Ormat: Time Will Tell Whether the Warning Was A One-time Event

Ormat Technologies Inc. (ORA) gave the market an unpleasant surprise this week, something which is highly irregular for this company.

While the analysts' consensus predicted earnings per share of $0.23 for the first quarter of 2007, the company said it would report a loss of $0.14-17 per share. It claims that this "is due to the cumulative effect of several unrelated events." First of there is the increase in maintenance costs incurred at three sites, which was attributed to two factors. The first is maintenance overhauls that are scheduled every four to five years, as well as the increase in costs to assure higher well availability in the summer months. Sales had fallen during the overhaul period. The second factor is the delay in the completion of a number of projects and the resulting increase in costs. Ormat also said that it also incurred settlement expenses of an outstanding dispute regarding royalty payments claimed in respect of its Steamboat 1 project.

That these reasons have only been disclosed now is rather odd, but on the other hand, the announcement could bring Ormat's stock to values that are a lot more economic, thereby giving a good many investors - who have been constantly chasing this stock but have never bought it because of the price - the opportunity to buy shares in an excellent and interesting company with tremendous potential at a "normal" price. It is important to note in this regard that the company also said in the latest announcement that it "expects to be profitable for the remainder of its fiscal year and believes that its business and prospects remain strong."

Two weeks ago, Lehman Brothers published a review of Ormat in which it rated its stock "Equal Weight," which is slightly better than "Hold," after reading the company's 10-K report and participating in the conference call on its results for 2006. Lehman Brothers expects Ormat to post earnings per share of $0.23 for the first quarter of 2007. It also lowered its earlier forecasts to $1.06 for 2007 from $1.14 and $1.28 from $1.79 for 2008. This is a significant reduction, but it is most certainly not because of the company's announcement on Monday. As this review was published on April 18, I have been wondering why the company did not approach Lehman and warn them that their revised forecasts were probably still too optimistic. This behavior is not the kind that one would expect from a management team like that of Ormat.

What is interesting here is that the analysts at Lehman actually raised their target price to $39 from $37 for Ormat's stock, which broke through the $40 level just as the review was released. I have a feeling that the analysts felt that something was up, so they downgraded their forecasts significantly, but as I noted earlier, two weeks ago they did not suspect that the company would post a first quarter loss, and certainly not for the reasons detailed in its announcement. They said in their review that several investors had told them that they feared problems at the Puna and Ornesa sites, but they only mentioned this briefly.

Ormat will participate in the Jefferies 3rd Annual Global Clean Technology Conference today and in the Goldman Sachs Alternative Energy Conference 2007 tomorrow, both of which are taking place in New York. It will no doubt face a good many questions about this week's announcement. Yet despite this, if the stock takes a hammering so severe that it edges towards an economic price, below $30 (something that will probably not happen), it will create an interesting opportunity for an entry. As someone who believes in the company, in its management and the field, I feel that a stock like this should be in my portfolio, and that this could be the opportunity to make a move, although caution must be exercised since the precise extent of the problems and the financial media's stance in light of these are still unclear.

Disclosure: The author invests in various equities and may have a personal holding in the stock of companies named.

ORA 1-yr chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.