. All those losers spent significant time and money chasing those funds and, in the process, neglecting their real business and real customers. Lately the discussion in board rooms often has concentrated more on how to win the next government grant and which lobbyist to hire than on how to build a successful and sustainable business.

At the most basic level, the goal of current U.S. energy policy should be to speed our transition to sustainable domestic energy consumption – a transition that would occur naturally as carbon-based energy sources declined but likely too slowly to avoid the environmental, economic and national security implications. Presumably, the concept behind hundreds of billions of dollars in grants to the private sector is to enable and encourage acceleration of this change. As such, it also must presume that government employees can select winners better than the private sector, do so without political influence, and that the projects being funded are absolutely ones that would not have occurred without government funding. Finally, those same government employees; 1) must be able to select projects that will help accomplish our goal and; 2) must either be able to continue to fund those projects or have effectively analyzed that a one-time grant will be sufficient to incentivize the private sector to take over from there.

My Democratic friends may scream at me, but those are an awful lot of largely unrealistic presumptions that defy the history of government grant programs to the private sector. (Synfuels and the National Institute of Standards and Technology’s Advanced Technology Program are just two examples.) And to add insult to injury, large amounts of the recent cleantech grant money handed will help the competitiveness of foreign corporations as it was awarded to U.S. subsidiaries or joint ventures of those companies (for example, hundreds of millions in battery grants involving LG Chem, Kokam, Itochu Corporation, BASF and Saft). While the government has long had a role in advancing basic R&D, the concept that the U.S. will jump-start, let alone build, a sustainable energy economy through government handouts for implementation of manufacturing plants, production facilities or enhanced utility grids is, quite simply, ludicrous.

Government grants to the private sector are great PR and make the cleantech public feel good. But they don’t provide quick economic stimulus to the economy (see Cleantech Stimulus Not Very Stimulating) and will not provide meaningful acceleration on the path to sustainable domestic energy consumption. In the end, the only way to have sustainable change is to have a change in the fundamental economics of energy – both in the cost of non-sustainable sources and in the regulatory infrastructure through which carbon based energy companies and utilities earn money. We all saw how quickly things began to change when oil hit $100 a barrel and how quickly they reverted when prices went back down. Reform the regulatory environment so that utilities can profit from conserving energy instead of from building power plants and watch how things change.

In my home state of Colorado, wind turbine manufacturer Vestas just announced it is furloughing all 500 workers at the plant it built not long ago. Why? Vestas notes the challenge of natural gas prices being so low that wind turbines can’t compete. I guess we need to borrow more money from the Chinese and other foreign governments to further increase our grants to the wind turbine market…or, we can focus on a sustainable solution.

Nothing can provoke an economic transformation more quickly than the free market appropriately motivated by profit. That, in fact, is largely how we got to where we are today with our reliance on carbon-based energy sources. And the most sweeping and powerful thing the government can do is to influence the profit motive for the private sector by changing energy economics. But that is a topic for another blog post. (And now my Republican friends can scream).

David Gold is an entrepreneur and engineer with national public policy experience who heads up cleantech investments for Access Venture Partners ( This article was first published on his blog,

December 04, 2009

Hidden Gems? Why Green Investors Should Look at PFB, Vodafone And Telefonica

Part 1 of 2

Bill Paul

Looking for alternative energy stocks with undiscovered potential?

Who isn't?

Here are three possibilities (with three more to come next week). You can decide for yourself whether they are worth further investigation.

First up: PFB Corporation, which trades on the Toronto Stock Exchange under the symbol PFB. Calgary-based PFB is an energy efficiency play. The company makes insulating building products that it sells under branded names in commercial and residential markets in North America and Japan.

The company most recently reported third quarter net income of $1.6 million or 24 cents vs. $1.1 million or 16 cents, and nine months net of $2.5 million or 38 cents compared $1.1 million or 17 cents. Earnings rose significantly despite lower sales, a reflection of the difficult economy faced by all construction-related businesses.

What would seem to make PFB a hidden gem is management's demonstrated ability to control costs (and maintain the regular 6-cent-a-share divided payout) in tough economic times. With energy efficiency - especially in buildings - increasingly being recognized as by far the most cost-effective way to start greening the economy, PFB has hidden potential that might really blossom as the overall economy improves.

Next up: Vodafone Group Plc, whose ADRs trade on NASDAQ under the symbol VOD, and Telefonica S.A., whose ADRs trade on the Big Board under the symbol TEF.

Although they're already telecom giants, what gives Vodafone and Telefonica hidden potential is the role they appear destined to play in Europe's smart grid build-out.

By 2020 the British government plans to have a smart meter in every home under a program whose cost is expected to top $11.5 billion. (The rest of Europe may not be far behind.) This will require enormous amounts of data to be wirelessly transmitted from those smart meters back to Britain's energy companies. Vodafone and Telefonica (through its O2 unit) reportedly are negotiating to be the carriers of all that data, quite possibly through a new joint-venture firm.

While the payoff for investors won't be immediate, Vodafone and Telefonica could become huge long-term beneficiaries of the smart grid, which a number of communications experts now think will become as big as or bigger than the Internet.


DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of

October 18, 2009

What A Portfolio Approach To Climate Policy Means for Your Stock Portfolio

Portfolio theory can lend insights into which carbon abatement strategies policymakers should pursue.  If policymakers listen, what will it mean for green investors?

Good Info, Not Enough Analysis

I've now read most of my review copy of Investment Opportunities for a Low Carbon World.  The quality of the information is generally excellent, as Charles has described in his reviews of the Wind and Solar and Efficiency and Geothermal chapters.  As a resource on the state of Cleantech industries, it's generally excellent.  As an investing resource, however, it leaves something to be desired.  Each chapter is written by a different expert in a particular field, which means that the information is up to date, and comprehensive, but this approach means that there is little attempt to compare the potential of the different investment opportunities presented.  What is the point of in-depth research into carbon abatement technologies if we do not then take the next logical step and emphasize the technologies with the greatest potential for carbon abatement and investment returns?

A Portfolio Approach

The most useful attempt at investment decision-making is buried in the otherwise uninspiring last part of the book. A summary of a 2007 report from the London Accord, A Portfolio Approach to Climate Change Investment and Policy is buried among self-promoting chapters from companies such as Nissan (NSANY)and BP (BP) promoting their (real) investments in clean technology,   The report uses a Monte Carlo implementation of Modern Portfolio Theory to determine low-risk mixes (portfolios) of carbon-mitigation strategies, and was written by Professor Michael Mainelli of Z/Yen Group, and James Palmer.

While intended primarily for policy decision-makers, A Portfolio Approach attempts to determine which portfolio of carbon reduction technologies is likely to produce a desired level of climate change at the lowest cost (or highest investment returns) at the lowest risk of failing to achieve the reduction goal.  Phrased this way, it is easy to see why portfolio theory is an appropriate tool, since it is designed to minimize systematic (overall) risk even when all individual strategies in the portfolio have significant risks of achieving the expected returns and carbon reductions.


The data on various carbon reduction strategies came mainly from the 2007 IPCC Working Group report, "Mitigation of Climate Change."  This report is not complete, omitting some technologies with significant CO2 reduction potential, in particular solar thermal collectors such as solar hot water heaters and larger installations for process heat in industrial processes.  "Solar," as referred to in the report, refers solely to solar Photovoltaic and Concentrating Solar Power (CSP.)

One decision I found questionable was to ignore the carbon reduction potential of investments with "negative abatement costs on the basis that these investments should be undertaken under any business-as-usual scenario, and are not strictly investment measures as a response to climate change." (p5/22)  This is circular logic.  For an investment with negative cot to exist, there must be a market failure.  Almost by definition, in a well functioning market, all investments with negative cost will have already been made.  Simply saying that these investments "should" be made assumes that these market failures will correct themselves without any effort on the part of policymakers.  Why should energy market failures correct themselves in the future if they have not already?  

In the authors' defense, they run one scenario (#3) in which investments with negative abatement costs are allowed, and they state "Further examination of negative abatement proposals seems in order, as it should be important to understand why these investments fail to be made under current financial conditions.  Neglected negative abatement may justify regulatory intervention by policymakers, e.g. imposing minimum building or transportation efficiency requirements." (pp.17/22 and 18/22)  

From the hedging in this statement, and the fact that they spend less time discussing scenario 3 than either of their other two, I conclude that something prevents the authors from giving market failures the attention they are due.  I find this an extremely common failing among financial practitioners, and believe it is an unfortunate and common consequence of in-depth training in financial modeling.  Most financial models contain an assumption of market efficiency, and do not produce meaningful results in cases of large and persistent market inefficiencies.  Without tools to model market inefficiencies, practitioners are prone to ignore them, convincing themselves that the inefficiencies are unimportant or will cure themselves.  Most of the critiques of "Green Jobs" programs are based on this fallacy.

Put another way, if you have a hammer (a modeling technique which assumes market efficiency, such as modern portfolio theory), you tend to see all problems as if they are nails (efficient markets.)


Since the authors only look at scenarios 1 and 2 (those which ignore negative cost investments) in depth, these are the scenarios I will focus on.  I believe the results of these scenarios are still relevant answers to the question, "After negative cost investments in energy efficiency have been made, which positive cost investments should we pursue?"  Even if all the necessary carbon reductions could be achieved with negative cost investments, it would most likely be unwise to pursue such an approach to mitigate climate change: like all investments, there is no assurance that the expected reductions/returns will be achieved.  Pursuing a wide variety of carbon-reduction strategies provides the greatest chance that some such strategies will achieve the expected reductions, and others will exceed expectations, thus making up for any investments in the mitigation portfolio which do not achieve the expected reductions.

The chart below shows a series of "frontier portfolios": That is, portfolios of carbon abatement investments which achieve specified levels of carbon abatement at minimal cost.  The vertical axis is gigatons (Gt) of equivalent CO2 emissions (CO2e) reduced annually, and the horizontal axis is the annual investment needed to achieve this level of reduction.

 abatement cost.GIF

There are diminishing returns for carbon abatement, with the cost of incremental abatement increasing significantly above 15 Gt CO2e per year, and no practical increase in abatement beyond 20 15 Gt CO2e and $400B expenditure per year.  

For comparison, to stabilize the atmospheric concentration of CO2 at 350 ppm, a goal which, according to Joe Romm, will require 8 Gt CO2e (approximately portfolio 2) of reduction by 2030, and another 10 Gt CO2e (for a total of 18 Gt CO2e, or portfolio 4) by 2060.  abatement portfolios.bmpSince the model does not include negative cost investments in energy efficiency or solar thermal collectors, it is likely that these levels of abatement could be achieved at considerably lower cost by incorporating these opportunities.

The pie charts in the first column show the fraction of carbon abatement expected from each investment in the selected frontier portfolios, while the second column shows the cost of each investment.  The two columns differ because different investments produce different levels of abatement per dollar of investment.  For instance, the cost wedge for Biofuels in portfolios 3 and 4 are much larger than the corresponding abatement wedges.  This indicates that abatement with biofuels is more expensive on a per-ton basis than for the other investments in those portfolios.

I will focus on portfolios 2, 3, and 4, since those are the portfolios which deliver the necessary levels of abatement, which we will need to ramp up to over the coming years and decades.


The most striking thing about these portfolios is that Forestry dominates CO2 abatement, as well as cost in portfolios 2 and 3.  The more aggressive portfolio 4 has three relatively large cost wedges: Building Efficiency, Forestry, and Biofuels.

Unfortunately, according to the report's authors, the carbon abatement from Forestry is very uncertain.  To make matters worse, the methodology used in the report is extremely sensitive to the expected returns (or abatement, in this case) of particular investment classes.  Small errors in the expected returns can lead to frontier portfolios which are dominated by a single investment class, in this case Forestry.  The report notes that "forestry abatement potential is highly uncertain." (p.8/22)  While we can conclude that forestry is likely to be a significant part of our carbon abatement strategy, there is a good chance that forestry will not dominate the mix as it does in the model.

For stock market investors who want to allocate part of their portfolio to forestry, I recently wrote about investing in forestry stocks and forestry exchange traded funds (ETFs). While I was focusing on the potential for forestry to benefit from biofuels and bio-electricity in the article, any marginal demand for forestry services (including carbon sequestration) should benefit this sector.


Hydropower is also a significant investment in these portfolios.  Much of this investment will probably take place in the developing world, but there are also significant opportunities for upgrades to facilities at existing dams in the developed world.  I looked at the potential for hydropower stock market investments last year.


Biofuels also contribute significantly to all the portfolios, especially in the higher abatement scenarios, although the costs are high relative to other investments.  I don't believe that this is very realistic if we are also going to have large contributions to carbon abatement from forestry.  My guess here is that the authors did not take into account the negative interactions between forestry and biofuels, where an increase in one will drive up the costs of the other because of competing land and water use.  Land used for forestry cannot also be used for biofuels, and vice versa.


We see significant contributions from wind in portfolios 3 and 4, and the costs and potential for wind are much better understood than for many of the other scenarios.  Better yet for stock market investors, investments in wind are simple, with two wind energy ETFs allowing a simple investment in the sector.  Of the two, I have a slight preference for FAN (you can see my reasoning here.)

Efficiency, in all its Forms

Finally, port folio 4 shows considerable investment in Building Efficiency and Industrial Efficiency (which we usually refer to as just Energy Efficiency), while portfolio 2 has a good slice of Transport efficiency (what we usually call Clean Transportation.)  Keep in mind that these slices are only investments that do not have "negative cost," that is they do not cost less than new investments in conventional generation.  Since efficiency dominates investments with negative cost, the total investments in all forms of efficiency are likely to be many times what we see in these graphs.  While there is not yet an energy efficiency ETF available, there is one focused on clean transportation, the Global Progressive Transport ETF (PTRP).  I also have a few stock picks in clean transport.

For industrial and building efficiency, there is no ETF, but here are five of my favorite efficiency stocks, and you can find a much larger list of energy efficiency stocks here.  It's also important to note that smart grid stocks will fall into this category as well, at least for the purposes of the report.   Here are five of my favorite smart grid stocks.


Geothermal also has a small slice of portfolios 2 and 4.  This is significant given the small current size of the industry: even these small slices imply rapid growth for an underappreciated sector.  I mentioned three geothermal stocks to consider here, but I have since sold my stake in Raser Technologies (RZ), and will probably not repurchase it.  Our Twitter followers saw that first.  Charles did a good run-down of the public geothermal stocks in June.   

Other Thoughts

It's also worth looking at what is not in the efficient portfolios, but since this entry is already quite a thesis, I'll save that for later.


DISCLAIMER: The information and trades provided here and in the comments 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 24, 2009

Climate Change & Corporate Disclosure: Should Investors Care?

Charles Morand

On Monday morning, I received an e-copy of a new research note by BofA Merrill Lynch arguing that disclosure by publicly-listed companies on the issue of climate change was becoming increasingly "important". The note claimed: "[w]e believe smart investors and companies [...] will recognize the edge they can gain by understanding low carbon trends." I couldn't agree more with that statement.

It was no coincidence that on that same day the Carbon Disclosure Project (CDP), a non-profit UK-based organization that surveys public companies each year on the state of their climate change awareness, was releasing its latest report at event organized by BofA/ML in NYC.

I am fairly familiar with the CDP, having worked on one of the reports in 2006. In a nutshell, the CDP sends companies a questionnaire covering various topics such as greenhouse gas (GHG) emissions, programs to manage the identified risks of climate change, etc. (you can view a copy of the latest questionnaire here). The responses are then aggregated and made into a publicly-available report.

The CDP purportedly sends the questionnaire on behalf of institutional investors who are asked to sign on to the initiative but have no other obligation. The CDP currently claims to represent 475 institutional investors worth a collective $55 trillion. Not bad!

Putting Your Money Where Your Signature Is?

Despite their best efforts, initiatives like the CDP or the US-based CERES are mostly inconsequential when it comes to where investment dollars ultimately flow. Investors are asked to sign on but are not required to take any further action, such as committing a percentage of assets under management to low-carbon technologies or avoiding investments in companies with poor disclosure or that deny the existence of climate change altogether.

Case in point, the latest Global Trends in Sustainable Energy Investment report found that, in 2008, worldwide investments in "sustainable energy" totaled $155 billion. That's about 0.28% of the $55 trillion in assets under management represented by CDP signatories. A mere 1% commitment annually, or $550 billion for 2008, would substantially accelerate the de-carbonization of our energy supply, probably shrinking the time lines;we're currently looking at in several industries to years rather than decades.  

