2 Geothermal Heat Pump Stocks to Consider 12 comments
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Geothermal heat pumps [GHP], also know as Geoexchange, or ground-source heat pumps have been recognized by both the Environmental Protection Agency and the U.S. Department of Energy as the most efficient and environmentally friendly way available to heat and cool a building. The downside of GHPs has always been the large up-front cost associated with the cost of the ground loop.
With Obama promising a massive energy efficiency overhaul of federal buildings, the up-front cost is unlikely to be important so long as the expected returns on the investment are sufficient to pay for the upgrade. Since geothermal heat pumps on medium and large buildings typically have internal rates of return in excess of 28%, this should not be a problem. Many federal buildings also have significant open space or parking lots near them which can be used to install ground loops. In addition, a new federal tax credit for geothermal systems was passed in 2008 (10% for commercial installations, $2000 for residential), and may provide additional stimulus to the rapidly growing market in the private sector.
Hence, now seems an opportune time to consider investment in companies selling GHPs. I know of two such publicly traded companies in North America (there are also a large number of private players, especially installers.)
Waterfurnace Renewable Energy (WFIFF.PK)
Waterfurnace manufactures heat pumps for both residential and commercial buildings, as well as heat pump pool heaters. According to the company's third quarter financial statements, the company is in good shape from a liquidity perspective, so much so that it eliminated an unused line of credit in the quarter, and paid off the balance of outstanding bonds it had used to build its facilities.
The company has a strong Current Ratio of about 2.5. In fact, current assets exceed total liabilities. Its cash flow from operations is growing and more than sufficient to continue funding current levels of investment. I've previously mentioned Waterfurnace in my articles about Wind and Heat Pumps and how to invest in the Pickens Plan. As I also pointed out recently, Waterfurnace pays a dividend of over 3%.
A reader recently left me a comment pointing me to LSB as a GHP play. Unlike Waterfurnace, the company is not a pure-play on heat pumps. It also sells chemical products for a broad range of industries including mining and agriculture. Its climate control division, which includes heat pumps and air handling systems, accounts for about 41% of sales.
Like Waterfurnace, LSB has a strong balance sheet and has been repurchasing convertible notes with available cash from operations. It also has an excellent current ratio of over 2.5 and current assets exceed total liabilities. A review of the company's most recent quarterly statement shows that working capital growth has been a drag on cash from operations, while income has been reduced by losses on natural gas hedging contracts and an unplanned stoppage at one of its facilities. Despite these hiccups, I see little reason to doubt that LSB will continue to be able to fund its business growth and investment from cash flow.
Conclusions
Both of these companies boast strong balance sheets and inexpensive valuations. In today's volatile markets, that is no reason to expect that the stock price cannot fall further, but that would be a (better) buying opportunity for companies I'm comfortable owning for the long haul, and which are likely to receive a short term boost from the stimulus package.
DISCLOSURE: Tom Konrad has long positions in WFIFF and LXU.
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This article has 12 comments:
i installed a geothermal unit in nebraska, and, the yearly savings was tremendous in heating and cooling, but mainly heating. the additional initial installation expense was approximately 33% more, however, this was recovered in 3 years time. and that is without the tax credit. i highly recommend geothermal, and am now considering it for my home in texas. i certainly would recommend on ALL new home construction.
WFI & also on installing a ground loop heat pump at my house.
I was dismayed to learn that the cost of a ground loop system would be more than 3X that of the simple air-to-air system. The cost of creating the ground loop in my case (vertical well shafts) would add $20K+ to the system cost (for 3.5 ton unit). I live in typical suburbia so some of the other ground loop creation options are not available to me - trenching is not an option and I have no handy body of water to use either.... I live in the mid-atlantic and concluded that without some serious subsities the ROI was not going to close. In less temperate climates I do think they are a great idea.
Here is another interesting concept, have you hear of it?
Claim is 30% better efficiency, cheaper, and the working fluid is water
no special freon type gasses involved....
Even if only half true, still pretty good ????
blogs.zdnet.com/green/...
