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In part I of this series, I made the case that 2010 might be the year that transmission stocks caught investors' attention, as smart grid stocks did in 2009. In part II, I looked at the transmission stocks in our Electric Grid stock list, and compared their financial strength.

My initial screen, based on Current ratio, Cash on Hand, Debt, Cash from Operations, P/E ratio, and dividend yeild allowed me to narrow the list down to Valmont Industries (VMI), Jinpan International (JST), General Cable (BGC), MasTec (MTZ), and Wesco International (WCC) as stocks worth further research. I'm not buying any of these now, because I believe the market as a whole can nosedive at any time. It could also keep trending up for a while, but, on the whole, the possible upside gains do not seem sufficient compensation for the downside risks.

EMCORE Group

I particularly liked Valmont, because it has a high current ratio, no significant debt, and pays a small dividend. A reader suggested that if I liked Valmont, I'd like EMCORE Group (EME) even better. So how does it compare? Valmont has a 2.6x current ratio, can pay off its debt instantly with cash, has 12.2 trailing P/E ratio (Q4 09), and pays a 0.8% dividend. Emcore's current ratio is 1.45x, which is on the low (i.e. poor) end for the stocks in the group, could instantly pay off its debt, has an 11.7 trailing P/E (Q4 09), and does not pay a dividend. (Note that I used Q3 09 numbers in Part II; these were what was available at the time of writing.)

EMCORE's weaker current ratio and lack of a dividend don't make it more attractive than Valmont. A little more digging also turned up another problem with EMCORE: electric transmission seems to be only a small fraction of their overall business. This general mechanical and electicial construction group seems to get less than 20% of its revenues from transmission, quite possibly much less.

Further, as a construction firm, the best of the five companies above to compare it to would be MasTec (MTZ), which is also a contractor, as opposed to an industry supplier like Valmont. MasTec also is not a pure play, and probably only gets about 1/3 of its revenue from electrical transmission work, but MasTec sees transmission as key to the company's future growth. If it weren't for the lack of transmission focus, EMCORE would compare favorably to MasTec, which has an only slightly higher current ratio (1.6x), would need a couple of years to pay off its debt using internally generated cash, has a slightly higher trailing P/E (13.3), and also does not pay a dividend.

In short, EMCORE Group is probably not a very good way to invest in the Strong Grid.

AZZ Incorporated

I have run across AZZ Incorporated (AZZ) before, but had neglected to add it to the Electric Grid stock list, and didn't think of it when I was compiling the "Strongest Strong Grid Stocks." This time, I came across it on StockGumShoe, where Travis Johnson investigates the paid stock newsletter teases. If that sounds familiar, it's because we republished an article of his here in January. Motley Fool's Hidden Gems has apparently been teasing a stock which will save us from the implosion of the electric grid, and Travis makes a good case that it's AZZ.

One of the things I like about Travis's work is that he also goes into a good deal of depth looking into the same sorts of indicators I find interesting about companies after he ferrets them out. He has this to say about AZZ:

This one actually looks pretty appealing to me, as long as you’re not too impatient — they’ve got a price/sales ratio of under 1, but still manage to run a double digit profit margin, which is fairly unusual (though that margin might shrink), and they do appear to have a pretty strong national business with their large number of manufacturing and galvanizing plants, so they’re not completely stuck riding the regional trends if one of their areas sinks further into this recession.

The forward estimates by analysts are for very strong growth in the next several years, which gives them a price/earnings/growth (PEG) ratio of .59, which usually indicates a screaming value — but I’d be cautious about those future growth estimates. [There's much more here.]

I find it appealing too, especially after reading what he has to say about the balance sheet and insider trades. It still seems to have room to fall, though, but this one definitely deserves to be added to the other five "Strongest Strong Grid Stocks" listed in part two. These are the ones I'll be looking to add to my portfolio (assuming they're still strong) when the current euphoria turns into fear again.

Here they are (using Q4 09 data. Price data as of 2/10/10.) Note that most of the P/E's have dropped partly due to higher earnings in Q4 09 than Q4 08, and partly due to price declines in the last month.

Company Current Ratio T (see part II)
P/E (trailing) Yield
AZZ Incorporated (AZZ) 4.06x instantly 9.35 3.4%
General Cable (BGC) 2.1x instantly 11.34 0
Jinpan International (JST) 2.3x instantly 12.77 0.6%
MasTec (MTZ) 1.7x 2 years 13.35 0
Valmont Industries (VMI) 2.6x instantly 12.2 0.8%

DISCLOSURE: Long BGC.

Source: Will 2010 Be the Year of the Strong Grid? Part III