Alternative Energy Stocks

Solar Headwinds, Part I

Thu, 11 Mar 2010 10:27:08 -0500

How Solar PV is like Ethanol

Tom Konrad, CFA

High levels of competition in the the solar photovoltaic (PV) industry mean that buy-and-hold investors should look elsewhere.

In May 2007, I published a competitive analysis of the corn Ethanol industry based on Michael Porter's classic Five Competitive Forces model. At the time, Ethanol stocks were flying high, but my conclusion was that "the prospective ethanol investor should be very careful about investing in corn ethanol producers at random." If anything, I understated the case.

This chart shows three ethanol stocks that have survived since 2007. As survivors, they are among the best performers in the industry; several others declared bankruptcy.

Corn ethanol is not a great business to be in; it's too competitive. If you buy assets at the right price, you can do well, but it's all about timing. A passive buy-and-hold strategy will under-perform the same type of strategy in a less competitive industry. Companies in less competitive industries can maintain higher returns on capital for longer periods.

Solar Manufacturers

It's not a secret that I'm no fan of investing in solar stocks, although I understand why enthusiasts are seduced by the sector. Unlike corn ethanol, solar PV will likely be a significant part of any future sustainable energy mix, but that is not the same thing as saying that today's solar stocks will be good long-term investments. Americans watch more television today than ever before, but were network television stations a good investment over the last 20 years? No, because new entrants came in and stole their audience: the industry has become much more competitive than it was 20 years ago.

Thinking that todays solar stocks will do poorly over the long term is not the same as thinking that the solar industry will flop. Rather, it is the belief that increased competition will drive down returns at existing companies. This will be great for buyers of PV panels, but not so great for owners of PV stocks.

Porter's five competitive forces model of competion bears this out, just as it did when I analyzed the corn Ethaonol Industry in 2007. The next article in this series will take a look at the five forces, and how they apply to solar PV manufacturers.

DISCLOSURE: None.

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.

Vehicle Electrification – a Bird in the Hand

Tue, 09 Mar 2010 10:49:34 -0500

John Petersen

Since I'm frequently chastised for holding old fashioned views when it comes to vehicle electrification, I'll start this article by quoting one of the oldest known versions of a common English proverb, "A byrd in hand - is worth ten flye at large." While this theme is not always clear in my writing, it's never far from my thoughts. In fact it's the foundation of my conviction that manufacturers of cheap energy storage products are better investments than developers of cool energy storage products and batteries are great at minimizing waste but miserable at replacing fuel tanks. Just for this week, I'm going to take the debate down a notch and focus on what I see as a bird in the hand in the energy storage sector.

I've written about new European standards that will require automakers to reduce CO2 tailpipe emissions to 130 g/km by 2015. I've also written about new U.S. CAFE standards that will require automakers to achieve an average fuel economy of 35.5 mpg by 2016. While I've never written about the rest of the world, many governments are jumping on the bandwagon and adopting emission standards based on the European model. The following chart from Tenneco (TEN), a global leader in automotive fuel efficiency and emission control systems, provides a summary overview of the current global regulatory landscape.

For the last couple of years, a huge amount of hype and media attention has focused on a new generation of plug-in vehicles that automakers plan to introduce soon. What these stories invariably fail to recognize is that one or two million plug-in cars may contribute to the cause, but the overwhelming bulk of the progress must come from efficiency gains in the 48 million cars that can't be built with plugs because the world can't make enough batteries. From my admittedly stodgy perspective, the 48 million cars are a plump bird in the hand while one or two million plug-ins are, at best, wild geese on the wing.

In mid-February, I wrote an article, Exploring Energy Efficiency in the Automotive Sector, that included the following summary table of efficiency technologies for cars without plugs:

	Efficiency
Hybrid Electric Technologies	Gain
Prius-class strong hybrids with idle elimination, electric-only launch, recuperative braking and acceleration boost.	40%
Insight-class mild hybrids with idle elimination, recuperative braking and acceleration boost.	20%
Engine Technologies
Direct Fuel Injection (with turbocharging or supercharging) delivers higher performance with lower fuel consumption.	11-13%
Integrated Starter/Generator Systems (e.g. stop-start systems) automatically turn the engine on/off when the vehicle is stopped to reduce fuel consumed during idling.	8%
Cylinder Deactivation saves fuel by deactivating cylinders when they are not needed.	7.5%
Turbochargers & Superchargers increase engine power, allowing manufacturers to downsize engines without sacrificing performance or to increase performance without lowering fuel economy.	7.5%
Variable Valve Timing & Lift improve engine efficiency by optimizing the flow of fuel & air into the engine for various engine speeds.	5%
Transmission Technologies
Automated Manual Transmissions combine the efficiency of manual transmissions with the convenience of automatics (gears shift automatically).	7%
Continuously Variable Transmissions have an infinite number of "gears", providing seamless acceleration and improved fuel economy.	6%

While all these efficiency technologies are important, the only ones I'm qualified to write about are stop-start systems, mild hybrids and full hybrids.

In a presentation at last fall's IAA Investor & Analyst Conference at the Frankfurt Motor Show, Dr. Wolfgang Bernhart of Roland Berger Strategy Consultants predicted that automotive powertrain electrification would become a critical efficiency technology by 2020 and forecast high scenario market penetration rates as follows:

	ICE	Stop-start	HEV	Plug-in
Western Europe	6%	67%	7%	20%
United States	23%	51%	13%	13%
Japan	17%	60%	15%	8%
China	48%	30%	6%	16%

While some may find the distribution surprising, it actually fits nicely into the concept of the standard bell shaped curve that we all learned about in grade school when report card time rolled around. A few buyers will underperform and continue to buy vehicles with internal combustion engines; most average and above average buyers will buy vehicles with stop-start and HEV systems; and a few truly committed souls will buy vehicles with plugs. As an investor looking to minimize risk, I prefer mass-market certainty to early adopter potential.

The biggest impediment to the widespread adoption of stop-start systems is that stopping and restarting an engine several times during a typical daily commute is very hard on flooded lead-acid starter batteries. While stop-start systems don't need an exotic chemistry like NiMH or Li-ion, they do need a better grade of absorbed glass mat, or AGM, battery that can withstand heavier cycling. Where automotive OEMs have historically paid about $55 each for starter batteries, advanced batteries for stop-start applications can cost from $150 to $250 each. The price difference may be pocket change in the price of a car but it's a huge revenue opportunity for the companies that can make starter batteries for millions of stop-start vehicles.

Building top line revenue in any business is hard and the only ways I know are to sell more products or to sell higher value products. The same is true of bottom line profitability where the only options are to improve margins or cut costs. A business that can build revenue by increasing unit prices and simultaneously increase profits by selling at a higher margin is rare, but that's the direction the lead-acid sector is heading in. Assuming a modest price differential of $100 per vehicle, the incremental revenue to starter battery producers should be on the order of a billion dollars within five years and three billion dollars within ten years. Since the revenues will come from product upgrades rather than increased volumes, the stresses on capital spending budgets, supply chains and distribution networks should be significantly lower than they would be with a new product. The net result should be higher revenues and profits, which are always good things for low-priced stocks.

