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Five Green Up-And-Comers

Render unto biodiesel

Rising food prices throw a major roadblock on the biofuel highway. To make biofuel production profitable, even with government subsidies, you need a steady supply of cheap, raw material. That's where Nova Biosource Fuels comes in. It takes slaughterhouse leftovers -- hardly a hot commodity -- and turns the rendered fat into diesel fuel.

Rising prices for the raw materials used to make biodiesel, known as feedstock, work in Nova's favor. At least 75% of U.S. biodiesel is made from soybean oil, which costs about 31 cents per pound, up from 23 cents last year, and is expected to rise to as high as 36 cents per pound by 2008. But animal tallow, the fatty waste from meat processing, costs as little as 20 cents a pound, in part because there aren't as many commercial uses for tallow as there are for soybean oil. Nova's patented process can use 25 different feedstocks, including animal tallow, to produce biodiesel.

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Because feedstock expenses account for about 80% of a biodiesel plantUs operating costs, profit margins are sensitive to swings in those costs. "Nova can buy whatever is cheap," says analyst Walter Nasdeo, of investment bank Ardour Capital Investments. "That gives the company a great advantage."

The Houston company has begun to prove that it can produce biodiesel on a large scale. Its first commercial refinery, in Comanche, Iowa, started production in October 2006. The company eventually wants to build six refineries. With $40 million in cash on hand, Nova plans to raise an additional $200 million to complete its projects.

Still, Nova is a risky bet. It has a history of losses, and its prospects depend on the ever-changing prices of oil and tallow. But Nasdeo expects Nova to earn $70 million, or 64 cents per share, in 2008 as its biodiesel production takes off. The stock (symbol NBF), which has a market value of $319 million, traded at $2.90 in mid August. Based on his earnings estimates and the outlook for biodiesel, Nasdeo thinks the stock is worth $5 and rates it a buy.

High-tech cleanup

How would you like to clean the inside of a coal-fired power plant? Fuel Tech would gladly accept that dirty job. The Stamford, Conn., company has come up with a technique for reducing slag, a hardened sludge that accumulates on boiler walls and pipes during the coal-burning process. The resin, which is difficult and costly to remove, lowers a boiler's efficiency and can cause shutdowns when boulder-size chunks break off and damage pipes and other equipment.

The cleanup isn't as messy as you might think. Fuel Tech's low-cost, proprietary method uses a computerized model of the fire to pinpoint areas where slag is likely to build. Workers then insert nozzles directly into the boiler and spray a chemical compound on the problem areas, making it difficult for residue to gather. Aside from boosting efficiency and combating slag, the process helps curb emissions. "This is a technology where the payback is very, very high," says Jack Robinson, manager of Winslow Green Growth fund.

Slag-busting is actually a small part of what Fuel Tech does. The company's flagship business makes pollution-control equipment for utilities and industrial firms. Although that segment is expected to post impressive growth, it's the slag-reduction business that's kindling the most buzz on Wall Street. So far, 60 coal-fired utilities in the U.S. and Europe are each paying Fuel Tech $1 million annually for its chemical-treatment process. The potential market is much greater: There are 1,500 coal-fired plants in the U.S. and many more overseas. In June, the company announced a partnership to sell its slag-reducing system in China, the world's largest coal consumer.

Fuel Tech isn't cheap. At $30 in mid August, the stock (FTEK) traded at 100 times analysts' 2007 earnings estimates of 30 cents a share, according to Thomson First Call. But analysts see earnings soaring to 63 cents a share in 2008. Robinson thinks the stock, which has a market value of $668 million, could reach $100 in the next three to five years.

The lure of fuel cells

The market's enthusiasm for alternative-energy stocks these days tends toward wind, solar and biofuel companies. But if a small Danbury, Conn., company gets its way, fuel cells may soon have their day in the sun. FuelCell Energy has carved out a niche producing fuel cells that power large facilities, such as hotels, universities and hospitals. So far, it has more than 60 power plants up and running worldwide.

