By Warren Jual
Although the market for alternative energy sources is potentially enormous, the world still depends heavily on oil and natural gas. Alternative energy has not yet been able to fully substitute the benefits and uses of fossil fuels. However, there are alternative energy companies that are positioned to profitably ride the sluggish alteration of energy dependency. Here are five stocks that fit that description.
First Solar, Inc. (FSLR): Although FSLR recently downgraded its EPS forecast for 2012, earnings are expected to increase annually by 17.04% for the next five years. This is coming off its most recent quarterly revenue growth of 26.1% year over year. FSLR has a forward price to earnings ratio (fye Dec 31, 2012) of 9.25 along with a PEG ratio (5 year expected) of 0.36. It also has a profit margin of 19.5%. A cross-sectional analysis of FSLR creates addition optimism.
When compared to Sharp Corporation (SHCAY.PK) and Suntech Power Holdings Co. Ltd (STP), FSLR is very efficient operationally. SHCAY.PK and STP have operating margins of 2.44% and 6.09% respectively, where FSLR has an operating margin of 23.02%. According to the previously referenced article, in aggregate, solar stocks lost about 75% of their value in 2011. Although many may be heading towards bankruptcy, others will be compensated for their durability. Because FSLR is seemingly one of those companies, I would consider this a great candidate for further research.
American Electric Power Company (AEP): I like AEP because it seems to be well diversified and stacks up well on an operating basis against its peers. Along with generating electricity using hydroelectric energy and operating unregulated wind farms, it also does so using coal, natural gas, and nuclear energy. I recommend this stock for the long-term investor that requires a steady dividend. AEP has a payout ratio of 49%, a 5 year average dividend yield of 4.4%, and a forward annual dividend yield of 4.6%.
In aggregate, the financials strongly insinuate slow growth and stability. Because this stock is trading at around $41.00, close to its 52-week high of $41.98, I would recommend a limit buy order at or slightly below $40.00. The ex-dividend date is in November. There is ample time to buy shares and receive a dividend.
Cosan Limited Class A Common St. (CZZ): CZZ had impressive quarterly revenue growth of 44.3% year over year. CZZ’s main competitor is Archer Daniels Midland Company (ADM). CZZ has a trailing price to earnings ratio of 4.34 and a PEG ratio (5 year expected) of 0.17, where ADM has respective ratios of 8.85 and 1.16. These considerably low ratios imply that CZZ may be undervalued. CZZ also operates more efficiently. It has a gross margin of 14.15% compared to ADM’s gross margin of 5.28% and an operating margin of 6.26% compared to ADM’s operating margin of 3.37%.
About 5% of the world’s ethanol comes from Cosan factories. Sugarcane grows well in Brazil and is far more cost effective in producing ethanol than corn. Recent news explains that the U.S. decision to stop subsidizing domestic ethanol production could help Brazilian ethanol penetrate the U.S. market. Other news says that CZZ has promising long-term growth prospects.
To better access the ethanol consumer marker, CZZ created a joint venture with Royal Dutch Shell (RDS.A) called Raizen. This joint venture increases Cosan’s competitiveness in biofuels and fuel distribution businesses. Something to consider when purchasing shares of CZZ is that Cosan does not directly trade on the NYSE. The NYSE traded CZZ is actually a holding company that owns the shares of Cosan. Despite the fact, due to its existent market share in Brazil and its strong positioning to enter into new markets in the U.S., I speculatively recommend a buy.
AeroVironment Inc. (AVAV): In addition to its unmanned aircraft systems (UAS) business, AVAV offers electrical vehicle charging systems for passenger and fleet vehicles. Although revenue from its business segment Efficient Energy Systems (EES) only accounted for 14.6% of overall revenue for the fiscal year ended April 30, 2011, EES revenue grew by 68.7% from the fiscal year ended April 30, 2010. AVAV is placed in a competitive industry. Its two main competitors are L-3 Communications Holdings Inc. (LLL) and Lockheed Martin Corporation (LMT), with market caps of 6.79B and 25.9B, respectively. AVAV only has a market cap of 662.25M.
Although seemingly resourceful, LLL and LMT failed to come close to AVAV’s quarterly revenue growth of 26% year over year. Also, AVAV is only competing with LLL and LMT in terms of aerospace technology. LLL and LMT do not have an EES segment. AVAV is subject to a very low level of risk. Because AVAV operates predominately in the U.S., it has little exposure to exchange rate risk. Because it does not enter into interest rate derivative financial instruments, it has little interest rate risk. AVAV also does not have any interest-bearing debt. All of this coupled with low market volatility shown by a beta of 0.4 highly increase the attractiveness of this stock. I give this stock a buy/hold recommendation.
Amtech Systems Inc. (ASYS): ASYS is the market leader in solar diffusion processing systems. Management expects that long-term growth will be driven by several macroeconomic factors, including government incentives for solar-generated electricity, a decrease in the cost of solar energy, and an increased awareness of environmental issues. This is described in further detail in the 10K. For the fiscal year 2011, ASYS recognized net revenue of $247 million. $212 million or 86% of the total revenue was solar revenue. This can be compared to the fiscal 2010 results with net revenue of $120 million, which included $99 million of solar revenue or 82% of the total revenue.
As the solar market continues to develop, advances in technology will be vital to remaining competitive. ASYS has several patents in the U.S. and other countries. Most of these patents will not expire for several years. The recent growth in revenue can be contributed to the acquisition of Kingstone and the recent expansion of operations. This has placed, and any future expansion will continue to place, a significant strain on their resources. To allow growth to continue in the future, ASYS has taken measures to significantly expand manufacturing capacity and it has hired additional employees to support the increased strain on operational areas.
Quarterly growth was listed at 33.8% year over year, as compared to that of its main competitors, Applied Materials Inc. (AMAT) and GT Advanced Technologies Inc. (GTAT), of –24.5% and -5.10% respectively. Concerning stock price, ASYS has a price to earnings ratio of 3.82. This is substantially less than that of AMAT and GTAT, which have price to earnings ratios of 8.00 and 5.02, respectively. One area of concern is that as of September 30, 2011, one customer represented 33% of ASYS’s accounts receivable. This implies substantial credit risk. ASYS is not expected to pay dividends. Profits are reinvested to support growth. I remain cautiously optimistic about this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.