No matter how the stop-start market ultimately unfolds, starter battery manufacturers will thrive. If the OEMs bite the bullet and buy better starter batteries, revenues from original equipment sales will soar. If OEMs don't upgrade their starter battery specifications when they introduce stop-start systems, revenues from replacement battery sales will soar. It's just an updated version of the old Fram Oil Filter advertising campaign, "You can pay me now, or pay me later."

The three publicly traded U.S. companies that stand to benefit most from the widespread implementation of stop-start systems are Johnson Controls (JCI) Exide Technologies (XIDE) and Axion Power International (AXPW.OB).

JCI and Exide are global competitors in the OEM battery space and they each book billions in annual revenue from the starter battery business. JCI's Varta unit is selling batteries for over a million stop-start vehicles annually. Exide is using the proceeds of a $34 million DOE battery-manufacturing grant it received last August to build a new factory that will make batteries for up to 1.5 million stop-start vehicles per year. Both companies truly are bird in the hand investment opportunities that are certain to see significant revenue and profit growth over the next few years from market mechanisms that are already in place.

Axion is a more speculative microcap company that spent the last six years developing a lead-carbon battery technology that's ideally suited to the extreme cycling demands of stop-start systems. During the R&D stage, Axion's prototype PbC® batteries withstood over 1,600 cycles at a 90% depth of discharge while top quality AGM batteries made by others failed after 300 to 500 cycles. After entering into a worldwide supply agreement with Exide last April, the two companies sent pre-commercial PbC devices to several first tier automakers early last summer. Ten months later, the testing continues to yield positive results and negotiations are apparently in process for road testing of PbC batteries in pre-production stop-start vehicles. If the testing turns into orders, Axion will be able to leverage Exide's global manufacturing base by providing carbon electrode assemblies for co-branded products. It's not quite a bird in the hand, but it's a lot closer than the flock of wild geese.

I'm a former director of Axion and a big stockholder, so I'm clearly cheering for my home team. That being said I know several of Axion's directors well enough to feel confident that they wouldn't have closed a $26 million down-round financing in December if management wasn't preparing for a major capital spending program. I expect that we'll hear a good deal more about Axion's short-term plans when its annual report is filed at the end of the month. The one thing I can say for certain is that I feel much better about my risk/reward profile today than I did in October 2006 when I bought the bulk of my shares at a price that's within spitting distance of the current market.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a substantial long position in its stock, together with a small long position in Exide Technologies (XIDE).

Green Energy Investing For Beginners: How Many Stocks Should You Own?

Mon, 08 Mar 2010 16:38:10 -0500

Tom Konrad, CFA

In stock portfolios, deciding how many stocks to own involves weighing a trade off. A smaller portfolio can be built (and sold) with fewer commissions, and also requires less time to research. On the other hand, a portfolio with fewer stocks will gain fewer benefits of diversification, and likely be both more volatile and harder to sell in a crisis. These trade offs are also affected by the size of the portfolio, and the market capitalization and liquidity of the companies in the portfolio.

Diversification is widely accepted as a nearly costless way to reduce the risk of a portfolio. Diversification averages out the idiosyncratic risk that arises from unexpected events at particular companies, but it does nothing to remove market risk. When the market falls, nearly all stocks fall with it. The benefits of diversification from each new stock added to a portfolio are smaller than the diversification benefits of the prior one, but the costs of adding each new stock are nearly constant: transaction costs, and the cost of your time to do the research you need to decide this is the stock you want.

Most investors try to get the best of both worlds by buying mutual funds or exchange traded funds. I discussed the relative merits of these approaches in Part I of this series on Green Investing for Beginners. Green energy mutual funds are substantially more expensive than either green energy Exchange Traded Funds (ETFs) or stocks. The ETFs are much better than the mutual funds when it comes to costs, but brokerage commissions have fallen so low that stocks often have lower costs after just a few years.

Hence, the only good justification for buying a green energy mutual fund is because you believe the manager has superior skill, and the only good justification for buying a green energy ETF is simple diversification.

Where Mutual Fund Investors Go Wrong

If you are going to buy a mutual fund because you believe the manager possesses superior skill, you should buy just one. Countless studies have shown that the average actively managed mutual fund under-performs the similar index fund, and determining if a manager's track record is due to skill or luck is so statistically difficult that the only thing nearly everyone can agree on is that "past performance is not a reliable guide to future results." And, after they agree on that, most people go right back to studying past performance... because it's the only apparent indicator of a manager's skill that is easily quantifiable. Numbers make us feel like we know something, even if they are the result of completely random processes.

To make matters worse, most green mutual fund investors I have talked with about their holdings own small stakes in several mutual funds, so their money is being managed (very expensively) by the chronically-underperfoming "average manager." This is clearly taking diversification a couple steps too far.

Where ETF Investors go Wrong

In contrast, investors in green energy ETFs know that they cannot discern investment manager's skill, and so they opt for passively managed ETFs instead of the actively managed green energy mutual funds. (There are not yet any green energy index mutual funds I'm aware of.) Using ETFs is a much more internally consistent approach, and makes sense, especially in small portfolios where the investor does not want to take the time to research individual stocks. The problem with this approach is that the green energy sector is still very immature, and the indexes are dominated by growth companies with little or no earnings. In such an immature sector, the largest market capitalization firms (which dominate the ETFs) are not necessarily the most successful businesses. Rather, they are the companies which have caught investors' attention: the flavor of the moment. Buying and selling such companies may make sense for a speculator, but is probably not the best approach for a small investor who wants to invest money that will grow with the green economy.

When You've Eliminated Everything Else...

In short, investors in green energy mutual funds almost always under-perform, and investors in green energy stocks subject themselves to excessive volatility, the very thing that diversification was meant to protect against. That makes the best strategy in my mind to build a portfolio of green energy stocks that are not the minimally profitable or unprofitable flavors-of-the-moment that dominate ETF portfolios, but are instead profitable companies doing green work that has not yet caught investors' imagination. In Part IV, I discussed the green energy sectors where profitable but untrendy companies are most likely to be found, and at the end of last year I gave you a list of ten such stocks to consider.

But is ten stocks really the right number for a green energy portfolio? There's no reason to think so, since the number owes more to David Letterman than to financial theory.

How many stocks is the right number? The answer depends on the market capitalization and liquidity of the stocks in question.

Liquidity and Return Volatility

I decided to write this article after reading Has the U.S. Stock Market Become More Vulnerable over Time?, by Avraham Kamara, Xiaoxia Lou, and Ronnie Sadka in Financial Analysts Journal. The article looks at the trends over time for systematic risk (the tendency of stocks to move in the same direction as the market) and systematic liquidity risk (the tendency for the liquidity of all stocks to dry up or increase in a correlated fashion.)

This chart shows how excess liquidity volatility, and excess return volatility of equal-weighted portfolios of small and large companies have changed over time. Here, "small companies" are those with market capitalization in the lowest 20% of the researchers' sample, and "large companies" are the 20% with the highest market capitalizations.

