Raser Technologies: The Ugly Duckling of Alternative Energy

It’s difficult to imagine a more unloved stock than Raser Technologies (RZ). Motley Fool’s CAPS gives it a one-star rating, it has one of the highest short interests out there, it is suggested on a regular basis that the company has phony technologies, management is vilified like a candidate in a Virginia election, and their financial statements show a huge stockholders’ deficit and no significant revenues. It’s wise to be skeptical when it comes to stockpicking, but sometimes it’s equally wise to be skeptical of the skeptics. 

Raser Tech may be an ugly duckling if there ever was one. If Raser’s technologies are a scam, they’ve done a magnificent job fooling Pacific Gas & Electric, Merrill Lynch, Prudential Capital, United Technologies (UTX), the City of Anaheim, U.S. Senator Orrin Hatch (R-UT) and New Mexico Governor Bill Richardson, just to name a few. If management has something major to hide, it’s worth noting that insiders are buying in heavily.   If the company has a stockholders’ deficit, it seems to have very good cash flow prospects for the next few years if things are as represented. All in all, there are some reasons to believe that this ugly duckling might grow up to be a beautiful swan. 

Background

Raser operates in two different business segments, which isn’t the type of thing that normally gives investors confidence in a young company, but maybe it’s not such a horrible thing either. Raser originally launched with a Transportation and Industrial Technology segment which develops electric motor and plug-in hybrid vehicle (PHEV) technologies. Eventually, the company also formed Power Systems segment which develops and operates geothermal power plants. While the prospects for the former segment are not completely clear at the moment, the latter segment looks more promising than investors are giving it credit for.   

Geothermal power has to date been one of the more overlooked viable alternative energy solutions out there. While solar has gotten most of the buzz and T. Boone Pickens has stumped in favor of wind power, there are very good reasons to believe that geothermal may be the best solution of the three. If nothing else, the oft-cited issue of energy storage is not a problem with geothermal since unlike solar and wind, it is not dependent on weather patterns or the time of day. 

While geothermal many not be a viable solution for much of the nation east of the Rocky Mountains, it does have a lot of room for growth in the Western US.   Moreover, Raser Tech seems to have some competitive advantages in this market including the ability to build and bring geothermal plants online in a relatively short period of time and their bottom cycling model that may generate additional power.

The ribbon-cutting ceremony for Raser’s first developed geothermal plant in Utah (“Thermo”) occurred on November 6^th with U.S. Senator Orrin Hatch in attendance. The Thermo plant should give investors an early glimpse into the viability of Raser’s geothermal power segment, even if the economics for this plant are not as favorable as they are for future properties. 

Financial Expectations

A quick look at Raser’s balance sheet shows an $11.2 million stockholders’ deficit.   Any time a company has such a high debt level, it is frightening; however, RZ does operate in a capital-intensive industry with high up-front costs. Moreover, they expect roughly $55 million in net monetization for 2009. That’s about $1 per share. Raser’s target net monetization for 2010 is $175 million and $300 million for 2011. While I wouldn’t get too hung up on those numbers for ’10 and ’11 until Raser’s development begins more clear, even looking at 2009’s expectation might suggest that this stock is undervalued if things go even remotely close to plans. 

The Case Against Raser

One of the primary reasons for skepticism about Raser appears to originate with a report from Citron Research in June 2005. While parts of that report raised legitimate concerns about Raser’s management at the time, I’d also have to question the smear job that the authors did; particularly linking Raser’s Jack Kerlin to a Nazi sympathizer based on what appears to be a few sloppily put together Google searches that are almost laughable in their attempts to draw a connection. The fact that Citron allowed some garbage speculation to be published constitutes one of the few blemishes on their record. 

Regardless, since the Citron report, Raser’s stock has lost a significant portion of its value, they hired a new CEO (Brent Cook), and they entered the geothermal power business.   While Raser still has not proven it can pull significant profits out of its electric motors, their geothermal operations appear to be going much better. It might be a bit foolish to simply assume because some people might have distrusted this company three years ago that this is a good reason to continue shorting it right now. 

Another investor watchdog, the 10Q Detective, has seemingly been on a vendetta against Raser Tech, churning out negative articles at every turn. His best piece was run in March 2008, when he doubted Raser would be able to obtain financing (he was wrong) and he doubted Raser would ever construct a plant (he was wrong on that, too). However, that didn’t stop him from gloating in September ‘08. While I personally have a good deal of respect for the 10Q Detective, his attacks on Raser seem ill-informed and he has been rather one-sided in his proclamations of being right. After all, couldn’t you point to just about any company over September and October and say you were vindicated in your criticisms because the stock price plummeted? 

There might be a strong case to be made against Raser, yet. Unfortunately, it seems most of the cases I have seen are relying on old cases and conditions have changed fairly dramatically since then. With Raser’s first geothermal plant up at this point and a revenue stream coming in very soon, how much longer can people claim this company is “phony”? How much longer can people imply that they’ll never get financing? Perhaps there’s a case to be made that the company is overvalued based on its revenue stream, but I have not heard that case yet. 

The Case For Raser 

I believe the case for Raser is fairly simple --- you have a beaten down stock with a high short interest with a company that now seems all but certain to recognize significant revenues from its geothermal operating unit soon. While it’s unclear to me just how good their future prospects are and it will be difficult to make a meaningful long-term valuation on them before seeing the results for the next few quarters first, if the company produces anything close to what it expects, this would seem to be a huge bargain in the $4-5 range even if the Transportation and Industrial Technology sector never produces much of anything.  

Insiders are buying in heavily and the company expects about $1 net monetization per share for the first year of operations; that’s not bad. Even if you remain in the skeptic camp, I’d keep an eye on this company, especially after their next two earnings are released since that will give us a more clear glimpse at Raser’s future potential. 

Conclusions

While I try to be skeptical when approaching companies, I’m finding more reason to be skeptical of the skeptics on Raser. If they are right, then they deserve a huge pat on the back for being able to see through this company; however, I would be interested in seeing a huge “I was wrong” piece if they do end up getting burned on this.  So far as I can tell, there are much better shorting targets in the market than Raser right now and this almost feels like a reverse-momentum stock that might very well burst (upward). At the current price, there is limited downside if the company does not go under --- so essentially a short might be a bet on bankruptcy. On the upside, if the company’s revenues start looking good after these next few quarters, the stock could potentially jump through the roof. 

From my perspective, I believe this company might be worth a gamble at this point as a small holding in a well-diversified portfolio. The downside is 100% loss, but the upside is tremendous enough that it might be worthwhile. And under that plan, even if the skeptics are right, it doesn’t wipe you out. Regardless of what your position on Raser is, it should produce some of the more interesting stock market drama over the next year. Keep an eye on it. 

Disclosures: Author holds no position in RZ, but may choose to initiate a small long holding within the next month

Comments

[JGK:]

Without the UTC Power solution, they wouldn't have gotten this far in NM. I wish UTX wouls spin them off so I could buy that. RZ would lead you to believe that they have this magical technology that nobody else has. UTC has many clients using this solution, just not to this scale.

www.utcpower.com/fs/co...

2008 Nov 11 08:01 AM

[H.J. Huneycutt:]

JGK,

I definitely agree on UTX --- it would be nice if they spun that division off. Much of RZ's success can be traced to that.

2008 Nov 11 08:28 AM

[aquaculture:]

RZ geothermal rights (land leases Utah, Oregon etc.) alone are potentially worth more than current share price.
RZ seems politically correct, well-connected.

If management are such crooks, why would the Indonesian government partner with RZ????

The technology works, if they execute well, RZ share holders will be fine.

Why is RZ hated so much?
Is it because of management's enthousiasm in a sarcastic investment climate?

(long ORA, contemplating larger positions in RZ and HTM)

2008 Nov 11 08:53 AM

[shorty735261:]

You say that Raser is "all but certain to recognize significant revenues from its geothermal operating unit soon".

Is your analysis affected at all by the fact that Raser receives only 1% of the plant's revenue for the first 10 years? Yes they get a operation and maintenance payment after 18 months, but the Thermo deal they negotiated almost certainly has a negative IRR for them.

Raser built a geothermal plant when many shorts thought they would not be able to. But they have not shown that they can generate revenue from it, let alone the full 10 MW they promise. And even then, they have not even promised earnings.

In other words, Citron and 10-Q Reporter will very likely be proven correct that this is a fraudulent company, and they just underestimated how long Higginson and Cook could keep the scam going.

