Fuel Tech Profitably Cleans Up Pollution

Fuel Tech, Inc. (FTEK) provides engineering solutions for the optimization of combustion systems in utility and industrial applications worldwide. It offers boiler optimization, air pollution reduction, and control solutions.

The company operates in two segments, Nitrogen Oxide [NOx] Reduction Technology and FUEL CHEM Technology. The NOx Reduction Technology segment includes the NOxOUT, NOxOUT CASCADE, NOxOUT ULTRA, and NOxOUT-SCR processes, which reduces NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. The FUEL CHEM Technology segment uses chemical processes, including TIFI Targeted In-Furnace Injection technology, to control slagging, fouling, corrosion, opacity, acid plume, and loss on ignition, as well as the formation of sulfur trioxide, ammonium bisulfate, particulate matter (PM2.5), carbon dioxide, and NOx in furnaces and boilers. Fuel Tech distributes its products through its direct sales force, licensees, and agents. The company, formerly known as Fuel Tech N.V., was founded in 1987 and is headquartered in Batavia, Illinois

Financial Results: The Company continues to be very productive – it’s in growth mode in countries where pollution is s terrible problem, primarily China. With their last earnings results, FTEK also gave a solid forecast for the remainder of 2007, expecting revenues of $90 to $95 million. This is actually above the current estimates for the Company, so we could see some strong upside revisions to revenue estimates on the street. The numbers are falling to the bottom line fairly well, with earnings supposed to grow this year from $0.38 per share to $0.67 per share next year, nearly a 100% earnings growth rate.

Fuel-Tech’s balance sheet fundamental picture is also very strong, with over $1.50 per share in cash on the books, and no debt.

At the present level of $600 million market cap, FTEK also makes a possible acquisition candidate. Such speculation is beyond the scope of this report; however it does show that there is a comfortable level of value represented in the current FTEK share price relative to other companies in the industry.

Investment Recommendation: We recommend that investors accumulate FTEK shares at or below $27.40 per share, with a target exit price of $30 per share. This valuation is based on a 50x multiple (two times the annual top line revenue growth rate) for the $0.67 that FTEK is expected to earn next year. (2008’s expected levels).

Multiple Trade Ideas:

Buy the stock outright: We would commit 50% of the capital balance investors would like to commit to this company at present levels Monday morning, July 30th, 2007, at or below $27.40, and then look to add another 50% position if the stock price declines due to market activity, or specifically on its August 6th earnings date. The two-stage buy recommendation is based upon possible activity in the stock and market declines that may occur that don’t necessarily have anything directly to do with FTEK.

Covered Calls: On any shares purchased at or below $27.40, we would still look to write The December covered calls at $35.00 or higher against this long position. Current price for a December $35 call is $1.80 bid.

Stop loss: We would also put a stop loss sell order on the shares acquired at these levels recommended above, at a price of $25.40 (approximately 10% down from market price).

Call Spread Suggestion: Sell the August 30 Calls, and buy the September 30.00 Calls. This will give option buyers an opportunity to sell the front month, (August 30 calls are presently $1.05 bid) which offsets the cost of the longer term calls (September 30 calls are $3.20), giving an option investor a net cost for September 30.00 calls of $2.15. In this situation, option investors want the stock to stay static through August expiration, then rise past a level of $30, which is the break even level, into the September time frame.

Disclosure: Analyst manages a fund long FTEK stock, short FTEK puts, and long FTEK Call options.

FTEK 1-yr chart: