Sell Ormat Technologies (ORA)

09/28/2010 12:58 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It’s increasingly hard to figure out how much risk there is in owning shares of Ormat Technologies (ORA). There’s no doubt in my mind that the company is the best global pure play on the expansion of power production from geothermal sources.

But how much potential return do I need to see before the risks in that pure play are worth taking?

Especially since the risks in the stock keep rising.

Government price subsidies and financing programs for geothermal power are shakier than they were a year ago. (And they were pretty shaky back then too.) The financial markets haven’t become projects a lot more forgiving for projects like these. National goals for alternative energy production remain on the books but they aren’t exactly top of mind for global leaders still fighting off a recession. And that has all shifted more of the risk in exploring for, developing, and financing geothermal plants to Ormat. The company is getting an increasing large percentage of its revenue from building and operating geothermal plants rather than from the less risky manufacturing of geothermal equipment for sale to other power producers.

The problem for an investor is summed up very nicely in Wall Street’s consensus earnings estimates for 2010 and 2011. This year Wall Street says that the company will earn 41 cents a share. That’s a huge drop from $1.35 per share in 2009. And it makes a stock that trades for roughly $30 a share rather pricy. That’s a price-to-earnings ratio of 71 on projected 2010 earnings.

What really supports that price is the consensus estimate of $1.02 for 2011.

I’ve got two questions, though, about that estimate. First, how likely is it? Second, if that’s a rebound 150% growth rate off the depressed 2010 earnings, then what’s the company’s earnings growth after that bounce? Wall Street projects a five-year average growth rate of 29% for the next five years—which, of course, includes that 150% bounce in 2011.

I just don’t like the odds that I’m seeing here. Counting on a company facing as many risk factors—and all of them growing—as Ormat is to achieve a 150% growth rate when margins are under pressure and capital costs are uncertain just doesn’t seem attractive

In my calculations of a one-year target price I just can’t get much above $33 a share. That’s just 10% higher from here. (And from recent action the stock doesn’t seem to respond to a rally in the rest of the market with a move of it own so I don’t see the upside to waiting for a rally that will lift all boats.)

As of September 28, 2010 I’m selling Ormat Technologies out of Jubak’s Picks with a 29% loss since I added it to the portfolio on November 17, 2009.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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