Diamond in the Rough
Alternative energy stocks are usually exciting, development stage companies with break-through technology which just might totally transform the way we live. Unfortunately, that's a better description of a speculative lottery ticket style company than a solid investment which will provide solid, long-term capital gains. So it's always a pleasure to find a company whose products are so commonplace that we don't even notice them, even when we see them every day, and yet is involved in essential work to reduce our dependence on fossil fuels.
I took this picture in a new subdivision near me. They are scattered unobtrusively in back alleys, and painted a dark green to fade into the background. This is a transformer, which takes high voltage electricity and converts it into the lower voltage that runs your refrigerator and lights your compact fluorescent bulbs. It's also made by The ABB Group (ABB), a glaring omission from my article on transmission stocks as a way to invest in wind energy. That omission was due to the fact that, while I knew they are heavily involved in electricity Transmission and Distribution [T&D], I had no idea that they were anything other than what you might expect when looking at all those boring green boxes with the scary warning labels.
That changed when I read last week's Renewable Energy Insider column about improving T&D efficiency by Bob Fesmire, an ABB spokesman, and listened to an interview with him on the Inside Renewable Energy podcast. He mentioned ABB's FACTS [Flexible A/C Transmission Systems - also supplied by Blue Chip Alternative Energy Portfolio pick Siemens (SI)], which improve the carrying capacity of existing transmission lines (which is very important because of the difficulty and expense of expanding existing lines in urban areas, and of building new transmission lines anywhere), as well as Gas-Insulated Substations [GIS], which allow utilities to upgrade substations in dense urban areas with a smaller footprint and less noise than the original (also supplied by Toshiba (OTCPK:TOSBF) and Mitsubishi Electric, among others.) Finally, they also have a strong presence in High Voltage DC transmission, which many energy advocates are arguing will be essential for a modern grid, which will allow us to bring concentrating solar power from the US Southwest to the rest of the country as well as bringing North African Concentrating Solar power to Europe..
ABB clearly does not have the T&D efficiency space to itself, but it is hard to imagine a future in which it wouldn't be a player in upgrading our T&D infrastructure.
As you see from the chart, ABB has been on a tear. With a P/E ratio of 32 and a dividend yield of just 0.8%, this is not a value pick. Nevertheless, it has the same P/E as its larger and more diversified competitor Siemens (but without the cloud of the bribery scandal, which Siemens is trying to put behind itself).
Transmission Investment vs. Retail Electricity Sales
T&D investment has been lagging in the United States for decades, and politicians and public utilities commissions are starting to take this long-term underinvestment seriously. Hence, it is not unreasonable to assume that annual transmission spending in the US will increase to at least 1975 levels, and possibly much higher in the next couple of years, with ABB's US revenues doubling as well. European T&D spending is also increasing in order to ease the adoption of renewable electricity generation, but is unlikely to increase as much, as they have not neglected their grid to the same extent as has the United States. To me, this implies annual revenue and earnings growth even in in excess of the 25% currently predicted by analysts, making the 32 P/E look reasonable.
Given that most alternative energy picks don't have earnings at all, and those that do have even higher valuations, ABB deserves a look. I expect to buy more for my clients and myself on any decent pullback.
Speculative investors interested in T&D might also consider American Superconductor (AMSC.) As the name implies, they hope to use high temperature superconductors to increase the capacity and efficiency of the grid, as well as providing enabling power electronics for wind farms. Earnings are negative, but revenue is growing at 30-50% a year, and the stock has been on a tear since they secured Department of Homeland Security money for a superconducting cable to help shore up New York City's grid. In other words, they're an exciting, early stage company with break-through technology which just might totally transform the way we get electricity.
Disclosure: Tom Konrad and/or his clients have positions in these companies mentioned here: ABB, SI.