Fuel cells generate energy by creating a reaction between hydrogen and oxygen. Because the technique doesn't involve combustion, fuel cells produce energy more efficiently and with fewer greenhouse-gas emissions than conventional generators do. FuelCell's devices provide a reliable on-site energy source, which eases a facility's reliance on the power grid and is crucial for customers such as hospitals and hotels. It's also important for customers such as the Sierra Nevada brewery in Chico, Cal., which relies on round-the-clock power from fuel cells to keep its beer chilled. The generators can use a variety of fuels, including gases that are byproducts of wastewater treatment, of food processing and, in Sierra Nevada's case, of the brewing process.

Lately, FuelCell has seen a surge in orders. The company recently inked a ten-year manufacturing-and-distribution agreement with South Korean power company Posco. A deal is also in the works with the state of Connecticut for what could be the largest order in FuelCell's history: six projects requiring a total of 68 megawatts of fuel cells.

Although revenues are rising rapidly, FuelCell is losing money. Analysts estimate a loss of $1.35 per share in the fiscal year that ends in October. Chief financial officer Joseph Mahler says FuelCell needs to produce 75 to 100 megawatts per year to make money. "We've crossed the big threshold, and now we're trying to penetrate the market and gain volume,S he says. Analysts at Lazard Capital Markets think the stock (FCEL), which recently traded at $8 and has a market value of $541 million, will hit $11 within the next year.

Power controller

Small efforts in energy conservation can lead to big savings. That's the philosophy behind Echelon. When you forget to turn off the lights at the office, Echelon's technology flips the switch.

McDonald's sees the opportunity for cost-cutting. In July, the fast-food chain selected Echelon technology over rival systems to control the power supply for the lights, fryers and other equipment in its new and refurbished restaurants. Echelon estimates that the multiyear contract will bring in $20 million -- not an insignificant amount for a company with $93 million in revenues over the past 12 months -- and McDonald's expects the move to reduce its energy costs by 10%. More important, the deal will help Echelon win business with other restaurants, says analyst William Gibson, of investment firm Nollenberger Capital Partners, who owns Echelon shares.

Echelon's contribution to more energy-efficient Golden Arches masks the bigger prospects. In addition to control systems, Echelon makes "smart meters" for utility companies. The meters improve efficiency by allowing utilities to control electricity service remotely and prevent blackouts by automatically limiting power usage. "The market for EchelonUs products could reach billions of dollars per year later this decade," says Gibson.

Echelon's meter business is erratic. Sales often depend on the decisions of slow-moving governments and utilities. The San Jose, Cal., company has lost money for two straight years as it's been developing its next generation of meters. Gibson expects Echelon to turn a profit in the fourth quarter of this year. The global demand for energy efficiency will give Echelon shares a tailwind, but it will be a wild ride for investors.

The stock (ELON) has soared 44%, to $23, since early July alone, bringing its market value to $905 million. But it's nowhere near its record high of $113, set in 2000. Still, it might be prudent to wait for the shares to surrender some of their recent gains before buying.

Eyes in the sky

As they say in business, you can't manage what you can't measure. This rings especially true for companies that are expanding their operations into remote parts of the globe, where monitoring equipment, productivity and energy use can be difficult.

A small wireless company headquartered in Fort Lee, N.J., has a space-age solution to this problem. Orbcomm (ORBC) owns and operates a fleet of 30 satellites that help companies track and monitor their goods anywhere in the world. These satellites, which orbit the earth in less than two hours, can monitor corrosion in pipelines, track cargo containers, and report the location, speed and fuel economy of vehicles.

Orbcomm's feedback, which can be sent to an e-mail address or even a cell phone, helps companies and government agencies enhance productivity, cut costs, repair equipment and improve security.

Orbcomm generates about half its revenues from the sale of transmitters, iPod-size beacons that attach to trucks, trains, oil wells and other objects. The remainder come from average monthly subscriber fees of $5 to $6 per device. That adds up, especially when you consider that some customers outfit thousands of vehicles with Orbcomm's beacons (most of which cost about $100).

The number of billable transmitters has grown from 113,000 in 2005 to 278,000 at the end of June. CIBC World Markets analyst Tim Horan thinks that number could reach four million in the next five to six years. "A lot of things are coming together," says Horan. "The cost to buy the transmitting device has become quite cheap, and companies are figuring out how to make this information useful."