And that's ok. By-and-large, investors are investors and activists are activists. In certain cases, investors can be activists, either from the left side of the political spectrum with socially-responsible funds or from the right side with products like the Congressional Effect Fund. But overall, most sensible people want investors to be investors.

That's because the function that investors serve by being investors rather than activists is a critical one in a capitalist system - they force discipline and performance on firms and their management teams. By having to compete for capital with other firms in other sectors, clean energy companies have an incentive to crank out better technologies at a lower cost, and that process will have positive implications for all of society in the long run.

The problem with the CDP is that it's really an activist organization parading as an investor group. If the Sierra Club were to go around and ask Fortune 500 companies if they wanted to be hailed as environmental leaders in a glossy new report with absolutely no strings attached, I bet you anything they would get 475 signatures in a matter of days. And so it goes for CDP signatories - institutional investors the world over get to claim that climate change keeps them up at night while not having to deploy a single dime or alter their asset allocation strategies.

Approaching Climate Change Like An Investor

Someone approaching climate change like an investor - that is, as a potential source of investment outperformance (long) or underperformance (short or avoided) - isn't likely to care for activist campaigns aimed at forcing large corporates to disclose information on the matter; in fact, they may prefer less public disclosure to more.

That is because one of the greatest asset an investor can have is an informational advantage. In the case of climate change, those of us who believe that it's real and who think they can put money to work on that basis have a pretty good idea where to look and what to look for - we don't need the SEC to mandate disclosure. Those who think it's one giant hoax couldn't care less - they don't need the SEC to get involved, either. Yet this is where such campaigns are going, according to the BofA/ML report.

I like to think of climate change as an investment theme in terms of three main areas: (1) Physical, (2) Business, and (3) Regulatory. All three areas present investment risks and opportunities.

Opportunity Risk
Physical DESCRIPTION: Companies that stand to gain  from strengthening or repairing the physical infrastructure because of an increased incidence of extreme weather events or a changing climate. Examples include electric grid service companies such as CVTech Group (CVTPF.PK), Quanta Services Inc (PWR) and MasTec Inc. (MTZ)

: Medium-term   
DESCRIPTION: Companies that stand to be negatively impacted by more frequent and more powerful extreme weather events, or by a changing climate. Examples include ski resort operators, sea-side resort operators and property & casualty insurers.  

: Long-term
Business DESCRIPTION: Companies that provide technologies and solutions to help reduce the carbon footprint of various industries, be it power generation, transportation or the real estate industry. Renewable energy and energy efficiency are two obvious examples.

: Immediate     
DESCRIPTION: Companies that make products that increase humanity's carbon footprint and that could fall out of favor with consumers on that basis. Examples include car makers with a large strategic and product focus on SUVs and other needlessly large vehicles.

: Medium-term
Regulatory DESCRIPTION: Firms that have direct positive exposure to the regulatory the responses to climate change enacted by governments. Examples include firms that operate exchanges or auction/trading platforms for carbon emission credits such as Climate Exchange PLC (CXCHY.PK)  and World Energy (XWES).

: Near-term
DESCRIPTION: Companies that are in the  regulatory line of fire for carbon emissions. Coal-intensive power utilities are a good example, as are other energy-intensive industries that might have a limited ability to pass costs on to consumers because of high demand elasticity or fierce competition.

: Near-term 

This categorization provides a high-level framework for thinking about what may be in store for investors as far as climate change goes. However, with the exception of Business/Opportunity and Regulatory/Opportunity, the investment case is not necessarily clear-cut and requires some thinking.

For instance, oil would seem like a perfect candidate for the Business/Risk category were it not for another major and more powerful price driver: peak oil. As for Regulatory/Risk, the European experience thus far has shown how open a cap-and-trade system is to political manipulation, and firms there have been able to withstand the regulatory shock more because of achievements on the lobbying side than on the operational side. That is why I have stressed in the past that understanding emissions trading was more about understanding the rules and the politics than about understanding the commodity.

Nevertheless, these trends are worth following for people who: 1) like investing and 2) think that climate change is not the greatest hoax ever perpetrated on the American people. For instance, CVTech Group (CVTPF.PK), a small Canadian electrical network services company, reported that in fiscal 2008 around 58% of its annual revenue increase (C$23.0 MM) was due unscheduled electricity infrastructure repairs as a result of hurricanes in Texas, Louisiana, North Carolina and South Carolina. In the annual report, management noted: "Since 2005, an increase in the occurrence of hurricanes has resulted in growing demand for our services in these states."


I have nothing against the concept of activist organizations going after corporations with various demands, be they influenced by left- or right-wing thinking; after all, we live in a free, open society and it's everyone's right to do so within the confines of the law.

What I don't like quite as much is hypocrisy and greenwashing. As far as I go, if an institutional investor truly believes that climate change can be a worthwhile investment theme, they should put a couple of analysts on it and figure out how to put money to work. If they don't believe that it is, then they should just go on doing what they do best: manage money.

What they shouldn't do is pretend to see an investment risk or opportunity where they really don't just to appease a handful of vocal stakeholders. Lobbying to get the SEC to force disclosure on climate change is nothing more than window dressing; investors who think this is real already know where to look and what to look for and - surprise, surprise - it's not rocket science!


September 14, 2009

Book Review: Investment Opportunities for a Low Carbon World (Geothermal + Efficiency)

Charles Morand

Last Thursday, I reviewed two chapters from the recently published book "Investment Opportunities for a Low Carbon World"*. This post reviews two more.

 Geothermal Energy

Alexander Richter, Glitnir Bank (now Íslandsbanki)

Geothermal is one of the most interesting forms of clean power generation there is. As noted by the author, the most convincing argument for geothermal electricity is the fact that it operates at capacity factors in the upper 90s. This makes it the only renewable technology suitable for baseload power with the exception of dam-based (i.e. large-scale) hydro.

However, as the chapter demonstrates, global potential is unevenly distributed, with Asia, North America and Latin America having around three to four times more potential than Europe, Africa and Oceania. Besides a brief review of the global picture, the book focuses largely on the US, which will most likely remain the most active market for a few more years (the US currently accounts for a third of global installed geothermal electric capacity).

The author does a good job of breaking the geothermal development business model into its main phases (exploration, pre-feasibility, feasibility and design & construction) and explaining the various types of capital flows required at each stage, as companies move from a mining exploration business model (exploration, pre-feasibility, feasibility) to a power generation utility model (design & construction). What's missing, however, is a discussion of the probability of project success at each stage, with risk typically culminating in the feasibility phase with important sums of cash being spent on exploration drilling with no guarantee that the resource will materialize.

The chapter's strength is undeniably its assessment of the current state of the US market. The author uses data from a number of different sources to show the future potential of the market. California is expected to lead the way with Nevada coming in second. Based on a database of where the overall pipeline of US projects was at at the end of 2008, the author estimates that several projects will reach the feasibility and design & construction phases in 2011 and 2012, which should lead to greater demand for capital by the industry.

The chapter also touches on direct use geothermal, although the discussion is far less detailed than that on geothermal electricity. This despite the fact that the author writes: "[t]he biggest potential and prospects for the shorter term are in the direct use of geothermal energy, particularly for heating and other applications that use heat directly."

As with the first two chapters I reviewed, I would have liked a few stock picks, and I believe a sub-section on opportunities in the equipment sector might have been interesting. However, this chapter fulfilled its purpose well; it provided a good introduction to the sector and can serve as reference material for later on. The US data was also very useful.

Energy Efficiency as an Investment Theme

Zoë Knight, Cheviot Asset Management

Energy efficiency is the most straightforward way of cleaning up our electricity supply and, given the right incentives, could also be the cheapest one (up to a point, as efficiency investments eventually run into diminishing marginal returns). We learn that in 16 IEA countries with strong efficiency profiles, efficiency measures resulted in aggregate savings worth US$180 billion in 2005 - not bad!

Incentives is thus exactly what a large part of this chapter focuses on. The author provides a thorough review of European policies and US efficiency targets outlined by the Obama administration to date. In both cases, it appears evident now that a trend toward greater energy efficiency incentives and regulations is well underway.

The author also provides a breakdown of global fuel consumption by category and identifies sectoral investment opportunities that could arise in each category. On the manufacturing side, the greatest opportunities are in machine drives (refrigeration, fans, pumps, compressors and materials processing). For households, hot water and central heating are key areas. 

However, as with other chapters I've reviewed so far, there are no specific stock picks. I did learn, however, that Merrill Lynch created an energy efficiency equity index. However, because all substantive info on the index seems to be accessible only to clients, this won't help retail investors much.

I found the review of US and EU policies very useful, but would have appreciated a greater focus on some of the main technologies that are currently commercially available (with the exception of LED lighting which is well covered), as well as some stock picks.

The author makes the following useful point about large companies with exposure to efficiency (most of the opportunities currently available to investors in this area are large conglomerates): "investors need to identify whether the theme is a large enough driver to warrant stock selection or whether there may be other factors that will drive valuation of the stock [...], outweighing the positive structural drivers from increased investment at a government level into energy efficiency. As with any equity investment, positive long-term structural drivers may differ from short-term trading cyclicality."


* We are always interested in reviewing books and reports in the areas of alternative energy, cleantech or other environmental industries, especially where they add value to the investment decision-making process. If your organization would like a new book or report reviewed, please
contact us

June 24, 2009

Clean Energy Stocks Shopping List: Five Energy Efficiency Stocks

Stocks may be expensive now, but they won't be forever.  Five energy efficiency plays to buy when they're cheap again in efficient HVAC, desalination, thermal imaging, and lighting.

Tom Konrad, Ph.D., CFA

This article continues my Clean Energy Stocks Shopping List series.  In the first, I looked at five clean transport stocks I'll be looking to buy when the market falls.  In the second, I took a step back, and outlined why it makes sense to wait for better prices than to buy these companies now.  Here are five stocks I'll be looking to buy  in my all time favorite sector, Energy Efficiency.  Future articles in this series will be found here.

#1 Energy Recovery, Inc. (ERII)

Much has been written about how energy and water are increasingly becoming interlinked problems, with the production of energy (especially biofuels) and the pumping, sanitization, and desalination of water requiring increasing amounts of energy.  One way to invest in this theme is by investing in wind stocks or solar photovoltaic stocks, since these technologies require little or no water to generate electricity.  

Another way would be to invest in water rights or water suppliers, or a water ETF.  I have long avoided this method, because I consider water to be far too politically sensitive.  People have a deep distaste of companies making money from water, and this often leads to politicians expropriating water company assets or changing the rules so that owners of water rights don't make "unreasonable" profits from them.  With all this political risk surrounding water, the only way I feel comfortable investing is through an equipment supplier which can make a profit by selling equipment to utilities.  Once the sale is made, the profit can be booked, and there is much less ongoing political risk than there would be by investing directly in such a utility.

Energy Recovery, Inc. is such a company.  They sell systems which greatly reduce the energy used in desalination, making this both an energy efficiency play and a water play.  Better, they are currently profitable, and have an extremely strong balance sheet and good cash flow.  However, its valuation ratios are all quite high because of high expected growth. I'm waiting for the price to fall before I buy any more (I'm currently short a few August $5 puts.)

#2 and #3 LSB Industries and Waterfurnace Renewable Energy (WFI.TO / WFFIF.PK)

I wrote about these two geothermal heat pump companies last December, and Waterfurnace is one of my Ten Clean Energy Stocks for 2009.  Since I wrote those articles, Energy Secretary Chu toured a Waterfurnace plant, and announced $50 million in government support for geothermal heat pump use.  Given all the attention, both stocks have risen sharply, and I'd be happy to increase my stakes if a market decline results in a buying opportunity. 

#4 FLIR Systems, Inc. (FLIR)

I also recently covered Flir, which I expect to benefit from the growing number of energy auditors and energy audits which have been spurred by the stimulus package, and this stock, too, has advanced strongly.  The business case remains strong, and if a market decline takes this high-growth, high P/E stock with it, I'll be ready to buy more.

#5 Cree Inc (CREE)

Cree is probably one of my longest standing favorite stocks. It is in both my Ten Clean Energy Stocks for 2008 as well as the 10 for 2009, and I was writing about investing in LED companies long before I started the annual lists.  Because the stock price has gone up so quickly  recently, I've sold most of my position.  I went into some depth as to why I like the company in both articles, and I still like it and the LED industry in general, because it's a rare energy efficiency play that's a simple product, and hence does not encounter many of the barriers to energy efficiency. Reasonably high powered LED light bulbs are becoming more common in stores, as well as LED fixtures.  I recently purchased an LED Lamp for reading, and an LED Grow Light. If a market decline provides the opportunity, I plan to rebuild my position in Cree.

DISCLOSURE: Tom Konrad and/or his clients own ERII, LXU, WFIFF, FLIR, and CREE.  

DISCLAIMER: The information and trades provided here and in the comments 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.

May 09, 2009

Why the Financial Crisis is like Energy Inefficiency

Tom Konrad, Ph.D.

I have a regular column called Greener Money in Smart Energy Living Magazine.  The Spring issue just printed, and I'd like to highlight this column, because it discusses ideas I have not written about elsewhere.  The column begins:

As people become more aware of how we use energy, many become amazed and appalled at the sheer waste of it.  Why are homes built without attention to insulation and sealing that would not only make them more comfortable, but also mean they cost less to live in, even with the slightly larger mortgage payments?  Why do most microwaves use more electricity running the integrated clock than they do heating food?

The financial crisis can inspire similar emotions.  Why did so many institutional investors buy collateralized debt obligations which they knew they did not understand?  Why did regulators assume that these investors understood the risks they were taking?  Why did lenders make loans to people without first verifying their ability to pay? 

The answers to both sets of questions are surprisingly similar: both are manifestations of market barriers. In the realm of energy, these barriers lead to purchases which might be slightly cheaper in terms of first cost, but come with large ongoing energy costs, far higher than the lower initial cost can justify.  In the case of the financial system, these barriers caused the build up of risks which were much greater than could be justified by the potential gains investors might have achieved by taking them on.

What are these barriers? 

You can read the rest of the article here.

March 30, 2009

FLIR: The (IR) Image of a Stimulus Stock

I highlighted FLIR Systems (NASD:FLIR) as a way to participate in the growth of the energy auditing industry in late 2007.  I was ambivalent about it at the time: I very much liked the potential growth story, but felt the stock was overvalued.

Flir has fallen about 35% since late 2007, and 50% since its peak in July 2008 (while revenues have grown about 50%), prompting me to give it another look.  


Infrared Stimulus

Weatherization of low income housing and Federal building retrofits are a major component of the American Recovery and Reinvestment Act (aka "Stimulus Package.")  This will require the hiring and training of thousands of new energy auditors, for whom infrared (IR) imaging is an extremely versatile tool, both in terms of finding out what problems need to be fixed, and for convincing the customer that they are necessary.  IR imaging is not necessary for an effective energy audit, but it is increasingly becoming part of the energy auditor's standard kit. I expect that new energy auditors are likely to flock to the technology because of its strong visual appeal.  In addition, it requires training to use IR cameras properly, a service which Flir also provides.  

Because an IR audit is cheaper than a full energy audit, some state weatherization programs or utility Demand Side Management programs will choose to to adopt IR audits as the sole energy audit used in their program.  I think that this is likely, because Xcel Energy (XEL) initially proposed the use of IR audits in their most recent Demand Side Management Plan last fall.  Although, due to the efforts of the Energy Efficiency Business Coalition (EEBC), for whom I was consulting at the time, the final plan used the considerably more robust HERS audits.  If EEBC had not intervened, the plan almost certainly would have been approved with infrared audits as the sole requirement, which is why I expect that result in some of the many other national programs starting as the result of the Stimulus package. In cases where IR are not the sole requirement, properly used IR cameras are extremely useful tools in the energy auditor's kit, increasing both the speed and accuracy in detecting problems, so are likly to have some role in all such programs.

Flir's equipment is also used in maintenance and diagnostics of a large range of commercial equipment.  Much like rail maintenance stock Portec (PRPX), while manufactures are delaying new investment, such delays may increase the demand for Flir's imaging equipment to help assure that older equipment continues to function efficiently.  For instance, their GasFindIR range of cameras is designed to detect leaks of organic gasses, such as methane.   While stopping leaks is valuable in its own right, the potency of methane as a greenhouse gas means that a greenhouse gas cap and trade legislation will likely provide additional incentives to detect and fix gas leaks.

