The Army Is Investing in Geothermal, Should You?
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It is easy to forget the innovative role that the military has played in modern life. America's DARPA sponsored APRANET was one of the precursors of the internet. The modern rocket industry has its base in technological evolutions of World War II. Now, the U.S. Army is continuing the military's tradition of supporting innovation. It recently published a list of of renewable energy partners to help it develop its geothermal resources.
Companies Involved in the Initial Round of Army Contracts
Constellation NewEnergy was recently bought up by Exelon (NYSE: EXC) and brought into its diverse operations. The utility is known as one of the cleaner utilities with a number of nuclear power plants. It has pushed hard to get into the renewable energy business, and its interests in geothermal play along this trend.
Financially the company is somewhat questionable. Nuclear plants are not especially cheap and this has forced Exelon's margins and return on investment (ROI) below that of many of its competitors. With a five-year earnings per share (EPS) growth rate of -17.01% the company was forced to cut its dividend. This has occurred while many of its competitors are enjoying cheap American coal. With expected 2014 earnings per share (EPS) of $2.34 and stock price around $35, Exelon is too expensive for the time being.
Siemens AG (NYSE: SI) is an enormous conglomerate with interests throughout the energy sector. Based on recent second quarter, 2013 data, in its Energy division only its power transmission business saw revenue growth relative to last year. The company originally hails from Germany. Europe's sovereign debt issues continue to affect Siemens as governments are not inclined to speed billions on infrastructure upgrades when they find it difficult to issue new debt.
Geothermal energy is not a main focus of Siemens, but it fits nicely into the company's focus on electrical and energy products. As an investment Siemens is a mixed bag. GE is a comparable conglomerate and Siemen's profit margin of 5.7% and earnings before interest and taxes (EBIT) of 10.8% are below GE's figures. On the bright side, Siemens has a higher ROI of 9.7%.
Other Companies in the Geothermal Market
Ormat Technologies (NYSE: ORA) is a small fish in the big utility sea. It is a great way to invest directly in geothermal. The company owns a number of geothermal plants and recovered energy generation facilities throughout the world. Even the U.S. Army recognizes that geothermal plants can be very profitable as the operator does not have to pay for fuel inputs.
In 2010 Ormat Technologies bought a number of assets in California from Exelon's Constellation. The company recently changed its sales agreements for its Mammoth, California facility. This will give the company more income over the long run, but it was forced to pay a $9 million termination fee in the first quarter, 2013. This fee helped to push the company's electricity generation segment to post a loss in the last quarter. This is a short term negative that should not be over emphasized.
The company's total debt to equity ratio of 1.44 should be watched. It has a worldwide generational capacity of 611 megawatts and more than $2 billion in assets, but it is important to make sure that its debt load doesn't rise substantially. With expected 2014 EPS of $0.78 it quite expensive at its current forward price to earnings (P/E) ratio around 29.
The U.S. Army is looking for cheaper and more secure ways to power its operations. When its facilities are close to significant supplies of underground heat, geothermal power is an effective and easy way to make ends meet. Even with geothermal's positive long-term economics, Exelon is a questionable investment because of the high costs of its nuclear power plants. Siemen's continues to be weighed down with Europe's struggles. Ormat Technologies is an attractive pure geothermal play, but it is trading at a high valuation. Until it comes down in price, it is best to leave it on the watch list.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!