Horan expects Orbcomm to turn profitable by the end of 2008 and to begin generating free cash flow (earnings plus depreciation and other noncash charges, minus capital outlays) in 2010, after it completes a round of satellite launches. He sees the stock -- which, at $8 in mid August, sports a market value of $325 million -- reaching $12 over the next 12 to 18 months.

All contents © 2008 The Kiplinger Washington Editors

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Posted: 3 month(s) and 25 days(s) ago   |   0 Comment(s)   |   Rating: 0 0
Posted by: Jacorial

25 Stocks to Invest in a Cleaner World

You don't have to be a tree hugger to believe that climate change and energy efficiency will be significant investing themes for years to come.

The National Petroleum Council, a U.S. government advisory body, says existing supplies of oil and natural gas may not meet soaring global demand over the next 25 years. A shortfall could be a windfall for companies that can supply cheaper alternatives to fossil fuels.

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Meanwhile, the focus on global warming promises to lead to greater regulation of greenhouse-gas emissions. Already, the European Union has instituted a quota for carbon emissions in response to the Kyoto Protocol, a global treaty that went into effect in 2005. The U.S. did not sign the treaty, but a number of states are acting on their own to limit these pollutants. In addition, Congress passed an energy bill in 2005 that offers subsidies for various new energy technologies, and it is considering another bill this year.

Clearly, these trends will produce stock-market winners and losers, but not all of them are obvious. Makers of wind turbines and biofuels will surely benefit. But so will makers of rail cars and auto-emissions controls.

We've sifted through the implications and put together the Kiplinger Green 25, a list of companies we believe will get a big boost from the growing focus on climate change and the move toward alternative fuels. Our picks vary widely in size, and four are based overseas. Some of the stocks may be expensive, and shares of some of the smaller companies may be volatile. But we think all will do well over the long term. In addition, check out our separate profiles of five up-and-comers -- small (with market values of less than $1 billion), more-speculative companies that someday could grow into green giants.

ABB
One obvious solution to the global energy crunch is simply to use less energy. Companies that can help us become more energy-efficient will find their products and services in great demand. Switzerland-based ABB is expected to produce annual earnings gains of 25% over the next few years, largely because of strong sales of power-transmission equipment that reduces energy losses between power plant and end-user, and industrial-automation equipment, such as high-efficiency motors and robotics. The power-transmission business, which accounts for half of ABB's sales, should be particularly strong as emerging countries add new infrastructure and as developed nations, such as the U.S., replace aging, outage-prone systems.

AMERICAN INTERNATIONAL GROUP
A dense thicket of environmental laws and regulations has grown to cover such obvious targets as producers of chemicals and hazardous wastes. The rules now also apply to businesses as varied as commercial real estate developers, biotechnology firms, utilities, railroads and even schools (which may store potentially hazardous materials on campus). AIG, the giant insurer, has been writing policies that protect businesses against environmental claims since the early 1980s. Such policies represented about 3% of the $31 billion in premiums from AIG's U.S. property-and-casualty business last year. But as efforts to curb greenhouse gases grow, businesses will need protection against new types of liabilities that will surely arise. AIG is also a leader in writing insurance that protects participants in the nascent global market for trading carbon credits.

AMERICAN STANDARD
This 78-year-old company is getting a makeover. American Standard spun off its vehicle-control division this summer and will finalize the sale of its bath-and-kitchen business this fall. That will allow the Piscataway, N.J., company to focus on its most lucrative division, which makes heating, ventilation and air-conditioning (HVAC) systems. Selling principally under the Trane brand, American Standard is a leader in energy-efficient air-conditioning and climate-control systems. This will be a hot industry because buildings account for one-third of global energy demand. Any solution to greenhouse-gas emissions must include drastic reductions in energy demand from office buildings, residential towers and other large structures. Warren Buffett appears to like what he sees in the new American Standard; his Berkshire Hathaway has become one of the company's biggest shareholders.

