Ocean Power Technologies: Higher Oil Prices May Spark Consultancy Demand

Summary

  • OPTT is a slow-moving play, to say the least.
  • The technicals, however, have shown signs of life in recent months.
  • Shareholders will be hoping consulting, power from PB3 PowerBuoys and data will eventually move the needle here.
  • Looking for a portfolio of ideas like this one? Members of Elevation Code get exclusive access to our model portfolio. Learn More »

Peligrosa y poderosa ola de marejada de tormenta, escena provocativa oscura y temerosa

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Intro

We wrote about Ocean Power Technologies, Inc. (NYSE:OPTT) back in October of last year when we stated that the company still had significant upside potential. Despite the glaring lack of growth in the financials to date, companies that invest in electricity generation products (which are basically carbon-free PowerBuoys) that come from the ocean's renewable energy will continue to be supported as long as progress is being made. Given that the majority of this planet is made up of water, the opportunities are sizable concerning maritime solutions in sectors such as offshore wind, offshore oil and gas, and offshore defense to name but a few. Suffice it to say, if enough value is added, one would think that plenty of customers would be very interested here.

Technicals

If we pull up a chart of Ocean Power Technologies, we can see that we at least seem to have a short-term bottom in the stock. From the lows in January of this year, shares went on to test their 200-day moving average this week but did not have enough momentum to break through that resistance level. Long-term investors, however, will have been encouraged by the stock's recent tape action. Shares were able to take out their 50-day moving average with relative ease and we would expect buyers to enter on mass if indeed the 200-day resistance level can be taken out convincingly on the next attempt.

Rally in OPTT

Finally an Uptick in OPTT (StockCharts.com)

Fundamental Catalysts

Since investors have very little to go on in this play concerning a viable functioning business, we have reiterated in the previous commentary to watch the technicals to spot a change in the stock's fundamentals. Despite the fact, for example, that sales for the most recent second quarter more than doubled to hit $247k, OPTT is still nowhere near being profitable. Furthermore, the top-line print in Q2 was actually a sequential drop over Q1 and the higher operating costs in the third quarter resulted in a negative earnings print of $5.2 million for the quarter.

Given these types of trends where the net earnings loss continues to be many multiples over what the company is generating in sales, it is not surprising to see that over $240 million of losses have been assumed by investors at this point. When management was pressed on the most recent quarterly conference call on the company's line of sight to profitability, the CEO once more steered listeners to the data service segment where recurring income is intended to be the order of the day once enough Buoys get into the water. To this effect, the company recently appointed a new CFO to work in this area due to his experience with subscription models.

With respect to recent developments, the CEO highlighted the encouraging trend of the company's strategic consulting service, how OPTT's maritime domain awareness solution has been progressing, and the recent accreditive acquisition which is Marine Advanced Robotics. Probably, the most immediate item here which can favorably affect the sales numbers in Q3 and beyond is the booking of multiple engineering projects offshore. Crude oil, for example, has almost doubled in price since the third-quarter earnings report last December, so we would expect to see higher demand in Q3 from energy explorers & producers.

Valuation

Ocean Power Technologies' valuation is where things get interesting. Value investors, for example, would state that any company with a sales multiple of close to 50 does not constitute a value play. How are we to read into this? Bullish investors will state that the company's present market cap of $83+ million and sky-high sales multiple point to the huge potential in this play. While this may be true, the company's valuation will continue to keep value investors at bay. The reason being is that there are essentially two drivers of profit. One being sales and the other being assets. Considering the increasing costs which are taking place at the company, sales at present do not have the capability to drive earnings forward meaningfully in the near term.

Furthermore, on the assets side, OPTT's present assets are primarily made up of cash plus a small portion in property, plant, and equipment. Although shares are trading very close to book value, it has come at a cost with the number of shares outstanding now surpassing 55 million. Similar to inflation, which is rife in the world at present, those extra shares mean that the total amount of shares outstanding at this point are worth less than in previous times. Furthermore, with a further $5 million approx of operating cash flow being used in the third quarter, that $73 million cash balance is destined to keep on coming down until the fundamentals can change in here meaningfully.

Timing A Potential Long Entry

Since investors have no forward-based projections to work off, investors need to continue to base their assessments on the technicals and recent developments within the company and industry. Regarding the technicals, we reiterate our stance with respect to waiting for the 200-day moving average to be taken out. Furthermore, a drop in short interest (currently around the 4% mark), as well as some decent insider buying, would definitely foster confidence among impatient shareholders.

Conclusion

Therefore, to sum up, technically over the past while, we definitely saw some improvements in Ocean Power Technologies. Despite the ugly financials and lack of forward-looking guidance, we will continue to monitor the technicals as we believe the chart remains the best read on the fundamentals in this firm. We look forward to continued coverage.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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