Best stock to invest in
My recent post “Bull
Case in Rick Perry’s Grid Study” highlighted efforts by U.S.
Energy Secretary Rick Perry to help the coal industry with a study
of the U.S. electrical grid. Coal has long claimed advantage
as a ‘dispatchable’ power source, i.e. a consistently available
power source suitable to supply power for the base load.
Technology is making base load less important. Indeed,
modernized or ‘smart’ electrical grids are making it possible to
take advantage of low-cost renewable power sources even though they
produce power intermittently and are therefore considered ‘not
The preference of market-based electric grids for the lowest-cost
producer is what has got the coal industry in a knot as power
generated from cheap natural gas wins out the daily bidding
process. Even intermittent power sources such as wind and
solar can beat out coal-fired power
plants. When wind and power sources
are in operation at some scale their marginal cost is low (and
getting lower according to the National Renewable Energy Laboratory)
and therefore the asking price to the electrical grid is low.
As electricity demand escalates the grid operator casts about for
additional power from the next lowest priced power source. At
some time during normal operating conditions, as more power is
needed, wind and solar sources will rank as the next lowest-cost
power source and beat out a coal-fired power source.
Investors can take a cue from the Perry grid study by going long
companies with technologies and know-how that make it possible to
deliver power at the lowest possible cost. Following are few
companies that are helping to ‘smart up’ the U.S. electricity
An electric grid is smart when its can optimize electricity
utilization and interact with consumers and markets. EnerNOC, Inc. (ENOC:
Nasdaq) describes itself as a world leader in energy
intelligence. Among other energy management products for
industry and business, the company provides demand response
solutions and energy management software to customers in the U.S.
and around the world.
Demand response is a communications link between the power grid
operator and large electricity users, making it possible for grid
operators to cue these large customers that electricity demand is on
the rise. Participating electricity users can then temporarily
reduce their energy use during these periods of peak demand and get
rewarded with special low rates. Even with offering lower
rates the utilities and grid operator benefit from the smoothing
effect the demand response system has on electricity demand.
The grid operator does not as frequently have to reach out to
higher-cost power providers and can more frequently tap power from
intermittent power generators.
EnerNOC reported a net loss of $41.9 million on total revenue of
$398.7 million in total sales during the twelve months ending March
2017. As worrisome as that large loss might seem, it is not as
troubling as the fact that the company burned up $39 million in cash
resources to support operations during that period. To keep
things going as EnerNOC struggles to right the ship, the company has
tapped credit markets. The total debt to equity ratio is
141.88. The company has $74 million in cash on its balance
sheet suggesting that it still has some staying power to see its
strategic growth plan back to breakeven.
MasTec, Inc. (MTZ:
NYSE) is an engineering, procurement and construction company
focused on the energy and utility infrastructure sector. An
electric grid is considered smart when its can self-monitor its
equipment and components. Among a long list of
infrastructures, MasTec delivers on smart grid projects for
utilities, including smart-metering, energy controls and monitors,
and other technology solutions designed to regulate power flows.
The company is also experienced in wind, solar and geothermal power
construction, but has made wind power a specialty. For
example, MasTec constructed 32 miles of 34 kilovolt electric power
lines to collected power from a new wind farm for Transcanada.
In White Lake, South Dakota, MasTec erected 108 wind towers with 1.5
megawatt turbines for the Crow Lake Wind Farm owned by the Basin
Electric Power Cooperative. MasTec uses its extensive
knowledge of electric generation and transmission to connect and
deliver high voltage power in the most efficient network.
In the twelve months ending March 2017, MasTec earned $174.9 million
in net income or $2.13 per share on $5.3 billion in total
revenue. Operating cash flow generated during the period
totaled $343.9 million, representing a sales-to-cash conversion rate
of 6.5%. If that achievement is not impressive enough, note
that return on equity is 17%.
Analysts expect the good times to continue rolling for MasTec. The
consensus estimate is for $2.46 per share in the year 2017.
This represents a growth rate of 15.5%. We note that MTZ
shares are trading at 15.1 times forward earnings, suggesting that
the stock is just at fair value.
Quanta Services (PWR:
NYSE) is another engineering, procurement and construction company
based in the U.S. and claims to be the largest electric transmission
and distribution specialty contractor in North America. The
company has an engineering design and planning team focused
exclusively on smart grid technologies. The company puts
particular emphasis on information technology systems as needed for
achieving a truly ‘smart’ grid. Two-way communications
systems, automated feeder switches and phasor measurement units to
monitor grid stability are part of a sophisticated network
solution. With a robust IT solution the grid is able to
integrate renewable energy sources by nimbly switching among sources
as they generate power. This process levels out power
availability, thereby reducing dependence upon high-cost
Quanta is significantly larger than MasTec as an EPC services
provider, but is not quite as profitable. Quanta reported net
income of $226.5 million or $1.45 per share on $8.1 billion in total
sales in the twelve months ending March 2017. Sales-to-cash
conversion was only 2.1% in the year. Furthermore, Quanta is
only earned 6.9% on equity.
Shares of Quanta are priced at 13.4 times forward earnings and
therefore present a bit of a bargain compared to MTZ. Perhaps
more importantly, PWR shares are a less volatile with a beta of 0.74
compared to a beta of 1.88 for MTZ.
Silver Springs Network, Inc. (SSNI:
Nasdaq) offers a solutions to enable communications between devices
and the power grid. The SilverLink system provides utilities
with data to improve and even automate power management
decisions. The company is particularly focused on integrating
distributed energy resources to the electrical grid, and touts its
communications and intelligent control solutions for
utilities. Silver Springs also uses a novel concept of
‘virtual power plants’ to created greater reliability in distributed
Silver Springs reported a loss of $26.3 million or $0.51 per share
on $312.7 million in total sales in the twelve months ending March
2017. However, cash flow from operations was a healthy $18.6
million or 5.9% of sales. The benefits of internal cash
generation can be seen on the balance sheet with $116.6 million in
cash at the end of March 2017 and no debt.
Analysts anticipate even better times ahead the consensus estimate
is for net profits $0.30 per share in 2018. The stock is
currently trading at 32.8 times that consensus estimate.
Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
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.
– Best stock to invest in