APPLIED MATERIALS
First, this important Silicon Valley technology company overcame stiff Japanese competition to emerge as the world's largest producer of capital equipment for makers of semiconductors, with $10 billion in annual revenues. Then it applied that prowess to make equipment used to manufacture LCD flat-panel displays, a process that requires similar technology. Now, Applied, based in Santa Clara, Cal., is making a strong bid to be the leading manufacturer of equipment needed to produce photovoltaic cells and film -- another process technically akin to making semiconductors. With 85% of revenues generated outside the U.S., Applied, which also makes the tools to fabricate energy-efficient glass, has the world covered.

BURLINGTON NORTHERN SANTA FE
One double-stack train can haul as much freight as 280 trucks while emitting a fraction of the pollutants and burning a fraction of the diesel fuel. As railroads burnish their environmental credentials, Burlington Northern Santa Fe should benefit the most. The Fort Worth company hauls enough low-sulfur (and relatively clean-burning) coal from Wyoming's Powder River Basin to light up 10% of the nation's homes. It also hauls more grain products than any other railroad, including both the corn used to make ethanol and the ethanol itself. In fact, Burlington Northern frequently runs 95-car ethanol trains from the Midwest to California to meet the demand created by the state's strict auto-emissions standards.

COVANTA
An alternative approach to power generation that is already commercially viable is to get it from garbage, and the leader in waste-to-energy facilities is Covanta. The company operates 32 plants that burn trash and municipal waste to make steam and heat for power generation. Trash haulers pay the Fairfield, N.J., company to take the waste off their hands. This form of renewable energy is especially competitive in places such as New England, where landfill space comes at a premium. Besides, while there may be shortages of oil and natural gas, it's hard to imagine that there will ever be a shortage of a superabundant source of renewable energy such as trash.

EXELON
Nuclear power benefits in several ways from the emerging energy picture, says Robert Becker, co-manager of Cohen & Steers Utility fund. Surging fossil-fuel prices make nuclear energy highly competitive. Emissions are low compared with those from power plants that burn coal or oil. In the future, a system of carbon-emission credits and licenses is likely to develop in the U.S., as it has in Europe. "Under any scenario in cap and trade, the clear winners will be the nuclear generators," says Becker. His favorite utility is Exelon, of Chicago, the largest operator of nuclear power plants in the U.S. Exelon generates more than 70% of its power from nuclear fuel.

FPL GROUP
More than just a big Florida utility, FPL produces about 40% of the wind-generated electricity in the U.S. It gets 19% of its power from nuclear plants, and it owns few coal-fired facilities. In the future, if government regulations further cap the amount of pollutants that power plants may emit, the Juno Beach, Fla., company will be sitting pretty. More important, as the government requires other utilities to add more power from renewable sources to their mix, FPL will have a lot of power-hungry customers for its wholesale business, which can charge whatever the market will bear.

GENERAL ELECTRIC
You can't discuss new energy technologies without mentioning General Electric. The giant conglomerate is a major producer of wind turbines and clean-coal technology, not to mention energy-efficient locomotives, jet engines, home appliances and light bulbs. The Fairfield, Conn., company estimates that revenues from its clean-energy businesses were $12 billion last year (out of $163 billion total) and predicts that the figure will rise to $20 billion by 2010. And that doesn't include $1 billion in annual revenues from GE's nuclear-energy business. GE's stock is still one-third below its high mark in August 2000.

HONDA MOTOR
Any serious attempt to reduce greenhouse gases will need to zero in on the auto industry, which is responsible for at least one-third of carbon-dioxide emissions. That's why we like Honda Motor, whose fleet of cars, including the Accord, Civic, Odyssey and Acura names, is the most fuel-efficient of any major carmaker. That means the Japanese firm will benefit from tighter U.S. fuel-economy standards. The Civic Hybrid, for example, gets up to 45 miles per gallon. (Toyota Motors is the leader in hybrid vehicles, but Honda's shares are priced more attractively.) When the U.S. government mandates tighter fuel-economy standards, Honda will be off to the races.

