Investing in the renewable energy age
We are going to need a lot more electricity and that means real growth for ‘green’ energy, says this U.S. advisory, which has three buys.
There seems to be some debate as to what the economy will look like after the credit crisis has spent itself.
But one thing is certain. We won’t need any less energy — in our homes or our businesses.
But we will need cleaner energy. There may still be arguments about climate change and fossil fuels and carbon emissions, but governments are already taking steps to mandate cleaner energy.
This is the firm conviction of The Complete Investor. This U.S. advisory looks at a market that will be flooded with pent-up money and makes some specific recommendations on what to do about it.
(see Daily Buy-Sell Adviser, September 19)
So we’re going to get it.
Last week, we looked at the nuclear side of the equation through the eyes of a leading U.S. advisory, Personal Finance (see Daily Buy-Sell Adviser, September 19). This week we return to the same advisory for the story on renewable energy — wind, sun and earth.
According to Mr. Elliott Gue, the advisory’s editor and Mr. Roger Conrad, his co-author, cleaner energy is not the only issue.
There is also the crying need for more electricity. Nuclear power will take up an increasing slice of that need, but as carbon emissions recede, there will be plenty of room for renewable energy to fill the gap.
We’ll look at who has what share of the market today and what they’re liable to get in the future. Then we’ll get three specific recommendations from the advisory.
A thriving business
The U.S. demand for electricity will grow by almost 50 per cent in the next 40 years. But around the world, the need is even greater. It is bound to triple over the same period.
If you look at a pie chart of world electricity generation by kilowatthours, renewable sources take up a pretty large chunk, even greater than nuclear power.
But the vast majority of that chunk comes from hydroelectricity, something we’ve got plenty of in Canada, but isn’t as readily available in all other locales.
Alternative energy — solar, wind and geothermal — takes up a very small slice of the world electricity pie, but it has grown up. No longer a “green dream,” it has emerged as a thriving business.
Massive growth
The American Clean Energy and Security Act requires that 20 per cent of U.S. electricity be generated from “renewable electricity” by 2020. This definition includes energy efficiency as well as specific power sources like wind, solar and geothermal.
Two dozen states have followed with similar mandates. Success is still elusive, but it’s on the way. In Nevada, NV Energy actually met the state’s 9 per cent “renewable” target for the first time this year. But it still faces headwinds fulfilling the 20 per cent target for 2015.
“In many instances,” say the authors, “demand for new renewable resources over the next decade will be very hard, if not impossible, to meet. But it also spells massive growth for the renewable energy players who have survived the recent credit crunch and economic meltdown.”
The advisory likes three of those players.
Off in all directions
Chief among these potential winners is AES Corp (NYSE-AES).
This company started madly off in all directions, its “unbridled growth” leading it up many different paths, not all of them lucrative. But it has since turned its efforts to greater profitability. It slashed debt by 10 per cent in the past year and revved up free cash flow by $40 million.
AES still has a large part of its 38,000 megawatt (MW) capacity in traditional sources like coal, biomass, natural gas and hydro. But for growth, it is focusing on renewable energy.
Its wind generation segment now has 1,200 MW of capacity in three countries and another 400 under development in four others.
Its solar division has signed agreements with two other firms in an “innovative deal” to develop advanced grid storage applications.
Recurring revenue helped AES beat the Street with its first quarter results. With locked-in contracts for all of its current output, and almost 3,000 MW due to come on line, the stock is a buy up to $12, say the authors. It is trading at $10.20.
The advisory’s Income Portfolio holds the company’s AES Corp 6.75 Percent Preferred C (NYSE-AES C, CUSIP: 00808N202). The preferred shares were listed as a buy up to $50 and trading at $41.75.
A powerful statement
FPL Group (NYSE-FPL) has a NextEnergy unit devoted to solar and wind power. It has been at the head of its class for years.
In 2008, it led the U.S. in new wind assets deployed, something it has done for seven of the past eight years. A new 250MW solar thermal plant in California will put it in the same league in solar power.
New financing is being directed into more wind power in North Dakota and Iowa. The result of all this is that management has raised its 2009 and 2010 earnings forecasts substantially.
That’s a “powerful statement” in this economy, say the authors, who make FPL a buy up to $60. It trades at $56.62.
Then there is geothermal power, the ability to generate power from the earth’s core. Ormat Technologies (NYSE-ORA) is succeeding in this field because, like AES and FPL in theirs, it can create large utility-scale projects (very useful when the housing industry is flat).
Ormat has nine American plants, two in Guatemala and one each in Kenya, Nicarauga and New Zealand. It also builds plants for others.
Its first quarter revenues soared by 44 per cent and earnings per share by 33 per cent. The share price has picked up of late and its just under the advisory’s target price of $40, at $39.72.
When it comes to global warming, people still hotly debate what’s real and what’s not. But the profits in alternative energy, this advisory insists, will be very real.
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