It’s increasingly hard to figure out how much risk there is in owning shares of Ormat Technologies (ORA). There’s no doubt in my mind that the company is the best global pure play on the expansion of power production from geothermal sources.
But how much potential return do I need to see before the risks in that pure play are worth taking?
Especially since the risks in the stock keep rising.
Government price subsidies and financing programs for geothermal power are shakier than they were a year ago. (And they were pretty shaky back then too.) The financial markets haven’t become projects a lot more forgiving for projects like these. National goals for alternative energy production remain on the books but they aren’t exactly top of mind for global leaders still fighting off a recession. And that has all shifted more of the risk in exploring for, developing, and financing geothermal plants to Ormat. The company is getting an increasing large percentage of its revenue from building and operating geothermal plants rather than from the less risky manufacturing of geothermal equipment for sale to other power producers.
The problem for an investor is summed up very nicely in Wall Street’s consensus earnings estimates for 2010 and 2011. This year Wall Street says that the company will earn 41 cents a share. That’s a huge drop from $1.35 per share in 2009. And it makes a stock that trades for roughly $30 a share rather pricy. That’s a price-to-earnings ratio of 71 on projected 2010 earnings.
What really supports that price is the consensus estimate of $1.02 for 2011.
I’ve got two questions, though, about that estimate. First, how likely is it? Second, if that’s a rebound 150% growth rate off the depressed 2010 earnings, then what’s the company’s earnings growth after that bounce? Wall Street projects a five-year average growth rate of 29% for the next five years—which, of course, includes that 150% bounce in 2011.
I just don’t like the odds that I’m seeing here. Counting on a company facing as many risk factors—and all of them growing—as Ormat is to achieve a 150% growth rate when margins are under pressure and capital costs are uncertain just doesn’t seem attractive
In my calculations of a one-year target price I just can’t get much above $33 a share. That’s just 10% higher from here. (And from recent action the stock doesn’t seem to respond to a rally in the rest of the market with a move of it own so I don’t see the upside to waiting for a rally that will lift all boats.)
As of September 28, 2010 I’m selling Ormat Technologies out of Jubak’s Picks with a 29% loss since I added it to the portfolio on November 17, 2009.
Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.
morastr,
Agreed. That is exactly why I like the oil/gas companies I mentioned. Look at ECA today..something is up….a takeover would not shock me. Hope your industry gets better, to the point where it doesn’t have to rely on fickle governments so much. Higher oil and gas prices will certainly help in that regard.
tazman,
I figured that you had bought it recently. I mentioned spy, because it is less volatile over time and has been beating the clean energy space for awhile. I work in the renewable energy industry. It is getting crushed in the US. Nat gas is cheap=less alt energy. So if you are a believer in alternative energy power producer in US. You can buy nat gas producers also.
ORA has moved up by 7.5% since I bought it few months ago. I was looking to sell one of my stocks to buy MON, so I took your advice and sold ORA. By the way how do you see the future outlook of MON? Any updates would be appreciated.
Thank you,
morastr,
I have been recently trading it. Buying low to mid 8s and sell low to mid 9s.
In the context of this discussion I don’t think a comparison to the SPY is really pertinent since the SPY is really tracking the overall economy and picking a sector like renewable or clean energy is an attempt to pick a sector that will grow much faster over time.
The ETF is simply a way to play that hunch with less company specific risk and that is the reason I mentioned it here. The Ormats and Sunpowers can really blow up in your face.
Frankly I’d rather own an oil and gas company and clip a nice dividend while enjoying any price spikes, which is why I have just traded the PBW etf in a range from hated to mildly liked. I like COP ,TOT, ECA and CNQ. It seems to me that clean energy is driven by oil prices so why not own the real thing?
Ormat is a dog with fleas. I should have known to stay away from Companies with developing technologies. A very bad call and I will sell my holdings as well.
tazman,
How have you done reasonably well with PBW? Did you buy it recently? Just putting money in SPY has done better than PBW for much of the past 5 years.
Tough loss Jim. This is such a hard space to pick stocks in. You have technology risk, government risk, management risk and macro economic risk. Too many risks unless you are very very familiar with your company. If you like the space there is an etf.. PBW…is the ticker that I have done reasonably well with. At least it spreads the company, technology, and management part of the risk out a bit. I would still own an oil company as well though!! COP pays a nice dividend and you can smile at the pump…….