INTERNATIONAL RECTIFIER
Lighting is an energy hog. The International Energy Agency estimates that lighting accounts for 19% of the world's electricity consumption. The best way to address this insatiable demand is to replace the venerable incandescent light bulb with newer, more energy-efficient technologies, such as compact fluorescent bulbs and light-emitting diodes (LEDs), a technology that cuts electricity consumption by more than 80%. International Rectifier makes the semiconductor power-conversion devices, called ballast controllers, for both types of lighting. The El Segundo, Cal., company makes a broad range of energy-conserving power-management chips for cars, appliances, computers, aircraft and factories. Because so much manufacturing has moved abroad, International Rectifier books three-fourths of its sales overseas. (Note: IR is investigating accounting irregularities at one of its foreign units.)

ITRON
Variable rates for home electricity use are coming. A 2005 federal law requires utilities to look into ways to spread out electricity demand (and reduce the need for new generating stations) by charging more for power used during peak hours. A key player in this market is Itron, the leading U.S. supplier of electricity meters (and a leader in gas and water meters as well). Its 50% market share for "smart" electric meters that can be read automatically puts it in a good position to help utilities put time-based pricing in place. Shares of the Liberty Lake, Wash., company have nearly doubled in the past year, but the opportunity is big. Just 5% of the world's electric, water and gas meters use smart meter-reading technology.

JOHNSON CONTROLS
It invented the room thermostat in the 19th century, and Johnson Controls is still going strong. As the leading worldwide supplier of temperature controls to the heating, ventilation and air-conditioning industry, Johnson is still at work making buildings more energy-efficient. It's also a leading supplier of HVAC systems. But the Milwaukee company's largest business is making automotive products. It supplies long-life lithium-ion batteries for hybrid vehicles, such as GM's Saturn Vue Green Line sport utility vehicle.

MCDERMOTT INTERNATIONAL
The U.S. leans on its plentiful but dirty coal reserves for half of its electricity generation. So coal's not going away anytime soon -- far from it. The solution is to clean up the coal. McDermott International's Babcock & Wilcox division has cutting-edge technology for scrubbers that capture harmful coal emissions before they are released into the atmosphere. So McDermott stands to gain as environmental regulations mandate retrofits and upgrades to existing coal-fired plants. This Houston-based engineering-and-construction company is also a leading supplier to the nuclear industry.

MEMC ELECTRONIC MATERIALS
One factor restraining the growth of solar power has been the shortage (and soaring prices) of silicon wafers, the key material from which solar cells are fabricated. That's been a boon for MEMC Electronic Materials, the leading U.S. maker of silicon wafers, which has almost tripled its earnings in two years. This hard-to-make substance is the same material used for making semiconductors. But while the chip industry seeks smaller and smaller products, the solar-power industry wants large panels that cover rooftops. Edward Guinness, co-manager of Guinness Atkinson Alternative Energy fund, calculates that it costs MEMC $27 per kilogram to produce silicon wafers, which it sells for $180 to $300 per kilo. Not a bad business.

ORMAT TECHNOLOGIES
Geothermal power is a renewable energy technology that is not dependent on weather (as wind and solar are) and is thus more reliable. The technology uses hot water and steam from deep underground to turn a turbine and generate electricity. Ormat Technologies is the third-largest geothermal firm in the U.S. and the only one of the top three that focuses exclusively on geothermal power. Its shares are pricey, but the Reno, Nev., company stands to benefit from government mandates in California and Nevada (where most of its U.S. plants are located) that require utilities to buy more power from renewable sources.

PHILIPS ELECTRONICS
Philips Electronics of the Netherlands is such a sprawling consumer-electronics giant (2006 sales: $36 billion) that people forget it's the world's leading maker of incandescent light bulbs. But unlike most entrenched industry leaders, Philips isn't averse to jettisoning the old and adopting new technologies. Jens Peers, lead manager of Calvert Global Alternative Energy, says Philips is making an aggressive bid to capture the premier position in new, energy-efficient lighting, such as LED and compact fluorescent bulbs. In pursuit of this goal, Philips has been acquiring lighting companies with advanced technology, such as Color Kinetics, an LED fixture maker in Boston.