Growth Story

FLIR Systems is a growth story based on the rapidly decreasing price of thermal imaging systems, which leads to a rapidly growing market quickly expanding to new applications.  So far, the financial crisis has done little to reduce sales growth, and margins remain extremely robust, with a net operating margin of 26% and a return on equity of 28%, both of which have been increasing even with decreasing minor use of financial leverage.

While the stock price was plunging along with the market, revenue continued to grow at a robust 38% from FY 2007 to FY 2008, and the strength continued in the final quarter of 2008.  Management expects revenue to continue to grow at a more subdued 11-16% in 2009, without assuming any improvements in global economic conditions.  They have a low debt-to equity ratio of 0.23 which fell in 2008 and FLIR has continued to lower debt this year by allowing holders of its senior convertible notes to exchange them for equity.  Even with this declining leverage, their financial statements show no sign of difficulty in collecting payments from customers.  

With the stock at $21, the P/E ratio is now down to 17, about half of what it was when I first looked at the company.  I recently sold puts to acquire shares if the price falls below $15.

The Other 70%

Flir is not a pure-play energy efficiency stock.  According to the most recent annual report, the Thermography division, which includes the energy efficiency applications discussed above, accounted for approximately 30% of revenues in 2008, while its Commercial Vision Systems unit accounted for 17% and its Government Systems unit for 53%.  

Its Government Systems unit supplies military, police, and paramilitary with advanced infrared imaging equipment.  While defense stocks as a whole may not be a safe have in this recession, some analysts see FLIR's military supplier role as an advantage, because they expect government spending on small ticket items (as opposed to tanks and fighter jets) to remain robust.  Since I've never analyzed this sector, I can't take a strong position on this, but imaging systems seem to be military hardware which make a lot of sense in our current wars in Iraq and Afghanistan.

When considering an investment in Flir, it's important to understand that the company's primary markets are military and security, and they are likely to remain so, as all divisions are on robust growth trajectories.  Many clean energy investors may be uncomfortable with military contracting from a moral standpoint, but I feel that sensing systems are as likely to save civilian lives as they are to end them.  

From a financial analysis standpoint, I simply know that I don't understand the industry.  I can say, however, that this segment seems the safest part of the company's business, largely because they have a large an growing backlog in the segment.  One other upside is the fact that Flir is lumped with other military contractors and few other alternative energy investors are looking at the company.  Most of the analysts who follow it specialize in military contractors... such analysts are therefore as unlikely to understand the true potential of the energy efficiency market as we are to understand the potential of the military market.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad has a long position in FLIR.
DISCLAIMER: The information and trades provided here and in the comments 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 14, 2009

Congress Approves Billions in Energy Storage Incentives

On Friday, the House of Representatives and Senate passed H.R. 1, the American Recovery and Reinvestment Act of 2009 and sent the bill to President Obama for his signature. The impact on companies that manufacture advanced batteries and other energy storage devices will be staggering. The principal energy storage appropriations include:

  • $2,000,000,000 for grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers;
  • $4,500,000,000 for grants for “Electricity Delivery and Energy Reliability” including activities to modernize the electric grid, include demand response equipment, enhance security and reliability of the energy infrastructure, energy storage research, development, demonstration and deployment, and facilitate recovery from disruptions to the energy supply;
  • $6,000,000,000 to pay the cost of guaranteed loans under a “Temporary Program for Rapid Deployment of Renewable Energy and Electric Power Transmission Projects;
  • ”$500,000,000 for research, labor exchange and job training projects that prepare workers for careers in energy efficiency and renewable energy; and
  • ”$300,000,000 to purchase high fuel economy motor vehicles including: hybrid vehicles; neighborhood electric vehicles; electric vehicles; and commercially available, plug-in hybrid vehicles

In addition, the final bill includes tax credits for purchasers of plug-in electric vehicles as follows:

  • For new plug-in electric vehicles, a base credit of $2,500 plus $417 for the first 5 kWh of battery capacity plus $417 for each additional kWh of battery capacity, up to a maximum of $7,500 per vehicle:
  • For new neighborhood electric vehicles, a credit of $2,500 per vehicle:
  • For plug-in EV conversions, a credit equal to 10% of the first $40,000 in conversion costs

Analyzing Congressional intent is difficult and predicting how regulatory agencies like the DOE will interpret that intent is even harder. Nevertheless, recent DOE publications and the text of the legislation provide some important clues about how the subsidies are likely to be distributed. So I’ll go ahead and climb out on a limb and offer one lawyer’s opinion of how things are likely to evolve.

There are substantial differences between the original House bill and the final version sent to the President. The original House bill included $2 billion in funding for renewable energy research and development and specifically allocated those funds to biomass ($800 million), geothermal ($400 million) and other ($800 million). It also authorized $1 billion in battery manufacturing grants and $1 billion for the cost of guaranteed loans for battery manufacturing. Most of the bells and whistles were eliminated before the final bill was sent to the President. Now we have a single $2 billion appropriation for battery manufacturing grants. I would characterize the final bill as far more results oriented than the original House bill.

In a recent article titled “DOE Reports That Lithium-ion Batteries Are Not Ready for Prime Time,” I reviewed the 2008 Annual Progress Report for the DOE’s Energy Storage Research and Development Vehicle Technologies Program. While DOE concluded that Li-ion technology was promising, it also noted that there were numerous technical barriers that prevented immediate commercialization of Li-ion batteries for use in automotive applications including cost, performance, abuse tolerance and life. Based on the conclusions, tone and tenor of the DOE report, it’s clear that the DOE views Li-ion as a promising R&D stage technology, but believes it is not a prime technology that’s ready for immediate commercialization.

The final bill sent to the President requires the DOE to include Li-ion battery developers in the class of eligible grant applicants. Without that requirement, I think there would have been a reasonable argument that Li-ion developers should be excluded from grant eligibility. While Congress clearly wants some funding for Li-ion battery developers, it’s clear that the battery manufacturing grants are not directed solely or even principally toward Li-ion technology. The Congress wants energy storage solutions that work today, not potential solutions that may work in 5 or 10 years. On balance, I expect the bulk of the battery manufacturing grants to go to companies that are manufacturing and selling existing products into established markets.

In another recent article titled “Alternative Energy Storage: Enabling the Smart Grid,” I reviewed two recent reports from the Department of Energy’s Electric Advisory Committee that discussed the critical enabling role that energy storage technology would play in the evolution of the Smart Grid. At the time of the original House bill, I speculated that some of the $4.5 billion appropriation for electricity delivery and energy reliability might ultimately be used for energy storage devices. Since the final bill sent to the President specifically added, “demand response equipment” to the list of authorized uses, and the final bill includes a new $6 billion appropriation for guaranteed loans to electric power transmission projects that should alleviate some pressure on the $4.5 billion in grant money, I think my earlier speculation can now be classified as certainty. I’m not courageous enough to predict the amount of electricity delivery and energy reliability grants that will ultimately be allocated to energy storage, but I will be surprised if the grant funds allocated to energy storage don’t exceed $1 billion.

I believe a total of $3 billion in battery manufacturing and electricity delivery and energy reliability grants can do an immense amount of good across broad sections of the energy storage landscape as long as the DOE sticks to legislative intent and funds companies that can manufacture and sell commercial products today. It all goes back to my core belief that we need to wake up in the morning, go to work with the tools we currently have available, solve our problems to the best of our abilities and be prepared to embrace new tools and new technologies when the R&D work is done and the commercial value is established.

I have no doubt that the energy storage sector is in for some very interesting times, but this is a jobs, productivity and manufacturing bill, not a research and development bill.

Disclosure: Author holds a large long position in Axion Power International (AXPW.OB) and small long positions in Active Power (ACPW), Exide (XIDE), Enersys (ENS) and ZBB Energy (ZBB).

John L. Petersen, Esq. is a U.S. lawyer based in Switzerland who works as a partner in the law firm of Fefer Petersen & Cie and represents North American, European and Asian clients, principally in the energy and alternative energy sectors. His international practice is limited to corporate securities and small company finance, where he focuses on guiding small growth-oriented companies through the corporate finance process, beginning with seed stage private placements, continuing through growth stage private financing and concluding with a reverse merger or public offering. Mr. Petersen is a 1979 graduate of the Notre Dame Law School and a 1976 graduate of Arizona State University. He was admitted to the Texas Bar Association in 1980 and licensed to practice as a CPA in 1981. From January 2004 through January 2008, he was securities counsel for and a director of Axion Power International, Inc. a small public company involved in advanced lead-acid battery research and development.

December 21, 2008

Geothermal Heat Pump Stocks

Geothermal heat pumps (GHP), also know as Geoexchange, or ground-source heat pumps have been recognized by both the Environmental Protection Agency and the US Department of Energy as the most efficient and environmentally friendly way to heat and cool a building available.  The downside of GHPs has always been the large up-front cost associated with the cost of the ground loop.  

With Obama promising a massive energy efficiency overhaul of federal buildings, the up-front cost is unlikely to be important so long as the expected returns on the investment are sufficient to pay for the upgrade.  Since geothermal heat pumps on medium and large buildings typically have internal rates of return in excess of 28%, this should not be a problem.  Many federal buildings also have significant open space or parking lots near them which can be used t install ground loops.  In addition, a new federal tax credit for geothermal systems was passed in 2008 (10% for commercial installations, $2000 for residential), may provide additional stimulus to the rapidly growing market in the private sector.

Hence, now seems an opportune time to consider investment in companies selling GHPs.  I know of two such publicly traded companies in North America (there are also a large number of private players, especially installers.)

Waterfurnace Renewable Energy (WFIFF.PK)

Waterfurnace manufactures heat pumps for both residential and commercial buildings, as well as heat pump pool heaters.  According to their third quarter financial statements, the company is in good shape from a liquidity perspective, so much so that they eliminated an unused line of credit in the quarter, and paid off the balance of outstanding bonds they had used to build their facilities.

The company has a strong Current Ratio of about 2.5.  In fact, current assets exceed total liabilities.  Their cash flow from operations is growing and more than sufficient to continue funding current levels of investment.  I've previously mentioned Waterfurnace in my articles about Wind and Heat Pumps and how to invest in the Pickens Plan.  As I also pointed out recently, Waterfurnace pays a dividend of over 3%.

LSB Industries,  Inc. (LXU)

A reader recently left me a comment pointing me to LSB as a GHP play.  Unlike Waterfurnace, the company is not a pure-play on heat pumps.  They also sell chemical products for a broad range of industries including mining and agriculture.  Their climate control division, which includes heat pumps and air handling systems, accounts for about 41% of sales.   

Like Waterfurnace, LSB has a strong balance sheet and has been repurchasing convertible notes with available cash from operations.  They also have an excellent current ratio of over 2.5 and current assets exceed total liabilities.  A review of their most recent quarterly statement shows that working capital growth has been a drag on cash from operations, while income has been reduced by losses on natural gas hedging contracts and an unplanned stoppage at one of their facilities.  Despite these hiccups, I see little reason to doubt that they will continue to be able to fund their business growth and investment from cash flow.


Both of these companies boast strong balance sheets and inexpensive valuations.  In today's volatile markets, that is no reason to expect that the stock price cannot fall further, but that would be a (better) buying opportunity for companies I'm comfortable owning for the long haul.  And which are likely to receive short term boost from the stimulus package.

DISCLOSURE: Tom Konrad has long positions in WFIFF and LXU.

DISCLAIMER: The information and trades provided here and in the comments 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.

December 18, 2008

Smart Grid Stocks For The Obama Stimulus Package

A few weeks ago, I wrote about how a new Obama administration would renew with Keynesianism (i.e. large-scale counter-cyclical infrastructure spending) but with a green twist to: (a) get the US economy out of its funk and (b) propel America into the 21st Century by providing a massive push for its green industries. I discussed certain rail stocks and electric grid stocks that could benefit as a result. By-and-large, I've been right on both counts about the President-elect's strategy (i.e. Keynesian and green), but I did forget to mention an important part of the plan's focus: energy efficiency and the smart grid. Tom did discuss energy efficiency.

The smart grid, however, is increasingly being thrown around as a priority of the Obama plan insofar as the transmission system is concerned. It's thus not just about expanding transmission capacity but also about making the transmission infrastructure smarter and more efficient.

Stocks for the Smart Grid Build-out       

I'm therefore adding to my two previous lists some potential plays on large-scale smart grid expenditures.

EnerNOC (ENOC). EnerNOC designs, among other things, demand response solutions for grid operators and utilities. The company is earning-less at the moment. 

Itron (ITRI). This company is a leading maker of smart meters, the key tool on the consumer end of a smart grid. ITRI is a stock that I've found richly-priced for as long as I've followed the alt energy sector, and at a trailing PE of about 70x, I continue to find it very expensive.

Comverge (COMV). Comverge also makes smart meters and works with utilities to design smart grid solutions revolving around demand response. It's EnerNOC's direct competitor. The company is also earning-less.

RuggedCom (RUGGF.PK). RuggedCom, as its name indicates, designs communication applications for rugged environments such as electric utility substations. That communication equipment embedded at various points of the grid  is also critical in building a smart transmission and distribution system. This is a company that already makes money and trades at a reasonable PE of around 17x (reasonable given this sector's growth potential).     

DISCLOSURE: Charles Morand does not have a position in any of the securities discussed above.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide 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.

December 16, 2008

Ten Solid, Clean Companies Ready For Stimulus, and Five That Aren't

by Tom Konrad

Last February, I wrote "[Since] I expect the Fed-induced reprieve to be fairly short lived, [here are] ten solid companies I'd be happy to buy more of if and when the bottom really falls out of the market."  When I wrote those words, the Dow Jones Industrial Average was over 12,700.  Now, it's around 8,500, and I doubt anyone remembers the "Fed-induced reprieve" I was referring to.  The "bottom fell out" in September and October.   

On October 12, with the DJIA at 8451, I wrote "I don’t know where the market will go from here, but I now feel that we've seen the worst of what is likely to happen, even if the market has farther to fall."  With the market gyrating wildly but basically treading water since then, I still feel that many companies (if not the market as a whole) have seen their lows.   However, like my partner Charles, I'm interested in investing in companies which are likely to benefit from the stimulus.   I think energy efficiency stocks and electric grid infrastructure stocks are likely to be good bets, but I'm leery of any companies which depend on the consumer.

This is a reexamination of those companies in the new context.  The company names link to the articles where they were included in the series.

Building Retrofits

One of the major points which the President-Elect outlined for his stimulus plan was an energy efficiency overhaul for government buildings and schools.  Hence companies which sell services and equipment for building retrofits should be well placed to take advantage of these programs. Such companies include Johnson Controls (JCI), General Electric (GE), Owens Corning (OC),  Philips (PHG), United Technologies (UTX), Waste Management (WMI), and Honeywell, Inc. (HON).

Grid Infrastructure

During his campaign, Obama put much emphasis on the Smart Grid, but less on long distance power transmission, which I believe to be at least as important.  Fortunately, Steven Chu, Obama's pick to head the Department of Energy, is a strong advocate of transmission, and it also has support from Senate Majority Leader Harry Reid.  I am now fairly confident that, even if the initial stimulus package does not contain large spending on transmission, a more robust national electric grid is in our future.  From my list of Solid, Clean picks, those companies best positioned to benefit from this sort of spending are Quanta Services (PWR), General Cable (BGC), Siemens (SI), The ABB Group (ABB), and National Grid (NGG).  Quanta and General Cable perhaps the best positioned of these.

All of these were included in my partner Charles' list of companies well placed to benefit from electric infrastructure spending.  Given Obama's enthusiasm for the smart grid, it might also be worthwhile to consider these metering and energy management stocks.

Roads and Rail

Any spending package is likely to include considerable spending on roads, and, many of us hope, rail as well.  Not being a fan of the car, I generally don't pick road-building stocks, but one of my favorite rail picks, Trinity Industries (TRN), owns a leading producers of concrete, aggregates, and asphalt in Texas and neighboring states and the only full-line US manufacturer of highway guardrail and crash cushions, meaning that they are very well placed to benefit from the stimulus. My other rail pick, Greenbrier (GBX), seems less well placed because they are primarily in railcar leasing, which I don't expect to get immediate benefit.

