Tuesday, August 11, 2009

On a Clear Day

Follow the money! This is great advice in nearly every situation and certainly sound reasoning in choosing investment sectors. Where is money headed these days? Government money, at least in terms of the Recovery Act funding is headed toward environmental protection and energy development projects. The same might be true in the private sector where both venture and private equity are seeking the next paradigm-shifting technology that will solve our fossil fuel conundrum.

In the meantime there are some great companies offering products that mitigate the worse characteristics of fossil fuels at least in terms of reducing the worst pollution emissions.

CoaLogix, Inc., a private company owned by Acorn Energy, Inc. (ACFN: Nasdaq) sells the catalyst used in Selective Catalytic Reduction (SCR) equipment installed on power plant facilities. The company recently received a new orders valued at a total of $5.5 million from a Midwestern electric utility and five other unnamed electric utilities. The contracts cover SCR regeneration and management services aimed at reducing nitrogen oxide (NOx) and other toxic emissions.

FuelTech, Inc. (FTEK: Nasdaq) is another player in the environmental equipment and services arena. Its air pollution control equipment is used by power plants and industrial customers to reduce nitrogen oxide in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. FuelTech goes one step further than CoaLogix with Selective Non-Catalytic Reduction (SNCR) as well as SCR-based products. SNCR can be used in combination with SCR to achieve 65% to 85% reduction in NOx at a lower cost than conventional SCR systems.

On the basis of forward earnings FTEK is trading at 28.4 times. The company has met the challenge of soft demand over the last year with a reduction in personnel. Consensus estimates suggest the worst might be over for FuelTech as 2010 EPS estimates reflect a significant increase in earnings over 2009.

Acorn Energy, which is organized as a holding company, is not yet profitable. ACFN shares trade at 1.4 times total book value and 2.6 times tangible book value. Sales at CoaLogix have been climbing at a rapid rate and the net loss is diminishing. There are no published estimates for Acorn Energy, but it looks promising for a turn to profitability on higher sales volume.

FuelTech and CoaLogix have several mid- and large-cap competitors. Alstom (ALO: Paris) based in France and Hitachi (HIT: NYSE or 6501: Tokyo) also targets the power industry with SCR equipment and pollution abatement solutions. Both are highly diversified companies with interests in industrial equipment and infrastructure of various kinds in addition to pollution abatement. Indeed, we believe environmental trends and factors have little bearing on the valuation of either ALO or HIT.

U.S.-based competitors include Babcock & Wilcox (private), Peerless Manufacturing (private) and Foster Wheeler (FWLT: Nasdaq). Foster Wheeler caters to the power and energy industry with construction and engineering services as well as pollution abatement solutions. In contrast to ACFN and FTEK, shares of Foster Wheeler appear to be a bargain at 9.3 times trailing earnings. However, the forward PE of 12.7 times, suggests the company is still working through the front end of a turnaround period with difficult comparisons in the second half of 2009.


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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