On November 5, 2007, I posted a lengthy article on this site regarding Raser Technologies (RZ). At that time, the market cap was $550 million. Today, it’s 43% higher in a downward-trending market. This essay provides an update on the current activities and highlights the significance of recent announcements.
On January 18th, Raser Technologies made a substantial announcement with partner Merrill Lynch (MER). There are a few significant take-aways which are relevant to the stock:
1. Many people (in fact, 3.8 million shares worth) are still short this stock – predominantly on the belief (if the chat boards are any guide) that this company is “not real”, “does not have working technology”, or “is a fraud.” Presumably, although Merrill Lynch has made mistakes before (witness a series of huge write-offs and a new CEO), they did some homework in verifying the validity of the technology (remember UTX is a partner) and the resources. RZ’s CFO pointed out “these guys know the power industry very very well.”
2. Now that it’s evident that this company is not a fraud, it’s time to start modeling the revenue and earnings streams to the company – since, after all, that is how people value stocks. Until now, there were no metrics investors could use to estimate the company’s fundamentals. In fact, anyone who does an automatic screen for this company still sees relatively punk fundamentals - still no revenue or earnings. That is about to change…
3. In the press release and on their webcast, the company laid out the revenue streams they will receive from MER and from the projects. Without rehashing the language from the press release, the summary amounts to this:
- 3.1. Each 10 mhw plant generates somewhere north of $120 million in revenue over 35 years.
- 3.2. Using a 10-15% discount rate, the net present value amounts to $20-$30 million for the first 10mhw.
- 3.3. This deal is for 100 mhw with a right of first refusal on another 55mhw.
- 3.4. So that means the first 100mhw, assuming it takes 24 months to implement (conservative), will be worth roughly $200 million.
- 3.5. The additional 55mhw, if exercised with MER, would have a value of $100 million in today’s dollars discounted at 12%.
- 3.6. That means the MER deal is worth $300 million in net present value dollars, and in TOTAL REVENUE dollars, this is worth around $1.8 billion. For a company which people thought was a fraud prior to January 17, putting a deal on the tape with Merrill Lynch worth $1.8 billion is pretty significant.
4. The company continues to reiterate their plan to roll out 100 mhw per year for the first 3 years and 150 mhw per year thereafter….that would put the NPV (under this same math they signed with MER) at about $2 billion – just in the first 10 years.
5. Realizing that revenues have no cost of goods associated with them (translation: 100% gross margin), and the company’s cost structure on the opex side is relatively lean, a substantial portion of this revenue drops to the bottom line. Some basic math assuming JUST the MER deal and nothing else says that this co can earn $0.60 in EPS in 2009. A 20x P/E on a renewable energy company seems awfully low – regardless of the market environment given that competitors tend to trade north of 50-100x.
6. In their most recent “up to speed” video (available on their website), they introduce the new director of their waste heat recovery program. Nobody is talking about waste heat recovery, but this could be meaningful adder to EPS by the end of 2008.
7. Let’s not forget the scarcity value of a profitable renewable energy company – how many of those are out there? How many geothermal companies are out there? VERY FEW. What happened to solar stocks in 2007 will likely happen to other areas of alternative energy in 2008 as people broaden their horizons.
Bottom line: this is a stock for all environments. It’s got huge growth ahead, will be profitable in 2008 and has a massive short interest. Target is $30+.
Disclosure: Author has a long position in RZ