Your thoughts appreciated....
Residential and especially commercial geothermal applications are an economically superior product compared to their competitors with big savings realized within only 5 years of operation. The problem is that those upfront costs plus consumer ignorance prevents builders from spending the extra upfront money that would benefit the consumer. This seems like a very temporary state of affairs.
I fail to see why investors are so excited over debt-laden solar, ethanol, or wind stocks that they are willing to pay PE's of 20+, but that profitable geothermal heat pump stocks with little debt like LXU sell for single-digit PE's. Trendiness and hype I guess.
$20k to dig a hole and install some tubing in the back yard? That seems kind of high to me. You could rent a backhoe yourself for a couple hundred a day! Sounds like you either have no space to work with or live on extremely rocky soil. If not, I'd suggest another estimate. Sometimes, a highball quote is a contractor's way of saying no thanks to a too-small job.
Where I live there are dozens of subdivisions popping up in rockless, flat beanfields. Each house has the minimum insulation required by code and the cheapest HVAC system available. That's because most buyers are more interested in the paint and tile colors than the long term cost of operation. If those buyers would wise up, the builders would offer what they want. Likewise, if building codes improve, expect geotherm to get a look in such applications. That might not happen soon, but you can't go wrong investing in already profitable companies that have that possible upside.
I agree. The market's giving us an opportunity to make extraordinary profits. Good Luck (Luck doesn't really exist, people always tell me good luck, but with preparation, it's simply a probability of success that I have tried to increase to the point where failure is highly improbable).
LXU is a killer company.
Glen B
On Dec 22 11:39 AM Chris B wrote:
> $20k to dig a hole and install some tubing in the back yard? That
> seems kind of high to me. You could rent a backhoe yourself for
> a couple hundred a day! Sounds like you either have no space to
> work with or live on extremely rocky soil. If not, I'd suggest another
> estimate. Sometimes, a highball quote is a contractor's way of saying
> no thanks to a too-small job.
By saying geothermal, do you mean digging 50-70 m holes and using geothermal energy, or you mean laying down pipes at 1.5 meter in the ground and using sun energy stored in ground?
First one could cost more than 20K and is the most efficient.
Second one costs 2K more that air-to-water system and is very efficient (but fractionally less than geothermal).
Comparisement between air-to-water and ground-source pretty much depends on location. If winter temperatures do not get bellow 5 degrees Celsious, air-to-water is most economical. Bellow that, ground source is better.
Disclosure: (my father is long in air-to-water heat pump :)
Tom, Made any money on this dog yet?
Sorry for the delay, I wish SA had a way for me to get notified when one of my comments was replied to ;-/
That price is from a good friend of mine who is in the residential and commerical business for HVAC.
Due to lack of large open spaces, in my area the ground loop is installed vertically in what amounts to a well shaft similar to a water-well with a loop of tubing in it. one well shaft is required for each ton or so of capacity - in my case 3.5 tons meant 3 well shafts @ 6K+ each for drilling, sleeves, tubing, ..... etc... very disappointing.
If I lived near a pond or if I could use the horiziontal approach it would be less for sure, I do not know by how much.......
On Dec 22 11:39 AM Chris B wrote:
> fatpitch2,
>
> $20k to dig a hole and install some tubing in the back yard? That
> seems kind of high to me. You could rent a backhoe yourself for
> a couple hundred a day! Sounds like you either have no space to
> work with or live on extremely rocky soil. If not, I'd suggest another
> estimate. Sometimes, a highball quote is a contractor's way of saying
> no thanks to a too-small job.
>
> Where I live there are dozens of subdivisions popping up in rockless,
> flat beanfields. Each house has the minimum insulation required
> by code and the cheapest HVAC system available. That's because most
> buyers are more interested in the paint and tile colors than the
> long term cost of operation. If those buyers would wise up, the
> builders would offer what they want. Likewise, if building codes
> improve, expect geotherm to get a look in such applications. That
> might not happen soon, but you can't go wrong investing in already
> profitable companies that have that possible upside.