The Emissions “Game Changer” You Shouldn't Miss
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
United Parcel Service (NYSE: UPS) recently called natural gas a “game changer” for vehicle emissions. That's true, and companies like UPS, Waste Management (NYSE: WM), and Clean Energy Fuels (NASDAQ: CLNE) are ahead of the curve.
Garbage collection relies on a large number of vehicles that perform the same tasks every day on a regular basis. Large numbers of garbage trucks are owned by individual companies and normally all end up in the same place at night. Everything about the movements of these vehicles is so finely scheduled, that it makes the cost of switching to natural gas worthwhile.
Waste Management is the perfect example. More than 80% of this company's new garbage trucks are powered by natural gas. Its natural gas fleet has more than 2,000 garbage trucks. And it allows outsiders access to 15 or so of its around 40 natural gas fueling stations. For a company like Waste Management, using natural gas not only saves the company money, but it also helps improve its image as environmentally conscious.
The company's top line took a hit during the 2007 to 2009 recession, but has since gotten back on track. It earned more in 2012 than it did in 2008, its previous peak year. Earnings, however, have been more volatile. Margin compression over the last three years led to a bottom line drop last year and earnings still remain below pre-recession levels.
That said, the company is in the middle of an important industry shift toward green initiatives. It isn't surprising that Waste Management is experiencing some short-term weakness. That said, the company earned over $1.75 a share last year and has increased its dividend annually for a decade. With an around 3.4% dividend yield, environmentally-conscious income investors should be taking a look.
Clean Energy is focused on providing natural gas for such vehicle fleets. It owns, operates, or supplies around 350 natural gas fueling stations in over 30 states. It started out focusing on fleet vehicles like garbage trucks, buses, and airport vehicles, which together represent a $5.5 billion market opportunity. Clean Energy, however, has its sights on a bigger prize, the long-haul truck market. It believes that's a $25 billion opportunity all by itself.
To tap into this market, Clean Energy has been building fueling stations along the country's interstate highway system. Although all of its sites aren't yet operational because of a lack of demand, that should change over time. For example, the company notes that 3% of garbage trucks sold were natural gas powered in 2008. By 2013, 60% of the garbage trucks sold used natural gas.
Clean Energy expects 35% of the long-haul trucks sold to be powered by natural gas by 2017. If that happens, Clean Energy is way ahead of the curve. That said, building out a fueling system without customers is costly. The company hasn't made money in seven years and probably won't make money in 2013. However, when the business turns profitable, it could be quick and in a big way.
Clean Energy is a pure play on natural gas as a vehicle fuel for more aggressive investors.
Big Brown highlights the shift
If you question how important switching to natural gas could be, look no further than UPS. The company estimates that it could save as much as 40% on fuel costs by switching to natural gas. The big benefit will come from switching over its long-haul trucks.
Scott Wicker, the company’s chief sustainability officer, recently told Bloomberg that “It’s really the vehicles that are on the freeways that burn the most fuel.” The company has plans to buy around 1,000 natural gas powered trucks over the next two years. This will be an integral part of the company's move to cut costs and improve margins in an increasingly tough market.
The company's top line has been on the mend since falling during the recession, but last year was a difficult one on the bottom line with earnings falling over $3.80 a share to about $0.80. The big problem that UPS faces is that customers have been shifting their delivery methods to reduce costs, cutting into UPS' profitability.
However, UPS is an industry leader and one of the most efficient operators. The shares yield around 2.8% and the dividend has been increased in all but one year over the past decade. The shares are expensive at the moment based on recent performance, but this is a company that should be on green investors' watch lists.
An opportunity to save and make money
Natural gas is going to be increasingly important in the transportation industry. However, it's the country's trucking fleet, both local and long-haul, that will be the first to switch. UPS and Waste Management are on that bandwagon. Waste Management looks worthwhile today, but UPS looks expensive right now. Money losing Clean Energy, however, could be the biggest beneficiary, as it is setting itself up to be the leader in the natural gas fueling space.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels, United Parcel Service, and Waste Management. The Motley Fool owns shares of Waste Management. 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!