The clear trend over time is for portfolios of small companies to have lower excess volatility, while portfolios of large companies have mostly higher excess volatility. The authors hypothesize that this trend is the result of greater institutional dominance of the markets, especially in the form of ETFs, other index funds and basket trading. These institutions have predictable and correlated trading patterns that create greater correlation in both liquidity and return among the stocks they trade. Since most indexes are dominated by large companies, these have seen the greatest increase in correlation. Meanwhile, small companies have become less correlated with the market as a whole.

Given that the trend towards greater indexing has continued since 1985 and has not yet reversed itself, I think it is likely that the trends shown have continued. If this guess is correct, then excess volatility for portfolios of small stocks in 2010 will fall somewhere below the dotted lines, while excess liquidity for portfolios of large stocks will be mostly above the dashed lines, except for small portfolios (less than 20 stocks) of large companies.

According to these charts, portfolios of large companies rapidly reach a point of diminishing returns, at around 10 stocks for return volatility, and 25 stocks for liquidity volatility. Small companies continue or show benefits of added diversification for the largest portfolios shown, and these portfolios become less volatile than the market as a whole (i.e. achieve negative excess volatility) when they contain more than 33 companies.

An Ideal Green Portfolio

Even for a full-time market watcher like myself, I find it impossible to keep track of more than 20 to 30 companies at one time. For part-time investors, I expect the maximum is no more than 5 or 10 companies. Yet even 30 companies is too few to gain the full benefits of diversification available with portfolios of small companies.

One solution is to meld indexing with a small portfolio of actively managed small companies. The index fund (either an index mutual fund or ETF) should provide similar volatility reduction as a portfolio of about 25 stocks. If we combine the index fund with a our individual companies so that the investment in the index fund is 20-30 times the investment in each of the individual stocks, we should have a less volatile portfolio than if we had invested in the index fund alone, something which we probably would not be able to acheive without the individual small stocks.

I've shown three examples below, with five, ten, and twenty small stocks. Note that the amount invested in any one stock falls as you add more stocks, but the total proportion invested in stocks rather than the index fund increases.

This method should always be superior to using the index fund alone in order to reduce volatility because of the greater diversification benefits of small stocks compared to the ones used in index funds.

This type of portfolio also works well if you only want to devote part of your portfolio to clean energy. The index fund could be a mix of a Renewable Energy ETF and a general market index fund. The research suggests that the best choice for a general market index fund would be one that focuses on small stocks, such as IWC or FDM. You could then adjust your exposure to clean energy by changing the proportions of the index funds in the portfolio.

Earlier parts of this series, Green Energy Investing for Beginners, provide ideas about how to select the individual companies in your portfolio and and other aspects of green energy investing.

Beyond Beginners

Note that this is a long-only stock portfolio. I personally combine my long positions in green energy with short positions and option hedges against broad market indexes and non-green companies. In this framework, the shorts and option hedges on index funds would slot in to the index fund portion of the portfolio, while the options in individual non-green companies would fit into the individual stock portion of the portfolio. Allocations to bond funds and other asset classes may also make sense in the "index fund" part of the portfolio if they are baskets of securities, while they should go into the individual stock part of the portfolio if they are securities of a single issuer.

DISCLOSURE: None.

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.

Will Surging Smart Grid Investments Result in Surging Electric Prices?

Sat, 06 Mar 2010 14:19:30 -0500

John Petersen

The electric power system in the U.S. is dirty, antiquated, stupid, unstable, and a security nightmare. After years of discussion and debate, consensus now holds that the generation, transmission and distribution infrastructure will need hundreds of billions in new investment to reduce emissions, improve reliability, minimize waste and inefficiency, improve security, and facilitate the integration of wind, solar and other emerging alternative energy technologies. Commonly cited capital spending estimates range from $200 billion globally by 2015 to $2 trillion overall. In his November 2008 report, "The Sixth Industrial Revolution: The Coming of Cleantech," Merrill Lynch strategist Steven Millunovich observed that cleantech markets will dwarf IT to the tune of two orders of magnitude. While there's plenty of room to debate how the future will unfold, there's little question that we're watching the emergence of an investment mega-trend that will endure for decades.

The elephant in the living room is that while some smart grid spending will be recovered through increased efficiency, consumers will ultimately pay for any excess costs in the form of higher electric bills.

In the early release overview for its 2010 Annual Energy Outlook, the Energy Information Administration forecast that over the next 25 years, the constant dollar costs price per million BTUs of energy would change as follows:

	2009	2035	Price	Percent
	Price	Price	Change	Change
Crude Oil	$10.24	$23.04	$12.80	125.0%
Natural Gas	$3.24	$7.84	$4.60	142.0%
Coal	$1.56	$1.44	-$0.12	-7.7%
Electricity	$28.07	$29.87	$1.80	6.4%

To put these seemingly benign price forecasts into historical context, I prepared the following graph to show what happened to constant dollar energy costs over the last 17 years expressed as a percentage of their April 1993 values.

When I look at the historical trend-lines and factor in what I know about the energy industry and global economics, my sense is that:

The estimate for crude oil prices is too low given likely economic development in Asia and elsewhere;
The estimate for natural gas prices is too high given the recent emergence of shale gas as a resource; and
The estimates for coal and electricity prices must assume continuation of the status quo into the indefinite future.

When I consider the costs of alternative energy from wind and solar, the storage required to make these inherently variable alternative resources stable, the carbon mitigation requirements that will almost certainly be imposed on the coal mining and electric power industries, initiatives to move transportation from fossil fuels to electricity, and the huge amounts of capital spending required for the transition to a smart grid, the only conclusion I can reach is that electricity prices will have to climb and the increase is likely to be dramatic, particularly in the early years of a smart-grid build out. I don't have the skills required to forecast the probable magnitude of the coming price escalations, but I don't believe for a second that a flat line on the price graph is either a possible long-term outcome or a rational expectation. In short, there is no free lunch.

Every industrial revolution in history has been driven by new technologies that proved their ability to do more beneficial work with fewer economic inputs. The fundamental dynamic will be no different in cleantech, however the need will be even more pressing as global demand for energy, along with water, food and every commodity you can imagine, continues to skyrocket. My friend and colleague Jack Lifton is fond of reminding readers that the "Green Road to a sustainable energy future begins in the black earth." We truly can't have a secure energy future without a security in raw materials supplies, which is why I'm an unrelenting critic of ideologically appealing but resource foolish notions like plug-in vehicles that promise to do less beneficial work while requiring far greater economic inputs. It's all about getting the energy we need at the lowest possible price. But discussing energy options without carefully considering the natural resource constraints for proposed solutions is a non-starter.

Many of the adjustments we'll be forced to make in coming decades will be quite painful, but the world has already moved on while we were paying attention to other things. I'm a firm believer that energy storage is a critical enabling technology for our energy future, but unless and until storage is cheaper than waste, the potential benefits of storage will remain unrealized. This truly is a sector where price is the only thing that matters and the technology that does the required work for the cheapest price will win the lion's share of the potential market.