Consumer Goods

Although General Electric (GE) and Philips (PHG) may benefit from building retrofits, they are likely to be weighed down by their exposure to the suddenly frugal consumer.  My solar pick Sharp (SHCAY.PK), also has this problem, without many obvious ways to cash in on other spending.


My remaining February picks, John Deere (DE), and Applied Materials (AMAT) don't have any obvious way to cash in from a stimulus package, but don't seem overly exposed to consumers, either.

DISCLOSURE: Tom Konrad or his clients have long positions in JCI, GE, OC, PHG, WMI, HON, PWR, BGC, SI, ABB, NGG, TRN, GBX, DE, and AMAT.

DISCLAIMER: The information and trades provided here and in the comments 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.


December 04, 2008

Two Dividend-Paying Energy-Efficiency Companies

Charles recently recommended a few dividend paying alternative energy companies as safe havens in the current turmoil.  Since I've been thinking along the same lines, I thought I'd add my own picks.  I currently like energy efficiency companies with solid balance sheets, because I believe that Obama's fiscal stimulus will contain significant money for green, energy-efficiency related jobs.  

That said, here are two I'd add to Charles' list.  These two also have the advantage of being pure-play (or nearly pure-play) bets on clean energy.

Name Ticker Yield Focus Related Articles
Waterfunace Renewable Energy WFI.TO, WFFIF.PK 3.27% Geothermal Heat Pumps Wind and Heat Pumps
New Flyer Industries NFI-UN.TO, NFYIF.PK 17.7% (based on 12x last monthly distribution) Bus manufacture New Flyer Industries

The New Flyer yield is not strictly a dividend payment.  This is an "income deposit security" paying a blend of interest on a subordinated bond plus a cash dividend.  The dividend varies from month to month, based on earnings, but currently about two-thirds of the distribution is interest.

DISCLOSURE: Tom Konrad has owns shares of  WFI and NFI-UN.

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.

November 20, 2008

Is There Life After the Bulb?

When incandescent light bulbs are phased out in the United States between 2012 to 2014, managers of utility Demand Side Management (DSM) programs will be between a rock and a hard place.  At the Southwest Energy Efficiency Project's 5th annual Energy Efficiency Workshop, this fact seemed to be the elephant in the room that most of the utility executives in attendance did not want to talk about.

One Trick Pony

It's not for nothing that the compact fluorescent bulb, or CFL, has become the international symbol of energy efficiency.  While it is true that we're not going to stop global warming by changing light bulbs, switching out an incandescent for a CFL is one of the most cost effective and simplest steps we can take along the way.  CFLs are so cost effective that current DSM programs get the bulk of their electricity savings from this single measure.

In 2007, Efficiency Vermont saved over 1.7%[pdf] of the state's electric load while the vast majority of DSM programs save only a fraction of 1%. 78% of these savings came from lighting, meaning that the program's outstanding performance is almost entirely attributable to CFLs.

Larry Holmes, the manager of NV Energy/ Sierra Pacific Resources's (NYSE:SRP) DSM program told me that his programs get about half their electricity savings from CFLs, and that, the company's other DSM programs will not be able to ramp up to replace the savings from CFLs.

These programs are not alone... CFLs are a staple of DSM programs everywhere, so it makes sense for utilities and environmental advocates alike to promote the use of this simple, cost effective measure.

What's Next?

Although it will make the job of DSM programs harder, for a societal perspective, the phase out of incandescent bulbs will be a good thing: more people will use energy efficient lights, and they will no longer need to be bribed with bulb buy-downs and giveaways to do something which is already in their best interest, such as saving money by using CFLs.

The problem comes because regulators have mandated fixed amounts of savings for years into the future, and these savings are measured in comparison to a benchmark of what customers would otherwise be doing.  In the case of lighting, when CFLs or other energy efficient options become the legal default, DSM programs will only be able to achieve savings by encouraging even more efficient options.  

A program manager for residential programs at CEE, the industry association of efficiency programs, told me that she has hopes for solid state lighting, a.k.a. light emitting diodes or LEDs.  I'm intentionally omitting her name from this article because a quick examination of that idea shows that it is mathematically impossible.  The fact that industry insiders hold out these hopes for LEDs shows that the industry has little idea of how to replace the CFL in residential DSM. 

To see why LEDs in 2014 will not produce similar savings to CFLs today, consider the following example.    Replacing a 100 watt which is incandescent used for 1000 hours a year with a 25 watt CFL will save 75 kWh a year.  In contrast, replacing a 25w CFL with an 10 watt LED bulb only saves 15 kWh a year, or 1/5 as much.  Currently an LED bulb powerful enough to replace a 25w CFL or 100w incandescent uses 13 watts (and costs $80), so even these savings assume considerable improvements in LED prices and efficiency.  Note that further technology improvement does not solve the core problem.  

Even if we assume that there will be a lighting solution which uses no energy, the potential savings from residential lighting will drop by a factor of three when CFLs become standard, because only 25 watts can now be saved by any technology, where before the savings potential was 100 watts.  Hence, the savings potential in residential lighting will drop by a factor of  at least four between 2012 and 2014, meaning that most of the savings currently achievable in residential lighting will have to be made up by other programs.  

The Investment Angle

For electric utility investors, this is important because utility regulators usually grant incentives to utilities which meet or exceed their DSM targets.  For large DSM programs, these incentives can have a significant impact on earnings, and this impact will only grow as utilities meet more of their resource needs with DSM.  Yet, because of the loss of one very important measure in DSM programs, many utilities are likely to miss their savings targets during the 2012 to 2015 time period, unless regulators decide to ease the targets.  Investors who are buying utilities now as a safe haven during a recession may want to sell these stocks before the utilities start to miss their DSM targets.

As utilities ramp up other programs in an effort to replace the CFL, other household energy efficiency measures will benefit.   Those measures likely to benefit the most will address the projected large uses of residential electricity.   Measures which address heating and cooling efficiency, such as efficient air conditioners and heat pumps, as well as low cost measures such as duct sealing and air conditioning tune ups.  Companies which can figure out ways to inexpensively tune up air conditioners, or seal household ducts will be in an excellent position.  

Another large (and growing) user of residential electricity which DSM programs are just beginning to address is household electronics, especially televisions and set-top boxes, both when in use and in "off" mode.  Finally, even though LEDs will not be able to replace more than a fraction of the savings from CFLs, they will be part of the mix, especially in high usage lighting.

DISCLOSURE: Tom Konrad does not own any of the securities mentioned.

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.

October 21, 2008

Wise Energy Use Stocks, Part 5:Global Services Companies

This article continues a series on the companies in the Wise Energy Use index.  I believe that the current turmoil has given stock pickers an opportunity to buy well capitalized firms which make money by helping people save money on energy.    The industry is poised to do well in hard financial times, but companies with weak balance sheets or poor liquidity may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, and smart metering and energy management companies in the index, but wasn't thrilled by any of the electric vehicle picks. 

General Electric (NYSE:GE)GE has been a long-time favorite of mine (much to my dismay when it got caught with a small subprime exposure.)  In the short term, GE has shown that it can still raise money even in troubled times by doing a (rather expensive) deal with Warren Buffett's Berkshire Hathaway.  The $3 Billion injection, followed by the $12B public offering was necessary because GE has long maintained a very low current ratio, something they were easily able to do in ordinary times due to their triple-A credit rating.  Even a triple-A rated company (especially one with a large finance division) has trouble raising money in this market, and they need new cash to maintain that credit rating.  I wish I had looked at GE two weeks ago when I started dumping companies which would need to raise financing.  In fact, GE was a company I suggested would become a good buy when this market finds a bottom.  Now that GE has strengthened their balance sheet, I'm comfortable with my stake.  

Nevertheless, GE is a graphic example of what happens to companies which need to raise cash quickly when cash is tight.  Consider the company's recent drop in stock price, and then consider what would have happened without the extra confidence they obtained by bringing Warren Buffett on board first.

Honeywell (NYSE:HON).  Honeywell, which I like for its building controls systems and performance contracting business, has an OK current ratio of 1.3, and a very strong operating cash flow equal to half the company's total (not just short term) debt load, meaning they will probably not need to tap the markets for new funds in the near future.  I'm holding my stake in this company.

International Business Machines (NYSE:IBM).  IBM has a current ratio just over 1, and a strong operating cash flow sufficient to cover their total debt in two years.  Although IBM's push into solar was one of 2007's most blogged stories, I tend to avoid solar companies because of the investor excitement around the sector.  That said, there seems to be no reason to think IBM will have any immediate need to raise cash.

Johnson Controls (NYSE:JCI).  Johnson Controls has long been my top energy efficiency pick among blue chip companies.  With a current ratio of 1.2, and enough cash from operations to pay off their total debt in two years, the valuation is becoming increasingly attractive.  In response to my (negative) article on electric car companies, a reader wondered if Johnson Controls was also risky because of exposure to car buyers needing financing.  I like the current valuation, but, especially in the short term, we can expect earnings and cash flow to drop significantly.   If I didn't already own it, I'd be tempted to wait for the price to drop a little more before getting in, but I would not avoid the company all together, because they are well placed to buy up smaller battery companies to consolidate their lead in that market.  

Siemens (NYSE:SI).  Siemens also has a current ratio of 1.2, and enough cash from operations to pay off their total debt in two years.  I've long liked Siemens for their interests in a wide variety of my favorite sectors, in addition to energy efficiency.  They're a global leader in electricity transmission infrastructure, efficient lighting, rail infrastructure, and have a strong wind turbine unit.  Their wide array of businesses is less exposed to the potentially cash-strapped consumer than GE and Johnson Controls.

DISCLOSURE: Tom Konrad owns GE, HON, JCI, and SI.

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.  

October 16, 2008

Wise Energy Use Stocks Part 4: Metering and Energy Management

This is a continuation of my look into which companies in the Wise Energy Use index seem to have the financial strength to survive a prolonged slowdown.  I generally liked the efficient lighting companies in the index, but wasn't thrilled by any of the electric vehicle picks. This article looks at the energy management and metering companies described here, many of which were also featured in my article on smart metering.

Many of these companies sell their products to utilities, not consumers, so their revenues should be less vulnerable to a drying up of consumer credit than most. 

Itron, Inc. (NASD: ITRI).  Metering company Itron has a lowish current ratio (.93), but positive operating and free cash flow. It also sells its products into the utility market, not to consumers, giving it a relatively stable revenue base in a downturn.

Echelon (NASD:ELON).  Energy management company Echelon also sells into the utility market, has a strong current ratio over 5, and while operating cash flow is negative, it is less than 4% of cash on hand.  

Woodward Governor (NASD: WGOV).  Energy control company Woodward Governor sells into a wide variety of industry, aerospace, and energy companies.  Some of these will be exposed to a slowing economy, but certainly not as much as consumers, and some are relatively stable (utilities and military.)  The company has a comfortable current ratio of 3.3, and positive cash from operations and levered free cash flow.

EnerNOC (NASD:ENOC).  Demand Response company EnerNOC also sells into the relatively stable utility market.  Although still losing money, their current ratio is a relatively comfortable 2.8 and they have four years of operating cash loss and two years of levered free cash loss in cash on hand.

Energy Recovery (NASD: ERII). Energy Recovery was a new company to me.  According to Energy Tech Stocks, they provide "power to water desalination plants. Experts say Energy Recovery’s equipment provides significant cost savings over its competitors."  Desalinization plants should be a relatively stable market, even in a downturn.  The company has a solid current ratio of 3, but very little cash on hand; most of their current assets are in the form of accounts receivable and they have a small negative operating cash flow.  Doing a little more digging, I see that these numbers are from before the company's well-timed July 8 IPO, so the balance sheet now looks much better than would be expected from the last quarterly report.  I still need to do more digging, but Energy Recovery is going on my list of stocks for further research.


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.  

October 12, 2008

Wise Energy Use Stocks: Efficient Lighting


On Friday, October 10, 2008 , I stopped being bearish for the first time since the 1990s.  My long term expectation of a crash that didn't come had been undermining my self confidence.  Even the decline in 2001 and 2002 had not seemed severe enough, given the financial imbalances in the system.  I had begun to worry that I might be genetically bearish, and that my worries had nothing to do with a market that was greatly overvalued.

I am relieved to say that I am not a permabear, and that the market as a whole now seems to me to be fairly valued.  Some sectors and many stocks are still overvalued, but bargains are there for those who look.  I don’t know where the market will go from here, but I now feel that we've seen the worst of what is likely to happen, even if the market has farther to fall.  We have just seen two weeks where the largest investors in the market have been forced to sell everything they could in order to meet margin calls and cover debts.  The wildcard is how long such distress selling will continue.

Anyone who currently has cash on hand and the courage to buy is in an enviable position.  Selling has been indiscriminate, with the best companies being sold as hard as the worst.  Now is the time to begin buying quality companies at a large discount to their true value.  Forced selling may continue for a while yet, but fundamental buyers are beginning to move into the market, and the best companies may never be this cheap again.

Buy Carefully

I am not calling a bottom here for the market as a whole.  I would not be surprised if the Dow falls as low as 7000, but I do think that the current mispricings from forced selling are as extreme as they are likely to get.  Now is not the time to buy a market index, be it a general market fund, or a green mutual fund or ETF.  

It is extremely timely that I have already begun a series of articles looking into companies which help people and businesses save money by using energy more efficiently.  Energy Efficiency seems to be the most likely alternative energy sector to benefit from an extended recession or depression.  With that said, I will continue my look into the liquidity of companies in the Wise Energy Use Index.  A liquidity screen is a good way to quickly eliminate companies from consideration before you've wasted too much time researching them.

Wise Energy Use Stocks, Part 2: Lighting

Philips (NYSE: PHG).  Philips is a long time favorite of mine, has a current ratio of 1.7, and operating cash flow of $1.7 Billion.  With $3.3 Billion on hand, Philips may be able to continue their acquisition of other lighting firms at reduced prices, and cement their world leadership in efficient lighting.  Energy efficient lighting upgrades typically have paybacks of less than two years, and are a staple of utility demand side management programs.

Cree, Inc. (NASD: CREE).  Cree is a leader in bright white LEDs.  With no debt, and a current ratio of over 4, operating cash flow of $312 million, Cree should be able to weather a financial storm, despite trouble at a major customer.  Cree may even use its healthy balance sheet for a small acquisition or two.

Lighting Science Group (LSCG.OB).  Lighting Science is a manufacturer of LED fixtures, including replacements for normal incandescent household bulbs.  Although the industry is poised for explosive growth in 1-2 years as costs fall, Lighting Science may not survive to benefit.  The company has a marginal current ratio of 1.35, but their twelve month operating cash loss of $19M is far in excess of both their current assets less current liabilities and cash on hand ($2.8M.)  Despite recent good news in a patent case with Philips, and resolution of a dispute with the former CEO, Lighting Science will be in a bind if credit markets continue to be tight.  

According to Bill Paul of Energy Tech Stocks, the company is in his Wise Energy Use Index because it is in a great industry, and a rising tide floats all boats.  That had been my reasoning when I bought the company for myself, and recommended it as a speculative play in 2008, but now I think that a rising tide only floats those boats that don't sink first.  I decided to sell my stake while writing this article.  

Philips may consider buying Lighting Science now that they have been stymied in their patent dispute, but holders of the stock should not count on this to raise the stock price significantly.  Just as Barclays chose to wait and buy Lehman's core assets out of bankruptcy, a potential acquirer of Lighting Science might also choose to wait for the LED Light Bankruptcy Special.   Other potential acquirers include Cree, Osram Sylvania, a division of Siemens (NYSE:SI), and General Electric (NYSE:GE).

DISCLOSURE: Tom Konrad and/or his clients own PHG, CREE, GE, and SI.

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.  

October 09, 2008

Wise Energy Use Stocks for Troubled Times

Part 1: Introduction

In a financial world where there seems to be little hope, I see a bright spot in energy efficiency.  This is because energy efficiency improvements pay for themselves in a very short time, in addition to being the best thing we can do for energy security and reducing greenhouse gas emissions.  Given the current financial crisis, I also believe that investors should focus on companies with strong balance sheets, which will be able to internally fund their investment needs for the next couple years.

While I was making the above case, Energy Tech Stocks introduced their "Wise Energy Use" stock index, intended to "start every investor thinking about building a portfolio of companies whose fundamental business is to save their customers money by saving them energy."   Since I have been thinking about just that, I thought it worth asking the question, "Which companies in the index might be able to thrive in times when funding is scarce?"  Since there are fifteen companies in the Wise Energy Use index (nor was it intended as a formal index), this will not be an in-depth analysis of each, but rather more of a quick screen to find those which look ready to weather a continuing storm.