2008 Nov 11 10:22 AM

[alphaMS:]

H. J. you say this,

"If Raser’s technologies are a scam, they’ve done a magnificent job fooling Pacific Gas & Electric, Merrill Lynch, Prudential Capital, United Technologies (UTX), the City of Anaheim, U.S. Senator Orrin Hatch (R-UT) and New Mexico Governor Bill Richardson, just to name a few. "

With the exception of PG & E, none of the others you named are looking at raser's technology. Symetron is raser technology. The technology behind the success of the geothermal comes from UTC Power.

You focus on "net monetization", which of course is how raser is selling itself.

It is rare, if ever, that I see any type of fundamental analysis done using "net Monetization".

The insider buying is small and clearly token buys. The amount of purchased shares pales in comparison the amount Higginson disposed of about a year ago-- the method he used to mask the transaction also raises eyebrows.

When you say, “….a company that now seems all but certain to recognize significant revenues from its geothermal operating unit soon.”

I ‘m not certain what you mean by significant or soon, but 1% of the revenue from a fully operational 10MW plant, is not significant when they are racking up losses of about $6-$7 million per quarter.

2008 Nov 11 03:32 PM

[H.J. Huneycutt:]

Shorty & Alpha,

Now that I used the word "revenues" in the article; I realize I probably should've said "cash flows", as I'm not necessarily quite as concerned with actual GAAP revenues as much as I am the cash flow element.

Why do you say that Thermo is almost definitely a negative IRR? Not that I'm disagreeing --- I'm just curious to hear your analysis. My thought was that it was probably be close to break-even or slightly negative, but the value of all their properties and their know-how is worth something as well, and at $3-$5 per share, I think even if they don't live up to expectations, there still might be some value in the company.

AlphaMS,

I regret not clarifying some of my thoughts further. You are correct in that the power system technologies are not technically theirs --- however, to my knowledge, they are amongst the first to utilize it on this scale. Given the nature of the geothermal industry, I believe their early experience with UTX's technology might be a bit of an advantage. Mind you, they aren't out there manufacturing widgets, so even if others have access to the same equipment as they do, there is still significant value-added by them that can not be imitated without doing the same things they have.

I certainly wouldn't suggest I have full trust of all the insiders of the company (trust must be earned, after all), but at this stage, given the market's valuation, I simply believe that the likelihood is that they are worth more than $4 or $5. And they might be worth quite a bit more. It's no safe bet, but it's not a bad position in a diversified high-risk portfolio.

2008 Nov 11 07:05 PM

[aeronaut4life:]

While the Pure Cycle binary generation units themselves are indeed UTC's intellectual property, there's more to a geothermal plant than than. Raser has succeeded in developing a proprietary rapid deployment modular plant design, including how it is controlled and monitored. In a traditional stick-built geothermal project, it takes about 5 years to build a plant because of sequencing issues. Therefore, nearly half of the development cost is interest paid on the funding commitment. Raser's rapid deployment design drastically changes the economics of geothermal. Don't forget that under the funding arrangement with Merrill Lynch, Raser's capital contribution to a new plant is well field development, meaning drilling the production and re-injection wells, flow testing, etc. Merrill completely funds the construction of the above-ground plant. The water temperature after passing through the first set of turbines is still sufficient to generate more power before being re-injected. So, Raser installs 50% more turbines at no additional capital outlay for Raser. The bottom cycling add-on is funded entirely by Merrill. Get a clue, people!

2008 Nov 13 01:41 AM

[Chris B:]

Green tech stocks are a lot like the dot-coms of the 90's in that there is/was such a wall of money flowing at them that schemers can potentially still attract millions in capital from the didn't-do-their-homewo... this-is-a-sure-thing crowd. Remember Zap! and their claims to be building an electric car? Look on wired.com for a synopsis of that scam. Enthusiasm is expensive for investors.

RZ claims to have an pretty trick-looking electric motor that allows a full-size hybrid SUV to get 100 mpg. Isn't it strange, then, that Toyota, GM, Ford, Chrysler, Honda, Nissan, VW, and other automakers aren't beating down their door, not to mention manufacturers of industrial motors who spend millions trying to eke out 0.01% efficiency gains. To watch the company test this magical motor, you have to sign documents that would open up the possibility of a lawsuit for any company in the motor or vehicle business. Perhaps generating lawsuits is the real value of this motor. ZAP!