Disclosure: No companies mentioned.

2010: The Year of the Strong Grid? Part VI: Will the Real Strong Grid Companies Please Stand Up?

Thu, 04 Mar 2010 16:06:41 -0500

Tom Konrad, CFA

For clean electricity to flourish, the electric grid needs not only to be smarter, but more robust. This is where my strong grid stocks come in. But stringing wires for power is a lot like stringing wires for telecommunications as well a large number of other businesses which do not have much to do with the energy trends I hope will boost the long term prospect of these companies. Knowing how much these companies earn from grid infrastructure helps predict how much they will benefit from the trend.

Unlike many of the financial statistics I've been looking at in this series, companies have a great deal of leeway in defining their operating segments. Not a single company I looked at has a electric grid infrastructure segment, let alone a "strong grid" segment. Hence the numbers presented in the following table are subjective, based on my judgment as to what constitutes grid or clean energy related activity.

The information on which I've based these judgment calls often comes from investor presentations, many of which tend to include a slide on business segments. When I was unable to find a suitable investor presentation, I looked at a company's most recent annual report, where segment data is often included in the notes to the financial statements.

In terms of what constitutes grid infrastructure, I attempted to exclude any non-electrical wiring, as well as any electrical work inside buildings. I made other judgement calls along the way, especially when I had to determine how much of a specific segment to attribute to grid infrastructure. I made a note "unhelpful segmant data" when I felt my guesses were particularly questionable.

That said, here are my guesstimates:

Company	% Grid Infrastructure	Notes
ABB, Ltd (ABB)	30-60%	Unhelpful segment data
American Superconductor (AMSC)	10-20%	Mostly a wind company (for now)
AZZ Incorporated (AZZ)	50-60%	Strong Grid Part III AZZ & EME
General Cable (BGC)	55-65%	Strong Grid Part IV: BGC
Hubbell, Inc (HUB-B)	20-30%	Strong Grid Part V: HUB-A & HUB-B
Jinpan International (JST)	40-70%	Unhelpful segment data
MasTec (MTZ)	20-30%	Plans to grow grid segment
MYR Group (MTRG)	65-75%
Pike Electric (PIKE)	90-100%	The closest to a "Pure Play"
Quanta Services (PWR)	50-60%
Siemens (SI)	10-20%	Unhelpful segment data
Valmont Industries (VMT)	20-30%
WESCO International (WCC)	10-20%

DISCLOSURE: Long BGC.

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.

What’s the Stock Play in Wake of the Over-hyped Story About Fuel Cell Developer Bloom Energy?

Wed, 03 Mar 2010 09:25:08 -0500

Bill Paul

Having been a Wall Street Journal energy and environment reporter, one of the first experts I would have called before running a story on privately-held solid oxide fuel cell (SOFC) developer Bloom Energy would have been Neal Dikeman, who in addition to being a prominent alternative energy investor and the writer of an authoritative blog on clean technology, was involved in developing a fuel cell company.

But as Dikeman posted lasted week – Saving Cleantech: Bloom town Silicon Valley? – he didn’t get a call from the folks at CBS’s 60 Minutes, so the raft of legitimate technical questions Dikeman raised in his column went unanswered even as breathless 60 Minutes correspondent Lesley Stahl all-but-declared the energy crisis over thanks to Bloom.

To its credit, CBS did include an interview with a Bloom skeptic; however, he was more-or-less a prop inserted to make the story look balanced. If you read Dikeman’s list of unanswered technical questions surrounding Bloom’s technology, you realize that CBS never should have aired this piece in the first place, at least not without a lot more on-camera independent expert testimony.

But if Bloom Energy is over-hyped, investors might want to look closer at two fuel cell companies Dikeman says “are arguably shipping commercial product today,” FuelCell Energy (Symbol FCEL) and SFC Smart Fuel Cell. (Symbol SSMFF).

In announcing last week that it was initiating coverage on FuelCell Energy, Liberty Analytics noted that the company is the “world leader in the development and production of stationary fuel cells for commercial, industrial, municipal and utility customers,” and that its direct fuel cells (DFC) are generating power at over 55 locations worldwide.

Although still in the red, FuelCell Energy recently hired a seasoned senior executive in a bid to accelerate market penetration. The company is scheduled to announce its first-quarter results on March 10.

Smart Fuel is a German company that EnergyTechStocks.com has previously suggested investors might want to look at more closely. While also still in he red, the company’s losses have been narrowing significantly. The company describes itself as the market leader in fuel cell technologies for mobile and off-grid power applications serving leisure, industrial and military markets. Importantly, the company, in partnership with DuPont (Symbol DD), recently got a glowing review from the U.S. Defense Department for its lightweight power packs that soldiers can use in the field. DOD said the power pack “could offer a significant advancement in the area of soldier portable power in the field. (For more see From Small Fries to Big Shots? CBD Energy and SFC Smart Fuel Cell Look Promising.)

DISCLOSURE: No position.

DISCLAIMER: This is a news article. Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

How Aggregation Will Destroy Niche Markets for Smart Grid Energy Storage

Tue, 02 Mar 2010 11:42:38 -0500

John Petersen

Last week I introduced a new study titled "Energy Storage for the Electricity Grid: Benefits and Potential Market Assessment" that was commissioned by the DOE's Energy Storage Systems Program, identified seventeen discrete storage applications for the electricity grid, discussed the technical requirements of each application and summarized the potential economic benefits.

If the Yahoo! message boards are any indication, investors are already jumping to inaccurate and wildly optimistic conclusions because they don't understand that many storage applications are synergistic and every storage system purchaser will try to maximize the value of its investment by capturing as many value streams as possible. The process is called "aggregation" and while it will speed the implementation of storage on the smart-grid, it will ultimately destroy the high value niche markets for frequency regulation, short-duration wind integration, electric service reliability and similar ancillary services.

To truly understand the issues, investors need to stop looking at individual trees and focus instead on the forest.

One of the biggest challenges facing developers of grid-based energy storage systems is that electricity is cheap and abundant, and storage can be incredibly expensive. As a result, most of the grid-based applications identified in the new DOE study are not attractive as stand-alone value propositions. In the following table, the applications highlighted in blue make economic sense today as stand-alone value propositions. Conversely, the applications highlighted in yellow won't generally work unless a particular installation can capture and monetize several value streams. As utilities and other users begin installing significant storage capacity and aggregating value streams to maximize their returns, total system capacity will rapidly outrun demand for niche services, thereby eliminating the value premium. Over the long-term, the economics of grid-based storage will obey the laws of economic gravity. The only companies that will survive, much less thrive, are manufacturers of cheap, durable and dependable energy storage systems that can do the required work at the lowest cost.

A prime example of the prevailing "can't see the forest for the trees syndrome" is the wildly over-hyped idea that we can use plug-in vehicles to provide ancillary services while they're connected to a charging station. The silly values floating around for vehicle to grid, or V2G, services are all based on the theory that EV batteries can be used for frequency regulation and other high value ancillary services. While the theory sounds wonderful in the telling, the fundamental premise is fatally flawed and the promised benefits to plug-in vehicle owners will never be realized because they violate the law of supply and demand. The easiest way to demonstrate the point is with an example.