In general, using energy wisely is a good business to be in when times are are hard.  When times are easy, conservation falls to a low priority, because the pennies saved will never add up to a big score.  When times are hard, people stop thinking about the big score, and spend more time thinking about making ends meet.  This should be great for companies whose business model is helping customers save money by saving energy, or Wise Energy Use.

In going through the list, I'll be looking for companies with short term assets in excess of short term liabilities (i.e. a Current Ratio greater than 1) and, if cash from operations is negative, it should be small relative to cash on hand, as well as small relative to the difference between short term assets and short term liabilities.  I'll also take a look at how levered free cash flow compares to cash and current assets.

I'm also going to be more interested in companies which are not dependent on consumer demand, but rather will stand to benefit from infrastructure investment, which seems more likely to be a safe haven as governments everywhere attempt to get their economies going again.

Next week, I'll go through the companies.  If you want a preview, here are the EnergyTechStocks articles describing the companies:

Lighting firms; Efficient Cars; Smart Grid and Energy Management; Global Services Companies

October 07, 2008

The Light at the End of the Tunnel is Energy Efficient

The Solar Investment Tax Credit has been extended, and the market for mortgage debt "rescued," but neither renewable energy nor the rest of the economy are out of the woods.  We'll probably be feeling the effects of the financial imbalances which have built up in our economy for years to come.

While the extension of the tax credit will help renewable energy technologies raise funding, the headwinds from the continued fallout of the structured finance and real estate bubble will be blowing in the other direction.  This will be a problem both for developers of new technologies, and project developers.  On the other hand, changes in the ITC (allowing it to offset the AMT, and removal of the public utility exemption) allow new investors, such as property and casualty insurers, into tax equity investing.  These investors are likely to be more cautious, but they are likely to be there.

The good news is that we already have the technology we need to decarbonize the economy.  The key now is adapting our regulatory structure and infrastructure to accept the technologies we already have.  Unarguably, project finance has become more difficult with the drying up of many pools of capital, but that is not the end of the story.  

Too Much Money

When money was relatively cheap, investors grew careless choosing their investments, most dramatically in structured mortgage products, but also in other sectors.  Now investors are more likely to careful about where they put their money.  For marginal or speculative companies, this is bad news, but it could be an advantage for dull but profitable businesses which might have been overlooked previously. 

The first steps towards decarbonizing out economy do not need to be high tech; they need to be hard work.  Energy efficiency is cheap (in fact, it usually pays for itself in just a few years, if not months,) but often requires new ways of thinking.  Investors and politicians have been quick to talk up photovoltaic companies.  Using the energy we already have more efficiently seldom received more than lip service.

I think that's likely to change, now that money is scarce.  In politics, it's no secret to anyone that the economy is hurting.  Even John McCain figured it out a couple of weeks ago.  This means that politicians are going to be looking for ways to help workers and create new jobs.  But with money scarce, there will be a push to do as much as they can with as few taxpayer dollars as they can.  

Energy Efficiency programs are an obvious option.  Most energy efficiency measures save far more money in fuel costs than they cost to implement.  This means that programs to promote energy efficiency put more money in peoples' pockets than they cost to implement.  This stimulates economic growth and jobs, all while reducing carbon emissions.  Typically, many opportunities to save energy at low cost are missed because people are too busy or in too much of a hurry chasing the big score to spend time thinking about saving a few dollars a week by sealing their house or driving sensibly.

Policy can do a lot to promote energy efficiency, through utility energy efficiency programs, independent programs with mandates to help consumers save energy, as well as labeling and information schemes such as Energy Star, and incorporating energy efficiency into building codes and other standards, such as the CAFE standard for automobiles.

Because few consumers consider energy usage in their purchasing decisions, such legislative measures as those outlined above save consumers more money than they cost to implement, and boost the economy because less money is spent over time on imported energy, therefore more can be spent on goods produced locally, keeping the money in the local economy.  Even in energy producing states, less money spent on locally produced energy means that more energy can be exported, also helping the local economy.

Transmission for Economic Transformation

Another traditional way for government to fight a slow economy is infrastructure spending.  As I've long argued, in order to reduce our carbon emissions, we need better energy infrastructure far more than we need new energy technologies.  Right now, our electrical grid is outdated and Balkanized.  Just as the national highway system contributed as much as one-third of US economic growth in the 1950s by facilitating the transport of goods across the country, a national electric transmission system would contribute to national growth by lowering electricity prices in areas without abundant cheap generation, and adding export income in areas with inexpensive generation.  A national transmission network, by providing export opportunities, would allow wind penetration in under populated, windy areas to grow beyond the needs of the local utility.  A strong transmission backbone, combined with electricity demand responsive to price signals, and electricity and heat storage are how Denmark hopes to go from 20% to 50% wind penetration.

Price responsive electricity demand (which I discuss in my articles on the one-house grid and wind and heat pumps) and and a better transmission network both make the electricity market closer to the free market ideal. Any economist will tell you that improving price signals in a market or broadening the pool of possible buyers will improve market efficiency.  Efficient markets bring economic gains, which is why transmission investments (not to mention investments in smart metering to improve the price response of demand) are not only wins for renewable energy, but wins for the economy.

Might a slowing economy make political authorities see the potential of improving our electricity transmission?  Transmission advocate Charles Benjamin of Western Resource Advocates thinks it might.  At the Second Annual Concentrating Solar Power Summit, he told the story of how he persuaded the Republican Public Utilities Chairmen to support a transmission authority.  Key to his argument was the fact that electricity rates in East Kansas were six times the rates in West Kansas, so it was clear how West Kansas residents were losing out due to lack of transmission from one side of the state to the other.

Mr. Benjamin is currently making progress getting a similar transmission authority in Nevada, despite the fact that the local utility hates the idea.   The key to this battle is bringing politicians to the realization that what is good for the utility is not necessarily good for the public, and that he was having success pitching transmission as an economic development tool.  

Rather than a hindrance, Mr. Benjamin thinks the current economic crisis is making the case for improved transmission in Nevada easier, not harder.  Google CEO Eric Schmidt seems to agree.

Those of us who want to see the whole nation have access to plentiful renewable energy can hope that the same will hold true in our nation's capitol.

September 25, 2008

What I Sold: Carmanah Technologies (CMHXF, CMH.TO)

On Monday, I told readers that I was getting out of companies some which I feel are likely to need to raise new money over the next couple years.  I also provided a list of stocks I will be buying when I judge we're near the bottom.  This is the first in a series of short articles about those stocks. 

Carmanah Technologies (CMHXF)

I've mentioned Carmanah Technologies (CMHXF) in passing in articles about LED companies.  I first became interested in Carmanah in 2005. The company's integrated LED-solar lighting solutions caught my attention because they were (and are) economic regardless of the price of electricity; the savings come mainly from reduced installation costs.  The downside of this is that they are unlikely to see the spectacular growth that solar photovoltaics will see as solar approaches grid parity in cost.  They struggled with a strong Canadian dollar (loonie) driven by high oil prices.  Because company expenses are mostly denominated in loonies, company earnings tend to fall with a rising oil price, making this company a poor hedge against oil.

Carmanah has done much to recapitalize the company and refocus the business since they were badly hurt by a rising loonie last year, but their currency exposure was  unhedged as of their June quarterly report, so they are exposed to a rise in the value of the loonie (which I expect if oil prices recover.) 

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.

September 15, 2008

Wind and Heat Pumps: A Winning Combination

This article has been cross-posted on The Oil Drum.

Last month, I brought you some nice maps showing when and where good wind resources are found in the US.  Now I've found something better: a visual comparison of electrical load with wind farm production[pdf file], published by the Western Area Power Administration in 2006.  The study compared electricity production from five wind farms in Northern Colorado, Southwestern Nebraska, and Central Wyoming in 2004, 2005, and the start of 2006, compared with electricity consumption in the same area over the same time period.

Comparison of Wind Production to Electricity Demand

I've copied four of the most representative graphs below.

The first and third heat graphs below show electricity production at the five wind farms studied in 2004 and 2005, respectively.  The Second and fourth show electricity demand in the surrounding territory.  Red(blue) denotes areas of high(low) production or demand. 

All Farms 2004.jpg wacm load 2004.jpg All Farms 2005.jpg wacm load 2005.jpg

For wind advocates, these are probably rather scary graphs.  The first thing you probably noticed was the big blue patches of wind production during summer peak demand, roughly 10am to 10pm in June, July, and August.   This is why wind is referred to as an "energy resource" not a "capacity resource."  Right when demand is highest (namely hot summer afternoons), the wind is least likely to be blowing.

On Second Thought - How Much Backup Do You Need?

That is just the first impression, and while it is a true impression, it's also an oversimplification.  If you look at the scale, you will notice that the blues on the wind production graphs actually represent wind generating at 10% to 15% of nameplate capacity.  If you factor in the fact that a normal capacity factor for wind is about 25-40%, that means that even on these hot summer afternoons, the farms are generating at one-third to one-half of their "normal" output.  This means that, contrary to popular misconception, wind does not require a "100% back-up with natural gas."   It is true that wind is less reliable than baseload power plants such as coal and nuclear, which typically run about 90% of the time, but in an apples-to-apples comparison, a 100 MW coal or nuclear plant will produce as much energy over the course of a year as a 270 MW wind farm.  During the peak summer months, the coal plant will need some backup power in case of an unscheduled shut down due to lack available coal (this happened in Colorado in 2005 due to problems with dust in rail tracks) or lack of available cooling water during a heatwave, and when a coal or nuclear plant goes down, it goes all the way down, so the 100 MW baseload plant has a small chance of needing 90 MW of backup to produce at its "normal" rate of power production.  On the other hand, the wind farm will be operating at (a conservative) third of its "normal" capacity, producing about 30MW.  To bring that up to it's normal capacity for the year, it will need 60MW of back-up power.  

In other words, because some part of a large distributed group of wind farms is always producing some power, it will never go completely down.  A large baseload power plant, on the other hand, is completely down about 10% of the time (although less during peak summer months, because utilities schedule maintenance in off seasons.)

Pick Farms to Match Your Load

Another point worth noting, is that the wind has different annual patterns in different locations.  The smallest (8.4 MW out of 139MW) of the five farms in the study was "Wind Farm B" in central Wyoming.  If you look at the following two heat maps below for 2004 and 2005, which show the production of just this wind farm, you will note that during the peak summer demand, this farm was producing at over 50% of "normal" capacity for much of the summer peak.

Wyoming Wind 2004.jpg Wyoming Wind 2005.jpg

Since we know what electricity demand looks like, if we plan new wind farms (and adequate transmission), we can choose to build wind farms that produce more power when we most need it.  If all the farms in the example in the last section had more favorable production patterns like Farm B, even less back-up generation would be needed to bring them up to "normal" capacity.

For instance, in the Texas Competitive Renewable Energy Zones study [.pdf 7.64MB] wind in the coastal area (along Texas's southern gulf coast) was found to be a much better match for the ERCOT load shape than wind in other areas, although the average capacity factor was considerably lower than panhandle wind.  See chart below.

 TX CREZ Hourly Capacity July.jpg

Hence, careful selection of wind farms can lead to wind production with higher capacity during peak loads, and correspondingly less need for dispactchable power.  Although Texas is currently focusing on developing wind farms in West Texas and the Panhandle because of their high capacity factors and correspondingly high annual energy output, the power from coastal wind farms is likely to become increasingly valuable as wind reaches higher penetration.

It's Not All About Summer Peak

Statements about wind's need for large dispacthable backup generation because of low capacity factors during peak times contain am implicit assumption that electricity demand is fixed.  This assumption is both false and pernicious, because shifting demand can be done cheaply, and often produces multiple benefits.  While it is true that most large scale electricity storage technologies, such as pumped hydropower, compressed air energy storage, and utility scale batteries are expensive or limited to a few available sites (pumped hydro,) technologies which shift the demand curve are not.

If you look back at the first set of four heat maps, you will note that wind actually does a quite good job serving the winter peak.  In 2004 (a year with a moderate summer) winter peak demand actually exceeded summer peak.  

Capacity during winter peak has some advantages over summer peak.  First of all, natural gas prices are higher during the winter, because natural gas is used extensively for home heating as well as power generation.  In February 2006, Xcel Energy had a series of major power outages in Northern Colorado which they blamed on insufficient natural gas in storage due to an unusually cold temperatures.  Yet as this heat map   All Farms 2006.jpg

shows, wind farms in the region were operating at 40-60% capacity factors (i.e. well above "normal" production) for January and February.  Note that the blue at the end of the year was due to lack of data, not lack of production.  Had there been more wind farms installed, this would have had a large impact on the amount of natural gas needed for electrical generation, and the outages would not have happened.   I don't have data to back it up, but my personal experience leads me to believe that cold winters in the great plains are also particularly windy winters, meaning that winter wind capacity is ideally suited to displace natural gas needed for heating.

How Heat Pumps Fit In

Which brings me to the title of this article: why heat pumps are an excellent fit with wind generation.  In my article on how to invest in the Pickens Plan, I mentioned that ground-source heat pumps (GHP) can displace gas used for heating with a smaller amount of electricity from wind.   Since a GHP is both an efficient air conditioner as well as an efficient heat source, it not only reduces natural gas used for heating, but also reduces electricity used for cooling in hot summer months, which in turn reduces summer peak loads.  

Deployment of GHPs does three things to make energy supplies fit energy demand:

  1. Winter electricity usage is increased just when wind capacities are highest.
  2. Summer electricity consumption is decreased when wind capacities are lowest.
  3. Use of natural gas for heating is reduced during times of peak gas demand.

GHPs, because of their extreme efficiency, also have the benefit of saving users a lot of money.

The Dual Fuel Option

Unfortunately, GHPs have not been widely adopted, due to the difficulties of installing the buried heat exchange loops, especially in urban areas (although some utility programs have been very successful.)  When I bought a house, it was in a New Urbanist development with very small lots which was close to my work.  While this saves me countless gallons of gasoline, it meant that I was unable to use a heat pump.  I opted instead for the most efficient natural gas furnace available from my homebuilder, in combination with the most efficient air-source heat pump.  Unlike GHPs, air-source heat pumps lack a ground loop, meaning that they only work efficiently when temperatures are above about 40F.  In my dual-fuel system, the heat pump heats my house during milder weather (which is frequent in Denver winters), and the natural gas furnace takes over when it is cold.   Since the heat pump is only slightly more expensive than the air conditioner I would have bought anyway, the dual fuel system will pay for itself rapidly, especially when natural gas prices are high.

From the perspective of the electric grid, my electric usage is higher and my natural gas usage is lower during the heating season, when gas demand is high and wind farms are at their most productive.  So while a dual fuel house is much less of a strain on the energy infrastructure than one with a furnace and an air conditioner, it also saves the homeowner money for a much smaller investment.  In addition, while the need for a ground loop makes a GHP nearly impossible to retrofit to an existing home, an air source heat pump is an option for anyone considering replacing or installing an air conditioner, and has the added advantage of having a back-up heat source during a natural gas outage.

Another retrofit option I hope to see available soon is a hybrid ground/air source heat pump [pdf].  These systems combine a short ground loop with an air heat exchanger.  By using the air exchanger during milder weather, only a smaller ground source loop is needed for use during more extreme conditions, reducing the up-front costs compared to a GHP, but without the performance loss of an air source heat pump.  A startup called Co-Energies has developed a way to retrofit existing air conditioners into hybrid heat pumps; see slides 33 and later of this PowerPoint.

Electricity Demand Can Shift

Heat pumps are just one option for changing the shape of the electricity demand curve.  Many such efficiency measures can do so.  Other examples are improved home sealing and insulation, which typically pay for themselves in a couple years or less, and, because air conditioners work less hard in the summer, reduce summer peak loads.  Wind is undoubtedly a tricky sort of electricity to use in the existing grid, but the fallacy that demand is fixed makes the problem seem much harder than it needs to be.

September 11, 2008

What Do CPV and LEDs Have in Common?

I recently attended the Optoelectronic Industry Development Association's (OIDA) "Green" Photonics Forum.  Unlike dirty industries trying to appear green, the Optoelectronics industry does not really have to try to be green.  Two prominent examples familiar to clean energy investors are Concentrating Photovoltaic Solar (CPV) (i.e. using optics to focus light on high efficiency solar cells) and Light Emitting Diodes (LEDs).

