Wise Energy Use Stocks: Smart Grid Pioneers

This is the final article on the companies in the Wise Energy Use index.  I believe that the current turmoil has given stock pickers an opportunity to buy well capitalized firms which make money by helping people save money on energy.    The industry is poised to do well in hard financial times, but companies with weak balance sheets may not survive.  In this series, I try to separate the wheat from the chaff.   I generally liked the efficient lighting, smart metering and energy management, and global services companies in the index, but wasn't thrilled by any of the electric vehicle picks.  

Although the Smart Grid is something which is definitely necessary to use our electricity more wisely, it's also something of a research project: we don't really know what it's going to look like when it gets here.  What it does look like and which companies profit will be highly dependent on future regulation, so while many of the smart grid projects pursued by the following companies are quite admirable, I have to wonder if they will do much for any of the company's bottom lines.

Duke Energy (DUK).  Duke has a current ratio of just over 1, which is lower than I would like with its cash from operations only about a quarter of its total debt, and a slightly negative levered free cash flow.  However, since Duke is in part a regulated utility with very stable operations, a less solid balance sheet could potentially be tolerated, although I'd want to look deeper into the company's structure to see just how this affects the riskiness of the company as a whole before investing.  The pilot project in smart grid technology is interesting, but not much of a reason to invest.

Xcel Energy (XEL).  I'm very familiar with Xcel, which is my electric and gas utility in Colorado, as well as a company I deal with at the Colorado Public Utilities Commission [PUC].  Because of my personal involvement as an expert witness in Demand Side Management cases for the Energy Efficiency Business Coalition, I believe that the current program the PUC adopted as a result affords Xcel the opportunity to slightly increase its profit margins by aggressively adopting energy efficiency, benefiting both Xcel and its customers.  Therefore, I'm also a small shareholder (I consider the Smart Grid pilot in Boulder to be unlikely to affect the bottom line any time soon.) 

The company also leads the country for the amount of wind power delivered to customers.  Although the current ratio is only 0.8, and operating cash flow is a fraction of total debt, as a regulated utility profits are relatively stable.  I have also heard from company employees (water-cooler talk, essentially, but this could be confirmed by a review of company financial statements) that the company has been taking every opportunity it had over the last year to raise new debt financing, in anticipation of tightening credit markets. 

Whirlpool Corp (WHR). As a manufacturer of consumer durable goods, albeit appliances ready for the Smart Grid, Whirlpool's revenues are likely to be hurt by an extended downturn.  Therefore, although the current ratio is 1.2 and operating cash flow would cover the company's entire debt in three years if it were not to decrease, I would still be uncomfortable holding this company.

Samsung Electronics.  Samsung does not have a US listing, but Energy Tech Stocks chose to add it to the index because it's looking into the same unpromising business of selling Smart Grid-enabled appliances to consumers as is Whirlpool. As I'm reluctant to invest in any company hoping to sell durable goods to consumers, I decided not to hunt down the financial statements in order to examine the company's liquidity.

Freescale Semiconductor (FSL).  With a current ratio of about 3.5, and enough operating cash flow to cover all debt in a year, this company seems like a better bet to gain from putting chips in appliances than the appliance makers themselves, since each smart grid chip will be a new sale for Freescale, but simply replace another appliance sale for Whirlpool and Samsung.

DISCLOSURE: Tom Konrad owns XEL.

Comments

[Robert O. P...:]

Well said, but how about JCI? Lots of impact on energy conservation and measuring, etc. also TEG for its dividends in this poor investment climate.

Mon 10.27.08

2008 Oct 27 04:04 PM

[Ramdas:]

Were you recommending FSL bonds here? There is no equity available for purchase - the company was taken private in 2006 by Blackstone and some other pvt equity firms. Further, the debt is about $9B, and EBITDA is about $1.5B. How does that cover the debt (unless you meant that it covers the interest on debt)?

2008 Oct 28 12:43 AM