At last year's EESAT conference in Seattle, a representative of the PJM Interconnect estimated that total national demand for frequency regulation was on the order of 6,000 MW. Storage companies that are actively pursuing opportunities in frequency regulation include Beacon Power (BCON), Altair Nanotechnologies (ALTI) and A123 Systems (AONE). In general the battery companies that are working on fast response products claim their systems can provide two to four MW of frequency regulation service for each MWh of battery capacity. Beacon is claiming a 20-year life for its flywheel systems. Demonstration projects are currently under way to determine whether these performance claims will withstand the tests of time and intensive use. For purposes of this example I will assume that all systems perform up to expectations.

President Obama has established a policy goal of one million plug-in vehicles on the road by 2015. If that goal is reached and the average plug-in vehicle is equipped with 20 kWh of batteries, a figure that's mid-way between the GM Volt and the Nissan Leaf, then the total battery power available for V2G services will be roughly 20,000 MWh and the aggregate amount of frequency regulation those batteries could theoretically provide would be somewhere between 40,000 MW and 80,000 MW.

It doesn't take a PhD economist to know that if sellers try to force 40,000 to 80,000 MW of supply into a 6,000 MW national frequency regulation market, prices will collapse. Similar issues exist across the entire spectrum of grid storage applications.

In a 2007 "Guide to Estimating Benefits and Market Potential for Electricity Storage in New York" that was commissioned by the New York State Energy Research and Development Authority, Mr. Eyer and his colleagues identified and evaluated a number of potential synergies between different grid-based storage applications and concluded that users would need to carefully consider the potential value of the following complimentary uses when planning a new grid-based storage installation.

Electric energy time shift	Transmission and distribution (T&D) upgrade deferral; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.
Electric supply capacity	T&D upgrade deferral; Transmission support; Electric service reliability; Electric service power quality; and Electric supply reserve capacity.
Reduce transmission capacity requirements	Electric energy time shift; T&D upgrade deferral; Electric service reliability; Electric service power quality; Transmission support; and Ancillary services.
Transmission congestion relief	Electric energy time shift; T&D upgrade deferral; Electric service reliability; Electric service power quality; Transmission support; and Ancillary services.
T&D upgrade deferral	Electric energy time shift; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.
Operating reserves	Voltage support; Electric service reliability and Electric service power quality.
Regulation and frequency response	Limited.
Electric service reliability	Electric service power quality and Demand charge management.
Electric service power quality	Electric service reliability and Demand charge management.
Demand charge management	Electric service reliability and Electric service power quality.
Time-of-use energy cost management	Limited.
Renewables energy time shift	Generation capacity deferral; T&D upgrade deferral; Transmission congestion relief; Electric service reliability; Electric service power quality; and Ancillary services.
Renewables capacity firming	Electric service power quality; Electric energy time shift; T&D upgrade deferral; and Transmission congestion relief.

The point of the foregoing is not to pick winners and losers in the emerging market for grid-based storage solutions. Rather my goal is to highlight the immense differences between demonstration projects that establish whether a particular storage device can meet the technical requirements of a specific application and a detailed cost-benefit analysis that establishes whether a particular storage system will be cost effective for a particular user. As the market unfolds, I expect many demonstration projects to be impressive technical successes. Most of those technical successes, however, will be dismal economic failures because the cost of the storage system will be far too high for widespread implementation by potential users. The utilities all understand they can't buy a service for dime, sell it for a nickel and make it up on volume.

In a July 2008 report on its Solar Energy Grid Integration Systems–Energy Storage (SEGIS-ES) program, Sandia National Laboratories provided a summary table of current and projected capital costs for grid-quality manufactured energy storage systems. While commenters often criticize this table for conflicting with more the optimistic numbers that appear in corporate presentations and the mainstream media, I tend to believe Government studies are more reliable than public relations.

When I compare the capital cost figures in the SEGIS-ES table with the economic benefit per kWh values that I derived from the new DOE report on grid-based storage applications, the only companies I see that are within reasonable striking distance of a 10-year product life and a capital cost that compares favorably with the economic values are:

Enersys (ENS), a leading manufacturer of lead-acid batteries for commercial and industrial applications;
C&D Technologies (CHP), a leading manufacturer of lead-acid batteries for uninterruptible power systems;
Active Power (ACPW), an established manufacturer of flywheel-based uninterruptible power systems;
ZBB Energy (ZBB), which is scaling up manufacturing of a zinc-bromine flow battery system; and
Axion Power International (AXPW.OB), which is preparing to begin commercial production of its PbC line of asymmetric lead-carbon supercapacitors in cooperation with Exide Technologies (XIDE).

All of the other systems that I'm aware of suffer from crushing raw materials or capital cost constraints. I understand that every storage system developer is actively pursuing research and development programs that may significantly reduce costs at some future date. Unfortunately, experience has taught me that it's unwise to count chickens before they hatch and hope is not an investment strategy.

The grid-based energy storage sector is in its infancy and there is no reasonable way for an average investor to learn enough to pick individual stocks with any level of confidence. While I'm a stock picker when it comes to my personal holdings, I believe that a balanced portfolio of established and emerging energy storage companies is the only rational way for non-professionals to invest in the sector. Disproportionate investments in individual companies should be avoided unless you're prepared to do a whole lot of investigation and analysis.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and holds a substantial long position in its stock. He also has small long positions in Enersys (ENS), Exide Technologies (XIDE), C&D Technologies (CHP), ZBB Energy (ZBB) and Active Power (ACPW).

California Legislature to Consider Storage Portfolio Standards

Mon, 01 Mar 2010 15:05:51 -0500

John Petersen

The California Energy Storage Alliance just issued a press release that describes new legislation to require utilities to incorporate energy storage in their distribution networks. The rules will mandate storage equal to 2.25% of daytime peak power by 2014 and 5% of daytime peak power by 2020. The press release is available here.

A quick check of the California ISO website forecasts a peak load of approximately 29,000 MW for tomorrow. If one assumes an average peak demand of 30,000 MW, a 2.25% storage penetration would require an annual storage build of 135 MW per year in each of the next five years.

Using the average values reported in the Energy Storage for the Electricity Grid: Benefits and Potential Market Assessment report that I introduced last week, the incremental revenue to storage manufacturers from the sale of grid-scale storage systems in California would be worth roughly $200 million per year.

If the legislation is passed by the legislature and signed into law, the new storage portfolio standards will be great kick-off for the storage sector.

Disclosure: No companies mentioned

2010: The Year of the Strong Grid? Part V: Hubbell Inc.

Sun, 28 Feb 2010 12:35:58 -0500

Tom Konrad, CFA

Hubbell Inc. (HUB-B) is a strong grid stock that also has strong financials, signaled by a recent dividend increase.