The presentations on Tuesday focused on the above technologies, and I was struck by a common problem faced by both: heat dissipation.  According to Sarah Kurtz, a National Renewable Energy Laboratory scientist leading the team working on high-efficiency, multi-junction solar cells used in CPV, one of the key challenges for CPV integrators is bonding the solar cell to the heat sink.  This bond needs to be uniform, without any bubbles, and needs to be able to withstand large, rapid temperature changes, as the amount of light and heat on the chip goes from practically nothing to hundreds of suns.

What can LEDs not do at 150 lumens per watt?

The keynote speaker at the conference was Jay Shuler of Philips (NYSE:PHG) Lumileds.  He's confident that white, high power LEDs which have been demonstrated in the laboratory to produce up to 150 lumens per watt  will make their way to the marketplace in the next couple years.  At this level of light production, commercially available LEDs will surpass even the most efficient light sources available, low pressure sodium lamps (no, not CFLs, which typically produce about 100 lm/w) with much better color rendering.  But there are lighting markets that LEDs will have difficulty penetrating even when they are the most efficient white light source, namely retrofit markets for standard light bulbs (i.e. you will keep your CFLs for some time yet.)   

The problem with fitting into the form factor of a standard bulb in a standard socket is, once again, cooling.  The first commercially available100W replacement  LED bulb actually contains a fan for cooling... a step away from the solid state reliability we would expect from LED bulbs.  Jay suggested that buyers of such bulbs should be very concerned about quality and durability of such bulbs.  

As an aside, I have been using a 60w replacement (using 5w) in an outdoor light, and four 25w candelabra replacements (at 2w each) in a fan since January, without any problem yet.  On the downside, although the candelabra bulbs have a long, shiny base for cooling.  The light quality (soft white, about 3000K color temperature) has been excellent, and seem brighter than I would expect from the bulbs they are meant to replace. 

Can we invest in heat sinks?

Often the most profitable way to invest in an industry is to invest in the suppliers of hard-to find technology for that industry.  For instance, one of the best ways to invest in solar during the silicon shortage from 2004-2007 was suppliers of silicon.  This may be more difficult to profit from than silicon, because heat sinks are not particularly high-tech, but, as Dr. Kurtz pointed out, the connections to the heat sinks are.

This leads me to look for current industry leaders in thermal management, who might have relevant expertise.  A search for "Thermal Management Solutions" led me to several companies such as Rogers Corp (ROG), which is focused on wireless communication and computer markets.  Given this focus, they probably have some expertise to apply to LEDs, but not necessarily any that might apply to the extreme temperatures of CPV.  I also found a few private companies, of which the most promising for this market was Plansee, because of their experience in both optical and military markets, and claims the "ability to braze metal to metal, ceramic to metal and ceramic to ceramic to exacting specifications and tolerances." 

Unfortunately, as a private company, Plansee is not an option for public market investors.  The question remains open for readers: Is there a publicly traded company with experience in thermal management for the extreme temperatures needed for CPV? 

DISCLOSURE: Tom Konrad and/or his clients have long positions in PHG.

DISCLAIMER: The information and trades provided here and in the comments 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 25, 2008

Five Alternative Energy Stocks I'll Research "One of These Days"

I have more ideas than I have time to explore them, and it's getting out of hand.  I still need to write the promised articles on Evergreen Solar (ESLR) and Lithium Technology Corp (LTHU), but there are many others that have caught my attention over the last six months or so.  Since the list keeps getting longer, I thought I'd just give you a taste of some of the companies in my inbox, and why they seem interesting.  Since I may or may not ever write articles about any of these, I thought I'd give people the opportunity to evaluate the companies for themselves.

  1. AECOM (NYSE:ACM).  Astute readers of my recent Hydropower overview will have noticed I said: "AECOM Technology Corporation (NYSE:ACM) [is] a global provider of professional technical and management support services to a broad range of markets, including transportation, facilities, environmental and energy," and also that the most promising opportunities were in "suppliers of parts and services to hydropower projects."  Not only is ACM a prominent provider of services to hydro projects, they also get much of their revenue from, and, as one ACM employee described it to me, energy projects which don't involve burning something.  This includes some of my longtime favorite sectors, such as transmission and public transit.  So ACM is on my short list.  I might have already bought some, if the stock price had not been going up since I discovered the company.
  2. Kaydon (NYSE:KDN). As a wind industry supplier, I've had Kaydon as part of my portfolio for about a year.   When the company had disappointing earnings last month due to their non-wind business, my instinct was that it was time to buy more, but I wanted to dig a little deeper to make up my mind.  I still have not done that digging.
  3. Power Efficiency Corp (OTC BB:PEFF).  This company, which makes software to save energy in industrial motors and such as escalators and rock crushers caught my eye last year by advertising with us for a few months.  After an interesting conversation with the CFO, BJ Lackland, I decided to make a small investment.  It's a niche technology, yet has the potential to save a tremendous amount of energy even so, and it is already working in the marketplace.  If they can get the technology accepted by OEMs, the growth potential (from a tiny base) is enormous, nevertheless, I have not done the deeper digging I require of myself to make a larger investment than I already have.
  4. Orion Energy Systems (NasdaqGM:OESX).  Another energy efficiency company that caught my attention a couple months ago, Orion provides a suite of efficient lighting solutions to commercial businesses.  Since I expect the sector to boom in coming years, Orion seems well placed to take advantage of utility Demand Side Management programs.
  5. Texas Pacific Land Trust (NYSE:TPL).   A reader sent me this suggestion in response to my comment in my Invest in the Pickens Plan article "I'd prefer a REIT with a rural focus, but have been unable to find one."  According to the company's profile, they "owned the surface estate in 964,813 acres of land located in 20 counties in the western part of Texas" as well as some oil and gas royalties.   West Texas is typically fairly windy, but to really know if this stock would benefit from a rural resurgence driven by massive wind investment, we'd have to know how their lands line up with both wind resources and available transmission capacity... and how management feels about wind... would they sell out as soon as they saw a small price rise due to interest in wind, or would they wait for enhanced economic growth to produce long term superior returns?

DISCLOSURE: Tom Konrad and/or his clients own KDN, PEFF.

DISCLAIMER: The information and trades provided here and in the comments 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 11, 2008

Power Plant Costs & The Case For Energy Efficiency

A few weeks ago, I stumbled upon a presentation that was given by FERC officials on the phenomenon of rapidly rising costs in US power generation (presentation link at the end of this post). The FERC, or Federal Energy Regulatory Commission, is America's energy watchdog.

The presentation begins by noting that across America's major electricity hubs, power prices are up significantly on last year (between 62% in the Midwest and 123% in NYC) and that, unfortunately, this probably isn't an anomaly. In fact, the presentation argues, there may be something secular at play. Two main trends are noted.

Energy Costs

Because of gas' prevalence in US power generation, the cost of generating a unit of electricity through gas often sets the unit price in the marketplace across fuels - gas is said to be the marginal fuel. Commodity market watchers and anyone who needs to buy gas on spot or futures markets will have noticed a sharp increase in the price of gas over the past five years. This increase is what is responsible for the vast majority of power price increases currently being experienced by US electricity customers.

Of course, it hasn't helped that the price of coal has been rising as well on the back of a weak US currency and an explosion in demand from India and China. In some parts of the US, such as in the Midwest, coal is the marginal fuel. Tom wrote an interesting piece last year on how to play coal shortages.

Capital Costs

The second factor impacting the cost of power generation is a rapid rise in the cost of many key inputs needed to build a power generation facility. Increases in the price of steel and cement, for instance, have appreciably outpaced inflation as whole over the past few years, as have those for other commodities and even labor (albeit to a much lesser extent).

The result is the chart below, which shows the capital costs of building generation capacity in 2008 as compared to 2003-2004. The caveat with this graph is that accurate data on power plant capital costs is hard to come by given the sensitivity of this information. Nevertheless, the results from these estimates show that while the inflationary environment in power generation capital costs has impacted all fuel sources, wind has been impacted to a lesser extent than competing fuels like coal. While combined cycle and combustion turbine gas remains cheaper than wind, wind has made up some ground on the 2003-2004 period.

The effects of this phenomenon on power prices, however, may not be fully felt for a few more years.

Connecting The Dots

Throw these two factors together (rising capital and fuel costs), and the weighted-average levelized cost of electricity across the system - the levelized cost is the present value of the costs of building and operating a power plant and are used to set prices over the plant's economic life - looks like it could favor wind a few short years down the road.

There are two forces at play improving the economics of wind relative to conventional power generation: (a) growing wind manufacturing capacity currently under construction (this is not apparent at the moment because of the inflationary environment discussed above, but once new manufacturing capacity comes on line and the supply chain loosens up wind costs will decrease) and (b) worsening economics for fossil-fired generation due to increases in capital costs but mostly fuel costs.

Add to this regulation to force fossil generators to internalize the cost of carbon and a growing number state mandates for renewable power, and the picture looks even more positive.

But The Real Winner Is...

Unsurprisingly, the FERC expects there to be a response to rising electricity prices - in other words, demand for power is elastic.

What's the main response likely to be initially? An increase in demand-response (technologies that adjust power consumption based on prices). The FERC estimates that the first round of demand-response (the low-hanging fruit) could come in at about $165/kW, which compares rather favorably to the capital costs of the cheapest option on to the graph above, combustion turbine gas, at between $500 and $1,000/kW. And, like renewable energy, there are no fuel costs.

Somewhat paradoxically, one of the main impediments to demand-response growth could be energy efficiency measures more broadly, or reducing power use at any time instead of only at peak times, which is what demand-response does. Available energy efficiency measures would cost in the order of $0.03/kWh, compared to $0.09/kWh for the fuel alone for a combined cycle gas plant.

Demand-response is likely to be more popular in states where most customers have some exposure to fluctuating daily power prices, whereas energy efficiency measures may gain more ground in states where the pricing is more static for most customers.

It's The Economics, Stupid!

One of the biggest beefs alt energy detractors have with the industry is that "the economics don't make sense without state support." (Of course such detractors generally like to avoid conversing about the mammoth tax breaks the fossil industry receives) This could very well change in the years ahead as the burden of fuel costs on the levelized cost of fossil electricity boosts wind and solar's competitiveness.

However, as shown above, the cheapest kW is the kW saved, and regulators are aware of this. Unlike cars, where the entire vehicle has to be changed to gain access to more efficient technologies, energy efficiency measures in commercial, industrial and residential buildings can be implemented fairly painlessly. Now that the "economics make sense", expect such installations to grow in popularity

Access the FERC presentation here (PDF document).

June 26, 2008

Energy Efficiency Policy Recommendations for State Legislators

On Monday, I had one of my favorite sorts of opportunities, which was a chance to influence future energy legislation.  The National Conference of State Legislators invited me to give a short presentation as part of a two-day energy efficiency workshop for interested legislators from across the country.  

Given the short time frame, I couldn't say everything I would have wanted, but fortunately, I was part of a large group of excellent presenters, so what I didn't hit, they did.  I focused on my ideas for transforming markets and tackling the many barriers to energy efficiency [PowerPoint presentation, 12MB].

Tom Konrad

May 22, 2008

It's Energy Efficiency, Stupid!

It's no longer breaking news, Deloitte released earlier this week the results of two surveys, one of state public utility regulators and one of residential electricity consumers (both PDF documents). Deloitte's interpretation of the results can be found here.

The results have also been interpreted by two prominent alt energy/environmental blogs: the WSJ's Environmental Capital and Grist. The former argues that policy-makers and 'smart-money' are out of whack with the little guy, because the little guy simply isn't willing to pay for solutions to climate change out of his electricity bill. The latter, looking at the same data, effectively calls the little guy dumb and selfish. It's true: by-and-large, while respondents (consumers and regulators) express concerns over climate change, neither group is willing to see electricity rates go up to deal with the issue. But as I was reading through the survey slides from the standpoint of an alternative energy investor, different things stood out for me.

Firstly, regulators view transmission as the number 1 impediment to renewables growth (followed closely by cost). We at have been on the power grid and transmission stories for quite some time (see our Electric Grid section for investment ideas), so this result is not especially surprising. Nevertheless, the fact that the individuals who have perhaps the best visibility on this issue place transmission above costs speaks volume to the scale of the problem. But while this problem is well understood, it's still unclear how it's going to be resolved. We can all agree that more investment in transmission needs to be made, but who is going to make it and under what model? Governments are increasingly apprehensive to going into massive capital spending sprees, and the incentives for the private sector don't seem to be all there. One thing is clear: something will have give sooner rather than later.

However, the main thing that caught my attention in the survey is the degree of support energy efficiency receives from both consumers and regulators. When asked what approach had the best ability to deal with greenhouse gases (slide 8 for the regulator presentation), more regulators picked efficiency as extremely effective and moderately effective than did for renewables. A resounding 70.8% of residential customers would support their utility boosting profitability on the back of efficiency measures (slide 4 for the consumer presentation), and consumers would prefer energy efficiency to clean coal and nuclear (slide 11). Some 66% percent of regulators believed investment in efficiency should receive similar regulatory treatment as investment in new generation (slide 11).

What does this tell us? What we already know: that efficiency is a win-win. Efficiency can help utilities reduce operating expenses as the cost of generating power goes up (mostly because of fuel), not to mention avoid massive capital outlays as the capital costs of building new generation continue to increase. Efficiency also means flat or decreasing power bills as no or little new electricity needs to be produced to meet growing demand (granted, this is not possible where demand is growing too rapidly).

So why haven't policy-makers embraced efficiency and given it the same incentives as renewables? It's not clear, but I would posit that, for one, efficiency does not have a great job creation angle, quite the contrary. It's also not as sexy and tangible as new renewables project. Lastly, there isn't a well organized efficiency lobby, while wind has some very powerful allies.

No matter the reason, this survey reinforces my belief that the case for efficiency is growing, especially if electricity prices continue to trend up in the near-term as predicted by the regulators. Efficiency measures can be deployed relatively rapidly and have an almost immediate impact on power bills. In many cases, the upfront costs continue to discourage adoption, but that is something that could be remedied through simple fiscal incentives until scale pushes prices down. I expect we'll hear a lot more about efficiency in the months to come, and the investment case is, in my opinion, as strong as ever. Want to know how strong? This recent report by the American Council for an Energy-Efficient Economy provides some interesting numbers.

April 10, 2008

Money and Reduced Emissions Don't Sell Energy Efficiency, but Comfort and Health Do

    As an expert witness in an energy efficiency ("Demand Side Management" or DSM in utility-speak) docket before the Colorado Public Utilities Commission, I have been making the case that non-energy benefits of energy efficiency measures such as the increased safety and comfort of an efficiently operating home need to be included in evaluating the cost-effectiveness of energy efficiency programs.  There has been much resistance to the inclusion of these benefits, mainly because they can be difficult to quantify.  Yet we omit them at our peril.

Why Energy Efficiency and Health Matter

    Last summer, I explored why the economic benefits of energy efficiency measures had little relation to their actual market acceptance.  I concluded that businesses need strategies beyond touting financial savings to overcome barriers to acceptance.  One strategy I highlighted was making energy efficiency measures an emblem of social status (something I believe is behind the success of the Toyota Prius.)

    In this docket, I have been working with the Energy Efficiency Business Coalition, which brings together manufacturers, distributors, and Retail providers of energy efficiency products and services in order to support energy efficiency-friendly legislation and regulation.  For those who sell to the retail public, their primary messages have little to do with either financial rewards or social status.  Their marketing emphasizes the increased health, safety, and comfort of energy efficient homes.

    A home with properly sealed ducts will not only use much less energy, but it will not pull toxins from the garage or crawlspace into the living area of the home.  Properly functioning furnaces and water heaters save energy, but they also do not emit carbon monoxide.  A well insulated house lacks hot and cold spots, allowing the occupants to be comfortable everywhere in the home.  

    All of these facts are effective marketing tools for energy efficiency.  They're so effective, that a Google search for "insulation comfort" returns 597,000 hits, of which the first six are companies with something to sell.  In contrast, a search for "insulation savings" returns a slightly lower 540,000 hits, but of the first 10, only one (#6) has anything to sell.  The rest are information sites from government, nonprofits, or for DIY'ers.  

