Waiting for Geothermal

02/25/2010 4:32 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

On February 23rd, Ormat Technologies (NYSE: ORA) reported fourth-quarter results that paid the price of the global economic slowdown and of delays in any US plan to promote alternative energy sources.

In the company’s first business segment, electricity generation from its geothermal power plants, Ormat reported an increase in revenue of just 2.9%. Electricity generation went up 14.2% in the quarter, but the average price per megawatt hour fell by 12%. That’s exactly what you’d expect in this slow economy.

In the company’s other, much smaller products segment, the company reported revenues of $31.4 million from the sale of generating equipment to other geothermal power producers. Order backlog climbed to $90 million from $70 million.

The two segments added up to $95.3 million in revenue, essentially flat with the fourth quarter of 2008. Earnings for the quarter came to 35 cents a share. The positive surprise of four cents a share was due to higher than expected revenue in the company’s products segment.

Ormat isn’t projecting any improvement for 2010. Total revenue for the year will be $350-$370 million, down from $415 million for 2009.

I generally favor waiting when a long-term trend takes longer to assert itself than expected. Ormat is still the preeminent geothermal company in the world, in my opinion, and when the world gets serious about global climate change, Ormat will occupy a very profitable position.

The question, though, isn’t how long I can wait, but how long Ormat can. Ormat is still a rapidly growing company—that’s one of the reasons to own it—that’s investing lots of capital to build new geothermal plants. In fiscal 2010, the company has budgeted for $364 million in capital spending—a hefty $90 million increase from fiscal 2009.

The company ended the quarter with $46 million in cash and cash equivalents (and with $624 million in debt), and putting that cash together with lines of credit and a $100-million construction grant, Ormat has about $421 million in available capital. The company’s operations are cash-flow-positive, fortunately, and Ormat generated about $111 million in cash from operations in 2009.

I think you can see where my concern comes from: Ormat’s ability to finance its growth (through the construction of new geothermal plants) depends on its ability to generate substantial cash from operations. But if the global and US economies remain soft and the US government continues to drag its feet on setting a regulatory regime to govern alternative energy, then Ormat might not be able to generate the cash flow it needs to support its need for capital. (To understand why I’m worried about the US economy in the second half of 2010, see my post.

I’d definitely say this situation bears watching. As of February 25, 2010, I’m lowering my target price for Ormat Technologies to $38 a share by December 2010 from the prior target of $49 a share by November.

Full disclosure: I own shares of Ormat Technologies in my personal portfolio.

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