I came across Hubbell Inc. (HUB-B) when researching General Cable (BGC) for my recent article on the company. Just one more example of when you start researching a sector, (in this case electrical transmission and distribution, or "strong grid") you never know what new companies you may find.

Hubbell is a diversified electrical supplier, serving electric utility, residential, commercial, and industrial markets worldwide. About a quarter (26%) of its revenue comes from the "Power Systems" segment, which is roughly what I am focusing on in this series on the "Strong Grid." I previously rejected EMCORE Group (EME) because it only has about 20% of its revenues from the strong grid, so the reader might reasonably ask, "What's so much better about Hubbell?"

The main advantage is that Hubbell's other divisions have exposure to the Smart Grid, and Energy Efficient lighting, which means that my best guess of the company's overall exposure to my favorite clean energy sectors is somewhere around 50%. Emcore also had some exposure to these sectors (it is a diversified mechanical and electrical construction group), but probably not so much.

The Dividend Increase

And then there's the dividend increase. As a value-oriented investor, I love dividends. I'm especially fond of companies that keep increasing their dividends. Dividends signal that management is confident about the solidity of their revenues going forward, and they are also a valuable source of return in the low-growth (or even no-growth) environment I'm expecting to prevail in coming years. The new quarterly dividend payment of $0.36 per share (vs. $0.35 previously) equates to a 3% dividend yield at $48 per share. Three percent is not much by historical standards, but it's pretty good in current markets.

The company's growth strategy is also one of acquisitions. With companies still finding it difficult to raise funds, companies like Hubbell that can fund acquisitions directly from their balance sheet are in a good position to scoop up bargains, and the company's long experience with such acquisitions gives us some assurance that they will be able to integrate the acquired companies successfully.

Share Structure
Both Hubbell class A (HUB-A) and class B (HUB-B) shares are traded on the NYSE, with B shares having much higher volume, and class A shares trading at a slight discount to B shares. Class A shares have 20 times the voting rights of class B shares, but only have about 1/100 of the trading volume. A long term, small investor would probably be better off holding A shares to take advantage of the discount (and the voting rights) but larger investors and traders will gravitate towards the B shares.

Valuation
On the other hand, despite the solid balance sheet and cash flow, the company is trading at too high a Price/Earnings ratio (15) for me to consider buying in what I expect to be a down market in 2010. But if the market decline I expect materializes, that high-ish P/E will give Hubbell some room to fall. If a market decline brings Hubbell into the mid-to-low 30's, I'll have my finger on the "buy" button.

Selected data as of 2-21-2010:

Stock Price (HUB-B/HUB-A)	$47.48/$46.67
P/E (trailing 12 month, HUB-B/HUB-A)	15.17/14.91
Cash per share	$4.41
Months to pay off net debt from cash flow	7 months
Current Ratio	2.2
Dividend yield (HUB-B/HUB-A)	3.03%/3.08%
Revenues from "Strong Grid"	26%
Revenues from Clean Energy and supporting sectors	roughly 50%
3 month average volume (HUB-B/HUB-A)	214,000 / 2,100

Grid-Based Energy Storage; A $200 Billion Opportunity

Fri, 26 Feb 2010 05:43:19 -0500

John Petersen

Yesterday a reader sent me a copy of an exhaustive new study titled "Energy Storage for the Electricity Grid: Benefits and Market Potential Assessment Guide" that was commissioned by the DOE's Energy Storage Systems Program and prepared by Jim Eyer and Garth Corey. I've been following the work in progress on this report since last summer and have eagerly awaited an opportunity to shift away from the overhyped electric vehicle market and focus instead on a far larger market where cost, performance and substantive business merit will be the only drivers. It looks like my time has finally come. For technology aficionados that want a detailed understanding of what the various grid-based storage applications are, the entire report (232 pages including appendices) is a must read. Over the next few weeks I'll try to extract some high-level technical and market data and translate that information into a form that will be useful to energy storage investors.

The Eyer-Corey Report identifies 17 discrete grid-based energy storage applications, discusses the performance requirements of each application and assesses the 10-year economic potential for each application. The Report also includes a great summary that condenses a couple hundred pages of detail into a single table.

From an investor's perspective, the problem with the summary table is that it focuses on the needs of utilities instead of economic opportunities for storage device manufacturers. As a result the summary table uses a range of discharge durations, a range of power capacities and a range of economic benefits per kW of nameplate power capacity. Since investors typically think in terms of megawatt-hours of potential demand and economic benefit per kilowatt hour of storage, we have to take the Eyer-Corey calculations a couple steps further to arrive at a simple translation that fits an investor's perspective.

In an effort to translate the summary table data into terms investors will understand, I've calculated an average discharge duration and an average economic benefit for each grid-scale application identified in the Report. I've then used those averages to calculate potential demand in MWH, economic benefit per kWh and revenue opportunity to manufacturers. I've also reordered the data based on declining economic benefit per kWh to highlight the inverse relationship between economic benefit per kWh and potential demand in MWH. If you're interested in more detail, I've posted a copy of my Excel spreadsheet here. I've discussed this methodology with Mr. Eyer and feel comfortable that my potential demand, economic benefit per kWh and revenue opportunity calculations are at least in the ballpark. Since we're dealing with averages of values that covered a wide range to start with, my numbers are best characterized as rough estimates, but they're certainly good enough for a first pass. The summary results of my calculations are set forth below.

The color coding in the table represents my attempt to segregate economic benefit per kWh into cool technologies like flywheels, supercapacitors and lithium ion batteries, which are highlighted in blue, and cheap technologies like flow batteries, lead-acid batteries, compressed air and pumped hydro, which are highlighted in yellow.

Last summer I wrote about energy storage on the smart grid and said that in terms of potential demand, the market would be 99.45% Cheap and 0.55% Cool. Depending on how you want to classify the voltage support line that I've highlighted in orange, my estimate was either spot-on accurate or off by a half-point. Now that I can refer to a reasonable third-party estimate of storage system values, it's clear that revenue opportunities in smart grid storage will be about 90% cheap, 8% cool and 2% in-between. Any way you cut it, the substantial bulk of the revenue opportunity for energy storage on the smart grid will flow to companies that manufacture objectively cheap storage solutions. There will be meaningful niche markets in the $1 billion to $6 billion range for cool technologies like flywheels, supercapacitors and lithium ion batteries, but those niche markets will pale in comparison to the immense opportunities for cheap energy storage technologies.

The following table provides summary information on the pure play energy storage companies I track that are actively working on storage applications for the smart grid. To keep things as simple as possible I've used the same color coding to segregate their planned product offerings into objectively cool technologies and objectively cheap technologies.

For several years the market has been enthralled with gee-whiz energy storage technologies and references to potential markets that represent billions of dollars in potential for highly specialized niche applications like frequency regulation. In the process, investors have lost perspective on the question of how the niche applications fit into the overall market. This dynamic has led to inflated expectations for companies that are developing cool emerging technologies and unrecognized value in companies that manufacture the cheap established technologies that will do the yeoman's share of the heavy lifting for the smart grid. Unless I'm way off the mark, that dynamic will shift very rapidly as outsized revenue gains begin accruing to manufacturers of cheap solutions.