ROHM & HAAS
Air pollution can come from some surprising sources, such as house paints, which, years after their application, continue to release low levels of toxins into the air. Philadelphia-based Rohm & Haas, a maker of coatings, sealants and other specialty materials, gets 70% of its revenues from environmentally friendly products, such as water-based paints, formaldehyde-free insulation and lead-free electronics products. "It's a green company in disguise," says Todd Ahlsten, manager of Parnassus Equity Income fund, who holds Rohm & Haas in his fund.

SHAW GROUP
A growing number of people in developing countries now have the means to heat and cool their homes and businesses. That portends a huge increase in spending on power-plant construction -- as much as $5.2 trillion through 2030, according to the International Energy Agency. Shaw Group, an engineering-and-construction firm headquartered in Baton Rouge, La., has a 20% stake in Westinghouse Nuclear and is a major player in both building new coal plants and making older ones burn more cleanly. Bad accounting decisions have plagued the shares recently, but an $11-billion backlog of business, mostly from planned power plants, should lead to a brighter future.

SUNPOWER
The demand for solar cells and panels is booming. The question is whose technology will prevail in the youthful industry. Kevin Landis, manager of Firsthand Technology Value, thinks San Jose, Cal.-based SunPower will be a winner. SunPower makes the solar-power industry's most energy-efficient panels, measured by the conversion of sunlight into electricity (the efficiency of its solar cells is more than 20%, which is 50% higher than that of conventional cells). SunPower, which is 53%-owned by Cypress Semiconductor, derives all of its revenues from solar-related products.

SUNTECH POWER HOLDINGS
The enormous potential of solar energy is no secret, and that's why the stocks of so many firms in this field are expensive. One company that may nevertheless pay off is Suntech Power Holdings. China's largest maker of photovoltaic cells, which convert sunlight to energy, has the scale to produce low-cost, high-profit solar equipment for sale in the international market. The firm is profitable, and earnings should grow 25% to 30% annually over the next few years, says fund manager Guinness.

TENNECO
Over the next eight years, stricter auto-emissions standards will take effect in Brazil, China, India, Japan, Russia, the U.S. and Western Europe. That's good news for auto-parts supplier Tenneco, which gets nearly two-thirds of its revenues from emissions equipment (the rest comes from suspension gear). It is the leading supplier in China and Europe, and it is number two in the U.S. The Lake Forest, Ill., firm is especially well positioned to sell emissions equipment for diesel-powered cars and trucks, which offer better fuel efficiency than gasoline-powered models do.

TRINITY INDUSTRIES
Another way to play the boost in railroads' fortunes is via Trinity Industries, the nation's largest manufacturer of railcars. Demand for covered hopper cars, which carry grain, as well as for coal cars and tank cars for hauling ethanol, contributed to a record order backlog of almost 34,000 cars at the end of the second quarter. The Dallas-based manufacturer is also a backdoor play on wind power, as it is a leading maker of towers for wind-powered turbines. Trinity's energy division, which includes the wind towers and other businesses, makes up only 11% of revenues. But wind-tower revenues, driven by federal tax breaks, could soar to as high as $250 million this year, up from $11 million in 2004.

UNITED TECHNOLOGIES
This splendidly run industrial conglomerate focuses on energy conservation both within the company and with the products it sells. Its Otis elevator and Carrier heating and air-conditioning units are developing more energy-efficient systems. The Hartford, Conn., company also makes fuel cells for buildings, transit buses and the U.S. space program. Also the maker of Pratt & Whitney engines and Sikorsky helicopters, United has been riding the global boom in infrastructure building.

ZOLTEK
These are boom times for makers of carbon fiber, a strong, lightweight material used to make aircraft parts as well as the 175- to 200-foot-long blades that turn wind turbines. Zoltek supplies both markets, and its stock has more than doubled in the past year as demand from both sources has soared. But this may be only the beginning. Zoltek chief executive Zsolt Rumy thinks carbon fiber will soon be used to make lightweight, fuel-efficient cars; precast-concrete structures; and ultra-deep-sea oil-drilling equipment. He expects worldwide carbon-fiber production to more than double by 2010, to $2 billion, and thinks his own company's sales can hit $500 million in 2011, more than five times higher than last year's total.

All contents © 2008 The Kiplinger Washington Editors

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