Survival of The Fittest (In Competitive Markets Only)

    Those businesses which stay in business by successfully selling insulation do so by selling the comfort benefits, not the energy savings.  The energy savings are instead pushed by organizations (such as government) which will remain in business regardless of who buys what they are selling.  

    I find it quite telling that Xcel Energy (NYSE:XEL), the utility we have been dealing with in the DSM docket, markets their energy efficiency programs almost entirely on financial savings.  But then, Xcel is not going to go out of business if they don't sell as much energy efficiency as possible: their main business is selling energy, not energy savings.  I don't mean this as a condemnation of Xcel; the company is quite progressive, as public utilities go.

    Because public utilities are regulated, it falls on the regulator to ensure that the utilities incentive includes those factors which will actually increase the adoption of energy efficiency.  Normal businesses have found that the factors to emphasize are non energy benefits such as comfort, health, and safety.  These factors are out of favor in regulatory circles, because they are difficult to value in dollars and cents.  

    Difficult to value does not mean without value.  People buy things they value, and when it comes to home energy efficiency, they are buying health and comfort, with a dash of energy savings... not the other way around.  DSM programs which take this into account are likely to be much more successful than those which do not.

    Regulators take note.

Continue reading "Money and Reduced Emissions Don't Sell Energy Efficiency, but Comfort and Health Do" »

April 02, 2008

Current Picks: Busses and Energy Efficiency

Over the weekend, EnergyTechStocks published two articles based on an interview with me.

The first was about my conviction that Peak Oil induced rising gas prices is going to lead to a rush into mass transit building by cities, or investing in mode-shifting last September.  I've since written about opportunities in rail transit stocks, (P.TO, TRN, PRPX, and WAB), and more recently Hedging your peak oil risk with your lifestyle.  However, I have been frustrated until now that the only pure play bus stock I've been able to find is Firstgroup PLC (FGP.L, FGROF.PK), the British based owner of Greyhound and owner or operator of many other UK and North American transit services (both bus and rail.)  Back in September, Firstgroup seemed very expensive after a prolonged run-up, but it is now looking more reasonably valued.

Two weeks ago, however, I found a pure-play North American Bus stock, which I will be writing about this weekend.  I'm not ready to reveal the name, because I still have an account which has not yet bought the stock.  This is the company I was not ready to reveal in the EnergyTechStocks interview.

The second part of the interview referred to my conviction that lean economic times will benefit Energy Efficiency over other forms of clean energy.  I highlighted two of the stocks from the 10 Solid Clean Energy Companies to Buy in a Downturn series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in TRN, PRPX, WAB.

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.

March 02, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #1 Johnson Controls, Inc. (JCI)

Johnson Controls (NYSE:JCI) has long been one of my favorite energy efficiency picks, with an added bonus coming from their joint venture with Saft to produce batteries for hybrid and electric vehicles.  They have also shown some energy saving innovation making parts for auto interiors. jci.gif

Building Efficiency

Efficient buildings are much more complex than simply replacing inefficient HVAC and lighting with more efficient versions.  Quite often, the most cost effective measures come from using systems more efficiently.  As an analogy to the home, look at any list of quick tips for energy saving around the home.  This list of ten steps on Squidoo includes five tips for using existing equipment more wisely (programming your thermostat, cleaning air filters, loading your dishwasher fully, and only using the dryer when you can't air-dry.) Considering Squidoo is quite clearly trying to make money by referring people to Amazon to buy products, it's all the more significant that half of the steps need not involve buying anything.

In commercial and industrial buildings, the most economical gains also involve using existing equipment more wisely.  They offer a full suite of products focused on automation and integration to businesses and residential (with the recent York acquisition) customers alike. 

Building efficiency systems comprise about one third of 2007 revenues.

Batteries and Automotive Power Systems

Johnson Controls' joint venture with Saft has been making headlines recently, no doubt in large part due to Johnson Controls automotive industry network.  The partnership has won contracts to supply batteries to Chinese auto manufacturers Chery and SIAC for their Hybrid electric vehicles, and a battery development contract from GM to develop Li-ion batteries for GM's Saturn Vue Green Line Plug-in Hybrid.

I'm extremely enthusiastic about the growth prospects of the automotive battery industry, the reasons for which I detailed in this article about another battery company, and this one about the long term prospects for cellulosic biofuels.  The power systems division comprises about one third of 2007 revenues.

JCI also supplies automotive battery management systems and power systems, with a focus on energy savings, as part of their automotive division described below.

Auto interiors

Energy savings can come from unexpected places... like car seats.  Johnson Controls' EcoClimate seat provides much higher heat absorption and moisture absorption than conventional seating, which in turn provides for passenger comfort with less use of the vehicle's air conditioner.  New bio based materials may also appeal to automotive consumers concerned about environmental health effects and fossil fuel usage.  About half of JCI's 2007 sales were in this division, but most of the company's growth comes from the other two divisions.


With half of the companies 2007 revenues coming from two of my favorite alternative energy sectors (efficient buildings and automotive batteries), and these parts of the company growing much more rapidly than the auto parts division (which is likely to be a great competitive advantage in selling batteries and power systems to automakers,) JCI is a must for alternative energy investors attracted by the superior economics of energy efficiency.  

The stock has declined significantly since the start of the year, but it currently seems only fairly valued to me at the current price of around $34.  However, a decline in auto sales caused by a slowing economy, along with an increased debt burden due to recent acquisitions could easily hurt short-term profits.  With continued stock market weakness, patient investors could easily see some excellent buying opportunities in the next 6-12 months.  If we do, I will be buying more.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in JCI.

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 21, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: These Almost Made It

In the future, I plan to avoid doing lists of ten stocks. I've found the writing to be somewhat repetitious, and I suspect some readers feel the same way.  Look for more threes and fives.

That said, there are more than enough solid companies with strong clean energy arms.  These companies are my favorite investments right now, both because I think that now is a time to play it very safe in the stock market (I'm also increasing my cash reserve), and because these companies allow me to use Cash Covered Puts.

Since I do have several companies I nearly put in this list (I've been deciding which ones to write about as I go along... the list order doesn't mean much of anything.) I thought I'd share those with readers, but without extensive discussion of the pros and cons.  Also in no particular order:

General Cable (NYSE: BGC)

This was another transmission pick, but I chose not to include it because the I had two other transmission picks. Here are other articles where I mention it: Electric Transmission, Blue Chip Stocks, Transmission and Clean Transport.

Greenbrier (NYSE: GBX)

This is another rail pick.  I've also mentioned it here, and the price has fallen considerably since then, making it more attractive.

Owens Corning (NYSE: OC)

Another energy efficiency pick, this stock has been badly hurt by the housing bust.  I'm having trouble figuring out what a "good" price for this one is, so I decided to leave it out of the series.  I've also written about it as an Energy Star Summit pick, an efficient housing play, and as one of my  Blue Chip Stocks.

Honeywell International (NYSE: HON)

This stock didn't make it onto the list because I have not been following it.  Honeywell has historically looked rather expensive to me, although it seems to be getting cheaper.  I've mentioned it as a Performance Contracting stock, as an Energy Star Summit pick, and as one of my  Blue Chip Stocks.

Click here for other articles in this series.

REMINDER: I'm still collecting suggestions for companies to write about in a (shorter) series of articles which will appear in March.  I plan to select the companies from all suggestions submitted with a poll next week.

DISCLOSURE: Tom Konrad and/or his clients have long positions in BGC, GBX, and OC.

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 12, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #6: Sharp Corporation (SHCAY.PK)

I don't write frequently about solar stocks, especially photovoltaic (PV) manufacturers.  While the industry is almost certain to be a spectacular growth story, it's also a story that everyone already seems to know about.  Trader Mark put it well: "these stocks are too driven by retail hands."  The PV story clicks with people, and when that happens, they often buy stocks with little regard to what they are worth.  PV stocks are so psychological, we'd all do well to lie down on a couch before buying.

As the IRS is unlikely to allow psychotherapy as an "investing expense," I have looked to other, less popular sectors of renewable energy, and to energy efficiency in this series.  I sidestep the issue by investing in conglomerates and related industries such as electricity transmission and distribution, or agriculture which are less exciting, but will benefit from the same trends.  That is why I'm halfway through this series, and only now talking about the most popular form of renewable energy, solar photovoltaics.

SHARPSince Sharp (SHCAY (ADR), TSE:6753) is a conglomerate, its PV manufacturing is often overlooked by solar investors, despite the fact that it's the world's largest manufacturer of solar cells (according to Sharp, independent industry statistics are hard to come by.)  Admittedly, PV accounts for considerably less than 10% of their sales: PV falls under "other Electronic components" in their sales breakdown, and that category was only 9.6% of total sales in 2007.  In the last nine months of 2007, solar sales declined, most likely due to limited supplies of crystalline silicon.  They have taken steps to assure future crystalline silicon supplies, and are aggressively expanding their thin film production.

Thin Film Solar

Sharp is also rapidly expanding their production of amorphous Silicon (a-Si) thin film PV.  I find this particularly interesting, because unlike the other thin film technologies, there is no practical limitation on the quantity of a-Si production due to raw materials, unlike the non-silicon CIGS and CdTe technologies.  (You can read my discussion of the impact of possibly limited Tellurium supplies on First Solar (Nasdaq:FSLR) here by scrolling down to the bottom of the linked page.)

While some a-Si manufacturers have given the technology a reputation for low quality, many manufacturers produce high quality panels.  Amorphous Silicon, like other thin film technologies, tends to have a lower conversion efficiency than traditional crystalline silicon modules, but I was surprised to hear in Sharp's New Year Address that because their thin film more thermally robust in hot climates, their thin film panels actually operate at higher efficiency than their crystalline silicon panels in places like Spain.  For this reason, they are targeting large scale PV installations in Southern Europe with their thin film modules, while their crystalline PV modules are targeted at smaller installations in cooler areas.  I had previously thought that thin film was primarily useful for the same things as conventional PV, and also for Building Integrated Photovoltaics (BIPV.)  I had not expected thin film to have higher efficiency in any context.

Energy Efficiency

PV is less than 10% of Sharp's business, but many of their other products should also be of interest to Alternative Energy investors.  Japan is one of the most environmentally and socially aware countries, and as someone more accustomed to listening to investor presentations from North American companies, Sharp's presentations are a culture shock.  Profit numbers play second fiddle to environmental and social responsibility, the reverse of what I'm normally used to.  

Most of Sharp's other products are already familiar.  They include LCD screens and other components for a wide variety devices, as well as televisions and information equipment.  This is where the company's environmental awareness pays off, with Sharp's LCD televisions often near or at the top of energy saving rankings.  This is in contrast to Philips, which is profiled in this series for their efficient lighting business, not for their televisions.

Historically, United States government ratings only accounted for energy use of televisions in standby mode, a problem which will soon be rectified.  As of November 2008, Energy Star 3.0 specifications (see chart) will come into effect in the United States which will also take into account energy use when the television is on, and will make it easier for consumers to compare the true energy usage of televisions.  This should benefit energy-conscious Sharp relative to competitors, and LCDs relative to Plasma displays.

 EStar Spec.PNG

Perhaps even more than Europeans, the Japanese have been thinking about energy for a long time (no doubt in large part because they have to import most of it and therefore pay more for it than North Americans.)  Since most North Americans are only now waking up to the need to save energy, a Japanese company which has long known how to please energy-conscious consumers should be able to use those skills as more consumers become aware of the life-cycle costs of their electronic purchases.

Since a large portion of Sharp's revenues come from consumer products, lower consumer spending and a possible recession in the United States could easily lead to a sharp drop in the stock price.  If that happens, clean energy investors should take that opportunity to acquire one of the world's top solar and energy efficiency companies on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in SHCAY.

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 05, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #9 Koninklijke Philips Electronics NV (PHG)

Readers of this blog are well aware that I'm a fan for energy efficiency in general and efficient lighting in particular as good investments as more and more people and companies reduce their energy use in order to lower costs and green their image.  With the exception of niche players such as Cree and Lighting Science, efficient lighting is dominated by General Electric (GE), Osram Sylvania (a division of Siemens (SI)), and Koninklijke Philips (PHG.)   I'm a fan of all three of these companies, and both GE and Siemens are honorable mentions in this series.Philips

While Siemens and GE are broad industrial conglomerates, smaller Philips is comparatively focused on electronics, with lighting being one of just four divisions.  Last June, I told readers about my hunch that Philips was "the most serious [of the] lighting manufacturers about pursuing LEDs."  That hunch was quickly confirmed when Philips' announced the acquisition of LED company Color Kinetics a couple weeks later.  That acquisition was followed in November by Philips' announced acquisition of Genlyte, with the apparent intention of using this lighting fixture manufacturer to increase their US market penetration.

These two acquisitions allowed the much smaller Philips (market cap $42B) to surpass the more diversified GE ($363B market cap) as the leading lighting manufacturer in both North America and the world as a whole.  For investors who worry that a possible US recession might turn consumers' and companies' attention away from clean energy, energy efficient lighting is the perfect choice in a more budget conscious green era.  Commercial lighting retrofits often have payback periods of less than a year, and so are likely to appeal to companies seeking to reduce costs.

Philips' other businesses include medical devices and consumer products.  Not much about them seems particularly green, although they recently announced an LED-backlit "Eco-TV," which may appeal to the green aspiring couch potato.  It received faint praise from the green technorati, since a big new TV (even a relatively energy efficient one) is likely to be a lot more wasteful than the smaller TV you already have.  On the other hand, the Eco-TV may be the start of a strategy within Philips to leverage their lighting expertise to their consumer electronics business.

In any case, the lighting business is worth having in your portfolio, especially if a market collapse provides an opportunity to buy it on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in PHG, GE, SI.

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 03, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #10 United Technologies

Like most conglomerates, United Technologies Corporation (UTC), (NYSE:UTX) won't be found in any of the Clean Energy indices, but its growing portfolio of clean energy businesses makes it fit well into a diversified portfolio with a clean energy tilt.  A conservative capital structure and solid earnings and cash flow, and a decades long history of constantly increasing dividends make this a company that I'm comfortable holding for the long term.  

In terms of sustainability, the company has been recognized by Dow Jones as in the top 10% of the world's most sustainable companies.  Long before it became fashionable for companies to greenwash by reducing their environmental impacts, UTC pledged in 1996 to reduce their power and water usage by 25%, and they have met these goals while growing their business.  Their long track record of reducing their energy usage gives them a significant head start against rivals who have only recently jumped on the climate change bandwagon.

Of the company's eight major business units,  UTC Power and Carrier are both crucial to how we generate electricity and how we use it.  Carrier has a history of pushing for more stringent energy efficiency and environmental standards for air conditioning, a strategy which helps their business strategy since UTC's scale and research allow them to remain on the technological forefront.

UTC Power has a large portfolio of products which will help modernize our energy infrastructure.  They supply microturbines and Solid Oxide fuel cells, as well as integrated combined cooling, heating, and power products, which I feel are likely to become much more popular as more companies seek ways to lessen their environmental impact and energy bills at the same time.

With their PureCycle binary cycle turbine, UTC introduced the benefits of volume production to geothermal power by making slight modifications to an existing line of Carrier's industrial chillers which allow them to operate in reverse.  Raser Technologies (RZ) plans to use this technology in their aggressive plans to develop a large number of lower temperature geothermal resources throughout the Southwest.  According to a personal conversation I had with a Raser employee. UTC's ability to deliver the turbines quickly, and willingness to guarantee performance was key to Raser's selection of that technology in preference to rival products.

One other technology likely to be of great interest to clean energy investors is their molten salt storage technology, which provides a rare opportunity for a US-based public investor to participate in what I consider to be one of the most promising solar technologies: Concentrating Solar Thermal Power (CSP).  The thermal storage provided by molten salt gives CSP the potential to provide power on a dispatchable basis, allowing it to compete directly with expensive electricity from natural gas turbines.

Other divisions of UTC, such as the Sikorsky helicopter division, are major military suppliers, so traditional socially conscious investors may wish to avoid UTC.  On the other hand, the short supply of helicopters needed in modern warfare (as well a a large backlog in their Otis elevator division) have propelled strong earnings growth, while even relatively efficient air conditioners could not prevent Carrier from being hurt by the housing slowdown.  Such are the benefits of diversification.

At roughly $74, and a 17.3 P/E, UTX is not currently cheap.  I currently have only some out-of the money short puts on the company, but it's one that I intend to continue writing puts on until the stock falls and I'm assigned shares.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in UTX, RZ.

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.

January 18, 2008

Short Demand for Cree High and Rising

I got a call from my broker this morning asking me if I'd be willing to loan out my shares of Cree, Inc. (NASD:CREE) to a short seller.  Since the only cost to me is that I will not be able to vote my shares, and I will earn 2.5% per annum on the value, I said "yes." 

Normally, brokerages get the shares they lend out to shorts from margin accounts with a margin balance.  Since I never carry a balance (although I do have a margin account in order to trade options) they must ask my permission and pay me interest in order to borrow my shares.  I'm planning on holding these shares for the long term, so I'm happy to earn an extra 2.5% on my money.  (I could still sell them, in which case the short seller would have to find shares to borrow from someone else, or cover his position.)

I also had the idea of creating some synthetic cash-covered short puts (a combination of the long position in the stock with short calls) to give me more shares to loan out, but the relative prices of calls and puts on Cree make this unattractive.  Most likely, other arbitrageurs who are able to earn higher interest on their loaned shares have already pursued this route to the point where it is no longer attractive to me (my return on capital would only be about 8%; I can do better with a plain-vanilla cash-covered puts.)

What to Make of the High Short Ratio?

Cree's short ratio (the ratio between the number of shares short to the company's float, or shares available for trade) is an extremely high 26.9%, and has risen over the last month.  This is why my broker was calling me to borrow shares.  But, other than my opportunity to make an incremental profit on my shares, what does this mean for the future of the stock?

On its face, a high short ratio means that a lot of investors are bearish about Cree's prospects.  This can be good or bad news, depending on how likely the shorts are to be right.  The contrarian position (and I usually lean towards the contrarian) is that most investors are usually wrong, meaning that a high short ratio is a bullish indicator.  We also know, since I'm getting calls from my broker, that few new investors will be able to short.  Finally, there is the potential of a short squeeze, which could be triggered by positive news such as another buyout rumor.  Short squeezes can lead to radical price increases over short periods.

I'm taking the call from my broker as another moderately bullish sign.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE.

DISCLAIMER: The information and trades provided here and in the comments 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.

December 30, 2007

Ten Alternative Energy Speculations for 2008: Batteries, CHP, and Transmission

This article is a continuation of my Ten Alternative Energy Speculations for 2008, with picks #8, 9, and10 published last Thursday.  If you haven't already, please read the introduction of that article before buying any of the stock picks that follow.  These companies are likely to be highly volatile, and large positions are not appropriate for many investors.   My least risky picks (#8,9, and #10) are part of that same article; my most speculative plays (#1-3) will are here.

#7 Electro Energy, Inc. (NasdaqCM:EEEI) $0.68

Electro Energy has risen 36% in the month and a half since I last wrote about it.  But the reasons to own it are still strong, and the rising share price should actually help the company raise the money they need to ramp up production.  See this article and the one linked to above for my reasons to like this stock.  

More recently, EEEI briefly rose to over $1 because of some excitement generated by their participation in an electric vehicle symposium.  My guess is that year end tax loss selling has brought the stock back down since then.  If I'm right, we can expect it to rebound again the next time they get attention from the press.  In any case, we can expect a lot of volatility.

#6 Capstone Microturbine (NasdaqGM:CPST) $1.62, and

#5 FuelCell Energy Inc. (NasdaqGM:FCEL) $10.30

I'm bullish on both these companies because I'm bullish on distributed generation and Combined Heat and Power (CHP) technologies.  My intuition is that 2008 or 2009 will be the year that distributed generation and CHP grab the attention of Wall Street, the way thin-film PV stole the show in 2007.  Both FuelCell and Capstone stand to benefit.  They may even get a boost from making ethanol production more efficient

Regular readers may be surprised that I am recommending a fuel cell stock, since I call Hydrogen Fuel Cell Vehicles "a politically inspired boondoggle."  But there are more types of fuel cells than hydrogen: molten carbonate or solid oxide fuel cells.  FCEL makes a variant of  molten carbonate fuel cell, called the Direct Fuel Cell (DFC), a different beast than the hydrogen  fuel cells, because it can work without an external mechanism to reform the hydrogen.  

FuelCell's DFCs burn methane rather than hydrogen, and are very tolerant not only of low heat content methane (which is often produced in anaerobic digestion or wastewater treatment.)  Note that on page 10 of this EPA study [.pdf] of combined heat and power installations at wastewater treatment plants, a 300kW fuel cell requires a less expensive fuel treatment pressurization facility than a much smaller microturbine system. This is almost certainly due to the lower need for fuel pressurization.

Biogas can be a particularly tricky fuel given the presence of impurities such as H2S and siloxanes which build up as deposits in combustion chambers.  Microturbines, fuel cells, and internal combustion engines need fuel treatment if siloxanes (which are usually present in waste water treatment plants as a byproduct of deodorants) are present.  Fuel cells and reciprocating engines also require the removal of H2S.  Nevertheless, wastewater treatment facilities combine an abundant source of free fuel (biogas) with a need for heating, and so present excellent opportunities for CHP.

Fuel cells are more efficient (47% fuel to electricity conversion) than comparably sized microturbines (30-35%) or internal combustion generators (about 40%), which not only translates into fuel savings (or higher electricity output), but also leads to only 85% or less CO2 emissions than the less expensive (per kW) or internal combustion generators.  Both microturbines and fuel cells get a large system efficiency boost when the heat is also used; both FuelCell and Capstone claim that their products can reach 80% overall efficiency in a CHP context, while the relatively small size of microturbines and fuel cells are particularly well suited to small scale industrial facilities and commercial buildings.

Rising fuel prices make efficient generation important and new fuel sources such as biogas and other waste gasses (such as the Ford plant using a DFC to make electricity from paint fumes) will present opportunities for both DFCs and microturbines in CHP and distributed generation applications.  While DFCs have the advantage of working well on low energy content gas, microturbines are better suited to many projects due to their smaller size, and more fuel flexibility.  Microturbines are much more tolerant of a wide variety of fuels, and can even handle the H2S in digester gas, as noted above.  Capstone sells versions which can run on liquid fuels such as diesel, propane, and kerosene.  While fuel cells also have this capability, they are less tolerant of impurities, and FuelCell does not currently sell products for these markets.  

One final advantage for microturbines is their ability to ramp up and down quickly, meaning they can used in remote locations with irregular fuel supplies, or when demand for electricity is not constant.   DFCs are less able to ramp up and down because of the need to maintain a high temperature in the fuel cell stacks, so they will only be used when they can be always on, but their ability to supplement biogas with natural gas from the pipeline system still means that they can be used with fuel of variable availability.

FuelCell's DFC and Capstone's microturbines should be able to compete effectively with internal combustion engines in distributed generation applications, since reciprocating engines are too large for many potential projects.  Rising energy prices and tightening emissions limits should allow DFCs to slowly increase their market share in a rapidly growing market.  Incidentally, there has also been a successful test of a fuel cell/microturbine hybrid system [.pdf], with a Capstone turbine generating electricity from the waste heat of a fuel cell.

Capstone finished 2008 with a year-end surge because of new rules which streamline the installation of microturbines in New York City, but could easily continue higher, if I am right about distributed generation taking off.  The new NYC guidelines could easily be one sign of the beginning of this trend.  On the other hand, I wouldn't be surprised to see a small price retreat in January.  It may be wise to wait a couple weeks and see what happens with CPST.

#4 Composite Technology Corp. (OTC BB:CPTC) $1.37

I first recommended CPTC last April in an article about how electricity transmission is essential for renewable energy on a large scale.  At the time I focused on how transmission helps even out the variability of wind power, but transmission is going to be if anything more essential to the development of Concentrating Solar Power (CSP).  While a 100x100 mile square of Southwest Desert theoretically receives enough sun to generate electricity for the entire US, and that electricity could meet both peaking and baseload needs with thermal storage, if the population centers in the East and California are to be served, it will require a massive transmission build out.  

I don't expect Southwest CSP to ever supply all our electricity needs, but I do expect that this abundant, storable electricity will start to be used for more than just the local needs of the desert Southwest within the next decade.  Even this much smaller vision will require a large upgrade to our transmission infrastructure, as will the growing penetration of wind as a percentage of utility resource bases.  CPTC's Aluminum Conductor Composite Core (ACCC) is gaining acceptance in China (which is building out its electric infrastructure much faster than we are building ours.)  I expect the US to follow (although just the China play could be enough to keep the stock rising.)  In the US, I see an opportunity for ACCC with utilities that want to move more power down existing rights of way.  Many utilities need to upgrade their transmission after decades of relative neglect, and the added demands of higher wind penetration and the possibility of long range transmission of CSP power only enhance this need.

Using ACCC instead of traditional (Aluminum Conductor Steel Reinforced) power cables allows the same line to carry higher currents (up to 2x as much) with less sagging in hot weather, and line losses are reduced by as much as a third under all conditions.  For high usage lines, a straight retrofit with ACCC can have good financial returns for a utility based solely on the lower line losses. 

CPTC also has a wind division, which like all turbine manufacturers should, in my opinion, be able to sell all the turbines they can build for the foreseeable future, which should greatly help CPTC with their ongoing operating cash flow as they ramp up production of their D8.2 turbines.  However, they are not profitable, and much of their turbine technology is assembled through patents licensed from other companies, and these revenues are vulnerable to a declining dollar and other foreign currency exchange risks.  CPTC will not become profitable in the near future, and will almost certainly have to return to the capital markets for additional capital.  If their products catch on, it should be easy for them to raise capital on favorable terms; if they don't, we can expect massive dilution.

In all, the "Risk Factors" section of their most recent annual report is long and many of the risks (including multiple lawsuits) are not trivial.  Perhaps the most serious risk is the United States' utility industry's resistance to change, which may lead to a complete unwillingness to use ACCC, despite its superior properties.  This is a big if, and I expect to long term inventors returns to be excellent if they persuade utilities to adopt their technology, and miserable if utilities stick to the way they have always done things.

Three more speculative picks available here.

DISCLOSURE: Tom Konrad and/or his clients have long positions in EEEI, FCEL, CPST, and CPTC.

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.

December 27, 2007

Ten Alternative Energy Speculations for 2008: LEDs and Ultracaps

Investing in Renewable Energy Stocks seldom fails to be exciting, although it can lead to crushing losses as well as mouthwatering gains (Think Ethanol stocks and Thin Film Solar in 2007.)  With this in mind, I usually emphasize that the majority of most investors portfolios should be targeted towards larger, profitable companies, especially those focused on Energy Efficiency rather than the more sexy Renewable Energy technologies.  This is the philosophy behind Alternative Energy Stocks' Blue Chip Portfolio: companies which aren't sexy, but which still are well positioned to take advantage of rising oil prices and increasing efforts to reduce and regulation of Greenhouse Gas Emissions.

That said, a small exposure to even extremely volatile stocks can, if kept small, improve the risk-return profile of a portfolios, so long as those stocks are not overly correlated to the portfolio as a whole. 

Other people just like to gamble.   Given the vertiginous returns we have seen in the alternative energy sector recently (First Solar, NYSE:FSLR is up by a factor of ten in 2007,) it's a safe bet that this Alternative Energy has drawn more than our share of gamblers.

This article is for the gamblers (and a little bit for the cautious diversifiers.)  If you're a gambler, these are the gambles I would be taking.  If you're a cautious diversifier, you can consider using a few of these bets as a way to diversify your portfolio of bonds and energy efficiency companies, just keep it small (no more than a few percent your portfolio.)

In either case, be prepared to have any of these bets go wildly wrong, or succeed well beyond your expectations.  

Some Educated Hunches

Many people who see themselves as cautious diversifiers like to set aside a small part of their portfolio as "play money," which they can use without their normal portfolio discipline, to invest in something that makes them feel good.  I feel this is the wrong approach.  Emotional investing is a sure-fire way to stack the odds against yourself.  Even in risky assets, there are good bets and bad ones.

Especially when it comes to highly risky and emotive companies, I'm a great believer in Behavioral Finance, the theory that investors make the same mistakes over and over again because of the way our emotions are wired.  Roughly, this means that we all tend to invest in the same stocks at the same time because it feels good to do so (which means we buy precisely when the price is irrationally high) and sell the same stocks precisely when they're screaming bargains.

My favorite gambles therefore are stocks I think have the potential to be tomorrows feel-good fad, that is currently being ignored.  I call this gambling because it has very little or nothing to do with the underlying fundamentals, an a lot more to do with wild emotional swings of the retail investor.  While it is gambling, it has more in common with card-counting, than with slot machines.

Ten Gambles for 2008

I personally am more a cautious diversifier than a gambler, but I do have some gambler in me.  All the speculations below are ones I am taking with my own money, and some of them are also positions in client portfolios.  I don't see this as play money, but at the same time, I know that any of these gambles cold turn against us unexpectedly, and I keep the positions accordingly small.  In reverse order of my guess at their riskiness, here is the first installment detailing ten bets I'm currently making, and which I expect to pay off as a whole in 2008 (although individual stocks will undoubtedly be losers.)

#10 and #9: Cree, Inc. (NasdaqGS:CREE) $23.50, and Lighting Science Group (LSGP.OB) $0.32.

[Note: Ticker has been changed to LSCG.OB with a 20 for 1 reverse stock split.]

I've been invested in both of these for a long time, and last wrote about these LED stocks in June.  I sold half the holdings of many of my managed accounts  soon after that article when CREE was around $27-$30, about double the price at which I'd bought them.  Smaller positions in Lighting Science Group have followed a similar pattern, mostly due to buyout speculation in LED stocks, with only modest gains over the last year as speculation has died down.

Yet the fundamental reasons to be bullish about LEDs are stronger than ever.  This Christmas season was the Season of LEDs in more ways than one.  In my personal experience, I went to Target on December 15 to get another string to add to the ones I'd bought last spring, and found that they were totally sold out (although conventional lights were well in stock.)  I left empty handed, but I expect that Philips (NYSE:PHG - another holding), will report LED sales well above expectations this quarter.

Also, while solar stocks may suffer with tax incentives removed from the recently signed Energy Bill, the bill did contain a "Ban the Bulb" provision, phasing out incandescent lights by 2014.  Lighting Science saw a 20% jump the day it was signed, but it's still way down from its highs last summer, and Cree didn't budge.  It's true that most incandescent bulbs will probably be replaced with CFLs, but LEDs work better in several sorts of applications: they are dimmable, work better at low temperatures (such as in freezers), and are more tolerant of vibration.  Thus, the new law provides a practically guaranteed, large market.

I'll be surprised if both these stocks don't see significant run-ups sometime in 2008, and Lighting Science could easily see one soon after the New Year, due to the publicity they'll be getting in Time Square on New Year's Eve.  Most likely, we'll have to wait a little longer than that, but even without a run-up or buyout, I see these two as good long-term bets.

For hard-core speculators, one LED penny stock that you might look at is Cyberlux (CYBL.OB.)  Cyberlux was brought to my attention by a reader the last time I wrote about LEDs.  I looked into it again last week, but decided not to invest because of the large overhang of convertible debt.  In my analysis, it will be virtually impossible for long-term shareholders to profit because of the expected dilution due to the convertibles.  That does not mean that short term traders might not make a killing (or lose their shirts.)  For more on Cyberlux, go to this message board (run by the reader who brought the stock to my attention.)  There's a lot of information there, although I don't know if its accurate.

#8 Maxwell Technologies (NasdaqGM: MXWL) $8.10

Maxwell is a developer of ultracapacitors, which are currently used in wind turbines, utility power quality applications, and other industrial applications.  Wind should continue to see strong growth throughout the world, which should continue to help turbine component suppliers.

They also have the potential to be an important component for energy storage in Hybrid Electric and Electric vehicles.  Maxwell has recently announced a partnership with China's Tianjin Lishen Battery to manufacture hybrid powerpacks, which will combine the speed, long cycle life, and low temperature performance of ultracapacitors with the large energy storage capacity of lithium-ion batteries.  Readers and anyone who has seen one of my presentations already knows that I see energy storage as the best way to take advantage of the adoption of hybrid, plug-in-hybrid and electric vehicles.

The downside here is that Maxwell is currently in a large patent-infringement suit with private ultracapacitor company NessCap.  I find patent-infringement suits to be very unpredictable.  Maxwell filed the initial complaint in October 2006, and NessCap countersued in December.  A large negative earnings surprise last June and subsequent analys