Tuesday, April 26, 2016

Ormat Spreads its Wings

Most know Ormat Technologies (ORA:  NYSE) for geothermal power generation.  The company operates plants in the U.S., Guatemala and Kenya with total capacity to produce 697 megawatts of power from water heated deep underground.  Sales of electricity provide about two-thirds of the company’s revenue.  The rest comes from sales of equipment for plants using geothermal- and waste-heat to produce electricity.  The company has designed numerous innovations in power units that it uses in its own power plant installations and sells to other power producers.

In the most recently reported twelve months Ormat delivered $119.6 million in net income or $2.43 per share from revenue totaling $594.6 million.  That represents a profit margin of 20.1%, well above the average profit margin of 5.2% for the S&P 600 Small-cap Index. 

Despite the apparent financial success, Ormat has plans for change.

Of course, the company has the usual plans to build out its generating capacity with new or acquired geothermal power plants.  In March 2016, the company announced the acquisition of Geothermie Bouillante SA, a 10 megawatt geothermal power plant on Guadeloupe Island in the Caribbean. The plan is to apply Ormat’s technology and expertise to the plan to bring the back up to the designed 14.8 megawatt.  There is potential to bring generation up to 45 megawatts by 2021.

Ormat also recently entered into a collaboration with Toshiba Corporation (6502:  Tokyo) to discuss geothermal power generation and ‘related equipment.’  Ormat and Toshiba had already been working together in Kenya on the construction of Ormat's Menengai geothermal project.  Apparently, there is potential in combining the comapny's binary power system with Toshiba’s flash system.

However, Ormat management has its collective eye on new energy technologies as well.  Last year management began talking about the potential in other renewable energy technologies, even solar power or energy storage.  In March 2016, Ormat signed an agreement with Alevo Group, SA, and energy service provider, to build and operate a 10 megawatt energy storage project in Georgetown, Texas.  Alevo is contributing its GridBank inorganic lithium ion energy storage system to the partnership and Ormat will provide the engineering and construction services as well as other required equipment.

Ormat and Alevo are apparently looking at the significant installed base of wind energy generators in Texas.  Since wind power even at its best can be sporadic in output, successful and profitable connection to the grid requires storage capacity.  The team approach might be the best way for Ormat to spread its wings into distribution segment of the power business.

Ormat is scheduled to report financial results for the first quarter ending March 2016, next week on Wednesday May 4th.  The consensus estimate is for $0.35 in earnings per share on $138.3 million in total sales.  The company beat the consensus estimate with its last quarter report for the December 2015 quarter, following a long stretch of reports that came up short of expectations. 

This quarter could be a tough hurdle to scale as contributing analysts have edged their estimates higher over the past three months, apparently feeling optimistic about growth after the success in the December 2015 quarter.  There is a conference call scheduled the next morning following the earnings announcement.  We expect investors to give management a bit of a grilling on its energy storage investment plans.

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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