Is Raser Technologies a Bargain, Or Just Cheap?

by: Tom Konrad, CFA

Raser Technologies (NYSE:RZ) stock has fallen almost 50% since the company announced an offering of shares on June 30. Although the round quickly filled, the stock continued falling, and it seems like a screaming deal. Is it?

Raser Technologies

On July 7, Raser Technologies sold $25.5M of stock and warrants in a secondary offering. According to press reports, this amounted to 13% of Raser's stock, thereby valuing the company at (very approximately) $200M, or $175M pre-money.

The units, each consisting of 1 share and 1/2 a warrant exercisable at $4.62 was offered at $2.98. Depending on how you value the warrants, this means that the institutional investors who purchased the shares valued the stock at between $2.50 and $2.75 per share, which was approximately what the company's shares were trading at the day the offering closed.

Low Temperature Geothermal Development

Raser's model is to focus on previously known, relatively low temperature geothermal resources which had previously been passed over because they had historically been too cool to develop for electric power. As I discussed in my overview of Geothermal Power, exploration risks have historically prevented much geothermal power production. By using known geothermal resources, Raser completely avoids the risk and expense involved in exploration.

There is also little technology risk, since the modular PureCycle turbines produced by United Technologies Corp. (NYSE:UTX) are only slightly modified (by UTC) from a decades old production chiller from the same company. Assembly-line manufacture of the turbines also speeds deployment. The twelve to 18 months within which they expect to be able to develop projects is half that of the industry standard 2-3 years.

Raser is currently in negotiation with lenders in order to obtain financing for its 300MW geothermal development pipeline. In order to obtain that financing, lenders want to know that Raser will remain in business in order to build and operate the proposed plants. The additional cash from the secondary offering will go a long way towards alleviating that concern.

Raser is also pursuing a Department of energy loan guarantee, as well as stimulus funding under the ARRA. With Raser's Thermo plant now in New Mexico selling power to the city of Anaheim since 2008, utilities now seem to believe that Raser can deliver on its promises. Some evidence of this came in the form of a (non-binding) term sheet with the Southern California Public Power Authority [SCPPA] for 110 MW of geothermal that envisions part of the purchase price paid up-front, in effect, having SCPPA finance part of the plant construction.

If any of these multiple avenues for project finance are finalized, I expect the stock price to receive a big boost from the currently depressed levels.

The 100 MPG Hummer

If turning the business model for geothermal development on its head is not enough, Raser is also working on hybrid vehicles. They've put together a range extended electric drive train for large vehicles, which they chose to showcase in a Hummer H3. Like Trinity AFS, they choose to grab headlines by ignoring the electricity used to charge the vehicle, and emphasize the relatively meaningless MPG number. I'm not sure if much of this technology is unique; large vehicles like the Hummer are especially well suited for dual mode EV conversions because the frame is capable of carrying the extra weight of batteries without an extensive redesign.

I personally would be happiest if Raser divested their Transportation and Industrial segment, in which they are pursuing the hybrid technology. There seems to be little obvious synergy between the two segments, and they don't seem to have an outstanding technology or business model. Furthermore, they face significant competition, not only from incumbent car and heavy duty vehicle manufacturers, but also from countless startups, such as Trinity.

I know of two other pure-play publicly traded companies in the large electric vehicle space: Balqon Corporation (OTC:BLQN), and UQM Technologies (NYSEMKT:UQM), and where there are two public companies, there are bound to be several private ones. A third public company, Odyne, went bankrupt last year and sold its assets to Dueco, which is now a competitor in the hybrid heavy equipment market. I would prefer if management were to focus on geothermal, where their business model is relatively unique in the industry and the main competition is with increasingly expensive fossil fueled electricity generation.

However, while management denies any intent to shed the transport arm in interviews, they seem to be doing the next best thing: Devoting most of their resources to geothermal. According to the last annual report, assets in the Transport and Industrial segment fell from almost $1M in 2006 to $750,000 in 2008; they have "reduced our resources committed to new developmental efforts" in this segment. Meanwhile, assets in the Power Systems (geothermal) segment grew from approximately $6M in 2006 to $168M in 2008.

Too Cheap to Ignore

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Raser's future success will be highly dependent on their ability to raise project financing for their very ambitious development plans. In the current environment, raising such financing is far from certain. They will need to raise significant amounts of money for project finance, and successfully develop those projects if they are ever to reach profitability. If they fail, the stock price will continue to fall.

With such large uncertainties, it is difficult to value the company, so my inclination is to rely on the implied valuation from the recent offering, of between $2.50 and $2.75 a share. These large investors would only have invested if they felt they were getting in at a discount to the value of the business, and so I am comfortable buying at slightly over $2.00, giving me a comfortable discount to the offering.

At these beaten-down prices, any good news should cause a sharp spike in the stock price in very short order.

End Notes 7/23/09

I wrote this article over the weekend, and have since then tripled my position, at prices between $2.00 and $2.05. I also bought some January 2011 $5 calls. This morning, Raser announced the restructuring of an existing line of credit, not something I would consider major news, but it's a step along the way to advancing the projects in their pipeline. The stock seems to be starting to rebound on the news.

DISCLOSURE: Tom Konrad and/or his clients own RZ and UTX.