Tuesday, July 08, 2008

Engine Efficiency

In the last few posts, we have been looking at efficiency creating technologies and products. It is an important investment theme…worth extending a bit longer. The price of crude oil pulled back in the last few trading sessions. Nonetheless, higher cost of fossil fuel continues to filter through the economy. The U.S. Department of Energy (US DOE) estimates 70% of petroleum produced and imported into the U.S., is used for transportation - moving people and goods from one place to the other.

That makes the combustion engines on the road, the primary target for reducing fossil fuel consumption.

Using less fuel might seem like a no-brainer, but the present array of alternatives are just not sufficient. Even in those cases where the technologies are well developed (biofuel, ethanol), there is just not enough supply to make a difference.

In turn the efficiency of combustion engines becomes one of the most important issues in front of the U.S. economy.

Even when aided with turbochargers and stock efficiency aids, most internal combustion engines retain an average efficiency of about 20%. Most of the rest of the energy created when the fuel burns, is expended through heat loss. Unless you are trying to keep warm in a blizzard, all that heat production is just nuissance.

There are many inventions aimed at increasing the efficiency of engines. There is typically a trade-off between such factors as efficiency, weight, power, response, exhaust emissions, or noise. External factors include the cost of manufacturing the engine itself, manufacturing and distributing the fuel.

A couple of years ago the US DOE announced $87.5 million in co-funding to support a dozen projects developing advanced combustion engine and waste heat recovery technologies. The projects, with a total value of $175 million focus on increasing engine efficiency while maintaining low emissions. The DOE wants to increase engine efficiency to 45% by 2012 for passenger vehicles and 55% by 2012 for commercial vehicles.

The grant winners seemed like a good place to start looking for investment opportunities - the rational being that applicants would have a strong efficiency objective in the business model. As might be expected, some of the grant winners are familiar names: Caterpiller Corp. (CAT: NYSE), Cummins, Inc. (CMI: NYSE); General Motors’ PowerTrain Division (GM: NYSE); Deere & Co., (DE: NSYE), Detroit Diesel, a division of Daimler Chrysler (DAI: NYSE); Eaton Corp. (ETN: NYSE); International Truck and Engine Corp., a division of Navistar International Corp. (NAV: NYSE); and Mack Trucks of Volvo (VOL: SWE). The difficulty facing investors interested in the efficiency side of the fossil fuel conundrum is that the stocks of these automotive giants have been decimated and show no signs of turnaround, efficiency technologies notwithstanding.

There is also a host of smaller private companies that are subcontractors or partners in the grant projects. Nonetheless these are good names to watch, since many of focused primarily on engine efficiency technologies and would present strong “efficiency pure plays” if they were to stage an IPO or reverse merger with a public shell. Sturman Industries works on advance technologies for process controls. IAV Automotive Engineering, Inc. provides engineering services for powertrain, electronics and motor vehicle development. Silvatech Industries, Inc. offers hydraulics and hydrostatic drive trains for automotive and industrial equipment.

Two of the partner companies have publicly traded stocks: Ricardo Technologies (RCDO: LSE), consultants to automotive OEMs for new product development, and Jacobs Vehicle Systems, a subsidiary of Danaher Corp. (DNR: NYSE) that develops custom valve actuation technologies.

In the next post we look more closely at each of these names and consider how to play the “efficiency” strategy.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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