Paul's Pair: Alternative Energy

09/30/2005 12:00 am EST

Focus:

Paul Tracy

Editor, The StreetAuthority Market Advisor

"It's hard to believe that a little more than three years ago, crude oil traded under $20 per barrel," notes Paul Tracy. "It should come as little surprise that the search is on for efficient, cost-effective alternative energy sources." Here, he looks at a pair of favorites.

"Some forms of alternative energy are already being harnessed around the world today, from wind turbines and solar cells to ‘biomass power’ and fuel cells. It's important to note that many such technologies are still in the development stage or at least are in the very early stages of adoption. For those looking to participate in the alternative energy revolution without taking on excessive risks, in the text that follows I've decided to profile two of the more established names from this group.

"Praxair (PX NYSE) is the largest producer of industrial gases in the US. There are significant barriers to entry in this industry. The most obvious is transportation cost. It's very expensive to move gases from place to place. As such, to minimize costs, gases are rarely shipped great distances. Instead, Praxair usually locates its gas-producing plants near or on the premises of its customers to minimize transportation costs. Once that plant is there, Praxair has a tremendous cost advantage over would-be competitors.

"In the short-term, the refining market will be the growth driver. Praxair's hydrogen production is used in the refining process. Over the long-term, Praxair is extremely well positioned to benefit from the future ‘hydrogen economy.’ Fuel cells require a ready source of hydrogen gas. So, if fuel cells eventually become a reality, then the country will need to develop a hydrogen infrastructure that's similar to the gas infrastructure of today, including retail outlets that dispense hydrogen. As one of the largest producers of hydrogen gas in the US, Praxair stands to benefit immensely from that potential market opportunity.

"Long-term annual growth estimates for Praxair stand at about +10% percent. However, analysts have been steadily boosting estimates over the past six months due to stronger-than-expected demand from US refiners, most of which are struggling to keep up with gasoline demand. And if fuel cells do become more widely adopted, then you can bet that PX's growth will accelerate dramatically. Meanwhile, the company trades at roughly 17 times its 2006 earnings estimates--a reasonable premium to its growth rate given that PX is a market leader in industrial gas. PX is one of only a handful of alternative energy plays that's solidly profitable and also has exposure to the current energy boom (via sales to refiners).

"Ormat Technologies (ORA NYSE) is among the world's largest builders of geothermal power plants. These plants use the Earth's own heat to produce clean, renewable power. Its plants are installed in Hawaii, California, New Zealand, the Philippines, and Thailand, among other markets. The company also builds compact power plants that are designed to provide necessary power in remote locations, such as for pipelines located many miles away from population centers. And the company also builds units that recycle steam or heat released by plants to produce power. Finally, the firm is also now working with biomass power plants.

"Geothermal power has been among the more successful and low-cost alternative energy sources in markets where sufficient geological heat is available. Ormat's advantage stems from the fact that it has a proven track record of building working geothermal plants all over the world which makes it easier for the firm to win contracts to build new plants. Ormat also has a significant backlog of unfinished projects in both its geothermal and remote generation units.

"Long-term growth is pegged at about 14% per year. Meanwhile, the stock trades at just 23 times projected 2006 earnings estimates. I also believe that the firm's decision to announce a small dividend payout in the most recent quarter is a sure sign the company has firmly established its profitability. This positive signal from Ormat's management bodes well for the future."

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