Friday, October 03, 2014

In Middle(sex) of Organics-to-Power Sector

The June 20th post “The Better to Pay Your Dividend” featured Middlesex Water Company (MSEX:  Nasdaq) and unlikely player in the waste-to-energy game.  However, Middlesex has proven a capable project integrator, capitalizing on its collective knowledge of process engineering to launch a turnkey alternative energy service.  A successful waste-to-energy project in the Village of Ridgewood, New Jersey has placed Middlesex squarely in the middle of the organics-to-power sector.  Ridgewood taps its waste water for methane to power an electric generator.  The power is used at the Ridgewood Water Pollution Control Plant, making the plant self-sufficient for electricity.

The Ridgewood project could be just a one-off deal.  However, I think Middlesex could have some success in capturing more of the market.  Besides engineering savvy, Middlesex has a number of important municipal relationships.  A bit of networking, and Middlesex should be able to parlay its first success in Ridgewood into more situations with municipalities eager to find solutions to dwindling landfill space, ever-increasing solid and waste streams and the need to find new, lower-cost energy and fuel sources.  Municipalities have all the problems and few can manage the solutions on their own.

This provides one very good reason to put Middlesex in our list of waste-to-energy.  The second reason is the Middlesex dividend.  MSEX is currently providing a yield of 3.8%.  With a beta of 0.70, the stock can be expected to remain relatively stable as market conditions unfold.  Importantly, the stock is valued at 16.8 times 2015 earnings, making it just a bit more expensive that the rest of the industry that is priced at 15.0 times earnings.

Middlesex is also looking quite oversold at its current price level, at least according to a review of the technical indicator Commodity Channel Index for MSEX.  The stock fell through a key level of price support around mid-September 2014.  I view this as just a good chance to pick up some shares at good value.  It does not seem likely that the stock will continue to fall lower.  There is another level of support at the $19.25 price level, off which the stock bounced in early May this year.   Indeed, it appears the stock may be reversing course already. 

There is not a great deal of upward momentum for small-capitalization companies in the current market conditions.  Contrarian investors with a buy and hold strategy and a taste for a strong dividend could find MSEX a compellingly priced stock with a ‘green’ revenue stream. 


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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