Who knows, maybe current management inherited a company that was initially based on a scam and are in the process of turning that funding into a geothermal utility. The fact that they haven't sold or entirely dropped Symetron in embarassment suggests otherwise to me.

That's a shame too. I'm a believer in geothermal, but I don't want to buy Ormat at a PE of 25.

2008 Nov 13 11:37 AM

[Chris B:]

Green tech stocks are a lot like the dot-coms of the 90's in that there is/was such a wall of money flowing at them that schemers can potentially still attract millions in capital from the didn't-do-their-homewo... this-is-a-sure-thing crowd. Remember Zap! and their claims to be building an electric car? Look on wired.com for a synopsis of that scam. Enthusiasm is expensive for investors.

RZ claims to have an pretty trick-looking electric motor that allows a full-size hybrid SUV to get 100 mpg. Isn't it strange, then, that Toyota, GM, Ford, Chrysler, Honda, Nissan, VW, and other automakers aren't beating down their door, not to mention manufacturers of industrial motors who spend millions trying to eke out 0.01% efficiency gains. To watch the company test this magical motor, you have to sign documents that would open up the possibility of a lawsuit for any company in the motor or vehicle business. Perhaps generating lawsuits is the real value of this motor. ZAP!

Who knows, maybe current management inherited a company that was initially based on a scam and are in the process of turning that funding into a geothermal utility. The fact that they haven't sold or entirely dropped Symetron in embarassment suggests otherwise to me.

That's a shame too. I'm a believer in geothermal, but I don't want to buy Ormat at a PE of 25.

2008 Nov 13 12:06 PM

[H.J. Huneycutt:]

Chris B,

P/E ratios aren't always a great way to value a company and they are particularly bad for evaluation companies with high up-front costs. I'd argue you need to look at book value and cash flows and if Raser is successful on the geothermal front, it appears as if it would be a very great bargain even if they bring in half the cash flows they expect.

My problem with ORA has been that their stock has looked significantly overvalued for a while. It's starting to look a little bit better now that it's dipped down into the mid- to upper- $20 range, but I still view it as a riskier investment than Raser due to the high built-in expectations (which apparently makes me a contrarian, but that's fine). Since there seems to be a large swath of investors who despise Raser based on their lack of success for their Transportation sector, it appears to me that their stock offers a much more attractive opportunity. Like I said in the article, even if their Symetron stuff fails, I'm not sure it matters so long as the geothermal segment succeeds given their current valuation.

2008 Nov 13 12:48 PM

[hummer:]

Jacke H:

With the funding announced today and again on 12/14/08, RZ now has all the money it needs to complete 105 MGW in 09 and according to RZ will not need to go back to the street again.

BC at the announcement today said to expect 65 million in revenues in 09 which is a buck a share. Not bad.

in 2010, we can expect that to at least double. 2010 screams for net earnings per share w/o anything but geothermal.

RZ has so much more upside that ORA, there is not comparison.

RZ's battle with the shorts is now at its lowest. There will be no more shares added to the float. Shorts won't be able to find more shares. UBS is covering and Knight had to cover today after it learned no additional shares in the market despite its attempt to hit RZ hard at the open.

So what does this all mean?

2009 is a revenue year for RZ and it's no longer a concept company.

No more financial issues or plant issues. All management has to do is to execute and I believe RZ will.




On Nov 13 12:48 PM Jake Huneycutt wrote:

> Chris B,
>
> P/E ratios aren't always a great way to value a company and they
> are particularly bad for evaluation companies with high up-front
> costs. I'd argue you need to look at book value and cash flows and
> if Raser is successful on the geothermal front, it appears as if
> it would be a very great bargain even if they bring in half the cash
> flows they expect.
>
> My problem with ORA has been that their stock has looked significantly
> overvalued for a while. It's starting to look a little bit better
> now that it's dipped down into the mid- to upper- $20 range, but
> I still view it as a riskier investment than Raser due to the high
> built-in expectations (which apparently makes me a contrarian, but
> that's fine). Since there seems to be a large swath of investors
> who despise Raser based on their lack of success for their Transportation
> sector, it appears to me that their stock offers a much more attractive
> opportunity. Like I said in the article, even if their Symetron stuff
> fails, I'm not sure it matters so long as the geothermal segment
> succeeds given their current valuation.

2008 Nov 14 01:40 AM