When I started writing this blog I believed energy storage would become a major investment trend over the next few years because cost efficient storage systems can reduce waste while enhancing the reliability of most alternative energy technologies. Since then, the fundamental market drivers have developed faster than I imagined and what I initially described as a rising tide is rapidly becoming a full-blown investment tsunami. While rising tides lift all boats, the critical points for investors to remember are:

Percentage gains in the stock market are largely dependent on entry price and it's easier to bag a double or triple in a cheap stock than it is to get the same result in an expensive stock;
While it's all well and good to look a decade down the road and dream of a brighter future, America has pressing energy storage needs that require solutions today;
In America we get up in the morning, we go to work and we solve our problems using the tools that we have in our toolbox, however we remain ready to embrace new tools as they are developed, perfected and proven; and
Successful investing requires diligent monitoring to adjust portfolio positions to a rapidly changing market and technical landscape, and emerging technologies that are not ready for prime time, but will be someday.

Disclosure: Author is a former director of Axion Power International (AXPW.OB) and has a large long position in its stock. He also has small long positions in Enersys (ENS), Exide (XIDE), C&D Technologies (CHP) and ZBB Energy (ZBB).

Why I Don't Expect A Lithium-Ion Battery Glut

Wed, 24 Feb 2010 10:00:00 -0500

John Petersen

It's no secret that I think plug-in electric vehicles are unconscionable waste and pollution masquerading as conservation. To support my opinions, I've published an easy to follow Excel spreadsheet that shows why plug-ins are 5x to 6x less effective than HEVs when it comes to reducing national gasoline consumption and 9x to 12x less effective than HEVs when it comes to reducing national CO2 emissions. To date, the only challenges to my analysis have come from die-hard EV fanatics who seem to believe battery factories grow on trees and raw material supply chains sprout like flowers in an alpine meadow.

In early February, Joann Muller of Forbes warned of a coming Electric Car Battery Glut based on published estimates that global lithium-ion battery manufacturing capacity would reach 36 million kWh by 2016. Just this week, Roland Berger Strategy Consultants released a study that forecasts a lithium-ion battery supply bubble between 2015 and 2017 and predicts an industry-wide consolidation where "only six to eight global battery manufacturers will survive in the next five to seven years."

Despite my abiding disdain for plug-ins and my high regard for Forbes and Roland Berger, I don't buy the theory that excess manufacturing capacity will be a major problem for two simple reasons. First, I believe the Roland Berger forecast of global demand for 1.6 million HEVs in 2015 is far too low given the history of the HEV market and Toyota's (TM) plans to increase its production capacity to 1 million HEVs per year by 2011. Second, the Roland Berger analysis does not consider large format lithium-ion battery demand outside the automotive sector, which is where I expect the exponential growth to occur.

The first hybrid electric vehicles were introduced in 1999 and through 2007 the annual sales growth was spectacular. While the following graph of US HEV sales from hybridcars.com shows that unit volumes fell off a cliff in 2008 and 2009, the decline is easily attributed to two independent but identifiable factors; the economic collapse of 2008 and the growing hype over plug-in vehicles that caused many likely HEV buyers to delay new car purchase decisions.

Now that the roll-out dates for the GM Volt and the Nissan Leaf are only months away, two years of plug-in hype is about to hit an economic brick wall when potential buyers begin making relatively simple total cost of ownership calculations like this one.

	Conventional	Prius-class	Volt-class
	ICE	HEV	PHEV
Sticker price	$18,000	$22,500	$40,000
Tax credits			-$7,500
220 Volt outlet			$2,500
Amount financed	$18,000	$22,500	$35,000

Monthly payment	$307	$384	$597
(60 months at 7%)
Monthly gasoline	$105	$63	$21
($3 per gallon)
Monthly electricity			$20
($0.10 per kWh)
Monthly cost of ownership	$412	$447	$638

The big beneficiary of this exercise will be the Prius-class HEV, particularly if the buyer uses an assumed gasoline price in the $5 to $6 range. No matter how you fiddle with the numbers, PHEVs will come in a distant third for any buyer who thinks the green in his wallet is more important than the green in his cocktail party conversation. Jerry Flint of Forbes recently predicted that Nissan's Electric Car Will Flop. I'll go Jerry one better and predict that every car with a plug will face a similar fate.

While the idea of plug-in cars is just plain balderdash, there is another developing transportation trend that holds immense potential for lithium-ion battery manufacturers. That trend is e-bikes and e-scooters, which are rapidly becoming the vehicle of choice throughout Asia and the developing world. To put things in perspective, Pike Research is forecasting global sales of 80 million electric two-wheeled vehicles in 2016. When you consider that the average e-bike needs about 500 wh of batteries, it's pretty easy to see how an 80-million unit E2W market could make a huge dent in a 36 million kWh battery market. It's not a market that most companies and investors are focusing on, but it's a market that stands a very good chance of sopping up any excess supplies of large-format lithium-ion batteries.

Currently, the only thing standing in the way of lithium-ion dominance of the E2W market is price. While roughly 85% of e-bikes currently use lead-acid batteries because they're cheaper, the E2W market is ripe for the picking by lithium-ion batteries because size and weight truly are mission critical constraints for a 50-pound vehicle that runs on a combination of battery and muscle power. In its report on the coming battery glut, Roland Berger forecast that the price of automotive grade high energy lithium-ion battery cells would fall from the current level of $650 per kWh to $400 per kWh in 2015 and $275 per kWh in 2020. Consumer products grade cells should be cheaper. As lithium-ion battery supplies increase and reasonable economies of scale are realized, there's little question in my mind that they will become the battery of choice for the E2W market.

Currently, the only company I track that focuses on the E2W market is Advanced Battery Technologies, Inc. (ABAT). They've been making e-bike batteries for years and decided to vertically integrate last year when they bought Wuxi Angell Autocycle, a Chinese e-bike manufacturer. In my view, it was a much smarter purchase than Ener1's (HEV) stake in Th!nk Global or A123 Systems' (AONE) stake in Fisker Motors. I haven't changed my view that the lead-acid sector is more attractively priced than the lithium-ion sector, but if I had to invest in lithium-ion, ABAT would be at the top of my list because its profit history is exemplary and its business strategy just makes sense in a world where six billion people are trying to earn a small piece of the lifestyle 500 million of us have and take for granted.

Disclosure: None.

Pure Technologies: Making Water Systems More Efficient

Tue, 23 Feb 2010 13:27:43 -0500

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.

Beijing Cramps Foreign Offshore Wind Developers, Giving Boost to Domestic Firms

Mon, 22 Feb 2010 20:28:45 -0500

Bill Paul

As it scrambles to develop an offshore wind power industry that potentially may generate as much as 200 gigawatts of electricity, China has decided to hamstring all would-be foreign developers, which should provide a big lift to certain Chinese companies.

