Friday, July 10, 2009

Blowin' in the Wind

Germany’s backpedaling on plans to back sequestration of carbon emissions should put all investors on alert that the strategy of “burning with abandon and hiding carbon underground” may not have as bright a future as once thought. This means job security for the carbon-eating, biofuel-producing algae. (See the post on June 12, 2009, “The Color of Carbon.”) It is also a signal to look more closely at energy alternatives that do not involve combustion of fossil fuels - wind, solar and some hydrogen solutions.

The economy has most investors running for the predictability and security of large caps and away from alternative energy upstarts with weak balance sheets and negative cash flows. There is the perception there is no way to invest in alternative energy without inordinate business and market risk.

Look again - General Electric, Inc. (GE: NYSE) is a highly diversified company, but GE’s wind turbines are rising in visibility in the company’s operations. GE’s financing arm has been hanging around the corporate neck like an albatross and 2009 earnings are expected to decline sequentially. The stock is trading just above the 52-week low and has a 1.60 beta. However, for investors with a long-term investment horizon and some risk tolerance, the stock could be a bargain. A current dividend yield of 3.7% helps and GE management has made payment of the dividend a priority.

For small cap purists who want also want a wind energy pure play, AeroVironment, Inc. (AVAV: Nasdaq) is trading at 20.5 times forward earnings with a beta of 0.50. The company has two complementary divisions in unmanned aircraft and energy efficiency systems. In other word AeroVironment knows aerostructures and electric propulsion. The company reported $24.3 million or $1.11 EPS on $247.7 million in sales in the most recent twelve months.

The consensus estimates for AVAV imply 21% EPS growth over the next year and half. This suggests the stock is fully valued at the current price level. Indeed, the stock is trading just under the consensus target price. The stock chart suggests the stock is retracing the $26.00 price level, but long-term bullish price objective could be as high as $49.00. This suggests there is opportunity for investors to build positions in AVAV during a period of price weakness.

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

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