As reported last week by Environmental Finance magazine in its online edition, Beijing has effectively shut out international operators with new regulations requiring any foreign offshore developer to enter into a joint venture with a Chinese company under which the foreign firm must be a minority partner. “In reality, most of the international developers cannot, or are not willing to, do a joint venture with (a) Chinese partner,” Environmental Finance quoted the policy director of the Global Wind Energy Council as saying.

The wind council official called the new regulations “shocking,” but for investors they may be inviting.

With China expected to rapidly ramp up offshore wind generation, certain Chinese wind power companies could see their underlying valuations rise the more Beijing’s new offshore policy becomes apparent.

One in particular is China Longyuan (Symbol CGYG.OB), which just went public in December. Another possible beneficiary is Xinjiang Goldwind, which trades locally under the symbol 002202. Goldwind has announced plans to ramp up production of offshore turbine machines.

Still another potential beneficiary is Datang International Power (Symbol DIPGY). World wind-power leader Vestas of Norway (Symbol VWDRY) has called Datang an important wind development company.

DISCLOSURE: No position.

DISCLAIMER: This is a news article. Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

2010: The Year of the Strong Grid? Part IV: General Cable

Sun, 21 Feb 2010 13:34:46 -0500

Tom Konrad, CFA

General Cable (BGC) is a strong grid stock that's suddenly looking a lot cheaper. Time to buy?

General Cable is not only one of my Ten Clean Energy Stocks for 2010, it was also holding it's own in my list of "strong grid" (that is, electricity transmission) stocks that have strong financials. About 59% of the company's revenues come from what I would consider "strong grid" markets: their "electrical utility" and "electrical transmission" segments. I published the most recent version of that list on February 11. In both these articles I cautioned that I did not think it was yet time to start buying the companies I covered. Rather, these were companies to buy after a price fall.

The same day I published my recent strong grid list, General Cable reported a net loss of $0.17 for the last quarter of 2009, and lowered guidance for Q1 2010. Adjusted earnings were in line with what analysts were expecting, but the lowered guidance spooked shareholders. The stock got whacked. So is it time to buy?

I'm personally not all that concerned by a couple of quarters of lousy growth, but I want to know about anything that might hamper the company's long term viability, so I decided to dig a little deeper by reading the Q4 2009 earnings call transcript. Here are my take-aways:

The company has been focusing on reducing operating costs this year, and has strongly improved cash flow from operations over previous years (a large part of the reason it's on my lists).
The US utility market was unexpectedly week in Q4 09 (this may have been due to the fact that many stimulus programs ended up delaying spending in the targeted areas).
The company is expanding internationally and using its greater financial strength to out-compete or buy up smaller competitors in a difficult economy. They expect 2010 to be a "bottoming" year in terms of demand for their products.
The company does not expect to see any strength in North American utility markets for at least two quarters.
While the US has not yet begun to act to build needed electricity infrastructure, Europe (also currently weak) is well into the planning stage, and is likely to be a strong market over the next five years.
Rising commodity prices have hurt reported earnings because of their last-in-first-out (LIFO) accounting. This means that BGC's earnings will appear relatively low when commodity prices are rising, and relatively high when commodity prices are falling in relationship to non-LIFO competitors. The implication is that a good time to buy the stock would be near a commodity price peak.
The company has a strong presence in developing markets, where it continues to pursue growth opportunities. However, they intentionally have very little of their business in China.

Most of General Cables markets lag the economic cycle. Since we're only seeing glimmerings of an upturn, it will be a while before BGC's revenue an pricing power recover. Furthermore, capacity utilization in the cable market is very low world-wide: even with an upturn in volumes, cable pricing is likely to remain very competitive for quite some time. In the long term, this is good for General Cable, because it will squeeze weaker competitors out of the market, but in the short term, I would not be surprised to see some more disappointing quarters.

I don't see any systematic problems to worry me. While I believe that commodities are in a long-term uptrend, which will hurt reported profits because of LIFO, but it should have no net effect on real earnings. The industry continue to shake out until the surviving players can pass on cost increases to customers. General Cable is likely to be one of the survivors.

At $23.85, I think the stock has not yet hit its low for the year. The valuation looks good, but there will probably be more earnings deterioration next quarter. The 1Q 2009 earnings were $1, and the company is providing guidance that they will only be $0.05 in 1Q 2010. That will lower the "E" and raise the P/E ratio, which probably allow for a bit more downside movement in the stock price (P).

I currently guess that the best time to buy will be a month or two after the Q1 2010 conference call, possibly in June, but I will re-evaluate that guess after the next earnings call. I still hold a small long position in the stock which is partially hedged with a covered call. The call will expire this month, and I'm not planning to write another. I could be wrong about where the stock bottoms.

Selected data as of 2-20-2010:

Stock Price	$23.85
P/E (trailing 12 month)	9.66
Cash per share	$8.70
Months to pay off net debt from cash flow	20 months
Current Ratio	2.06
Dividend yield	none
Revenues from "Strong Grid"	59%

Why You Should Not Join a Portec Rail Products (PRPX) Class Action Lawsuit

Fri, 19 Feb 2010 22:17:12 -0500

Tom Konrad, CFA

Portec Rail Products (PRPX) agreed to be acquired by L. B. Foster Company (FSTR) on February 17. At least four law firms have started class action suits against the Portec board. Here is why not to join any of them.

Portec Rail Products has been a longtime favorite of mine. It's profitable, and delivers valuable services to the rail and rail transit industries. This article goes into a lot more detail as to why I like Portec. In large part because of the acquisition, Portec is the best performing of my Ten Clean Energy Stocks for 2010. I will be sad if the merger goes through, because I will need to find a replacement in my portfolio, although the cash will soothe the hurt nicely. L. B. Forster might be that replacement, but when I have a choice, I prefer microcap companies like Portec.

The lawsuits allege that Forster is not paying enough of a premium (4% over the closing price the day the deal was announced), and that the directors breached their fiduciary duty in not looking for other buyers: i.e. not shopping the company around more to get a higher price. One analyst of my acquaintance thinks a more reasonable premium would have added another buck per share.

But when was the deal negotiated? Almost certainly over the last month or more.

For most of January, Portec was trading around $10.50, and it started December at $9. The purchase price of $11.71 per share is an 11.5% premium over $10.50: not great, but not horrible. It's a 17% premium over $10 per share.

But no matter what you think of the price, there's no reason to join the lawsuit. Every dollar going to a lawyer is money that comes, eventually, out of some investor's pocket. You probably see an ad asking you to join one of the class action lawsuits next to this article: they're plastering them all over the internet.

If you don't like the price, you already have a perfectly viable option. It's called democracy. Don't tender your shares. 65% of shareholders must tender their shares for the merger to go through. If clean energy supporters had 65% of the votes in the US Senate, we'd have climate change legislation by now.

Why has the stock risen so quickly in the last few weeks? Perhaps rumors got out about the negotiations, and people with this inside information were (illegally) buying shares to make a quick buck. Despite being illegal, that sort of thing happens all the time. The trading pattern was particularly suspicious the day before the merger was announced .

Those insiders are the people to send the lawyers after!

DISCLOSURE: Long PRPX.

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.