Buy These 3 Smart Grid Stocks Before They Pop
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the early '90s, electricity usage in the United States has grown by nearly 25 percent, and currently accounts for one-fifth of the world’s total consumption. This expansion has been driven by increases in demand, as population growth and technological innovations have been the wind beneath the country’s wings, so to speak. Interestingly, electricity availability per capita in the U.S. has actually fallen over this time, which is a tell tale sign of the strains that have been placed on the U.S.’s electrical grid. In fact, many energy experts are worried about the grid’s reliability, which was recently given a D+ rating by the American Society of Civil Engineers.
Just as a good teacher would tutor a student with bad grades, the federal government has committed $3.4 billion in spending over the next decade for improvements. While some of this funding will be spent on transformer updates, it is expected that a good chunk will be used to develop a smart grid. Yes, this term sounds like the beginnings of Skynet out of James Cameron’s The Terminator, but its purpose isn’t the slightest bit nefarious. In fact, this isn’t the most ‘sci-fi’ business currently in development; to learn about Cameron’s astounding asteroid mining plans, see this story.
A smart grid would essentially mechanize the existing electricity grid by adding data-gathering sensors that measure power meters, broken lines, and voltage. Moreover, it is hoped that by 2050, a smart grid will be able to: (1) heal itself when power failures occur, (2) defend itself against cyber attacks, (3) self-adjust to differing power needs, (4) allow consumers to tweak their power supply allowance, and (5) feature green energy sources. The overarching purpose of a smart grid is to increase efficiency, as it is estimated that the U.S. loses over 30 percent of its yearly electricity generation before it is even used. As with any blossoming economic undertaking, there are companies that will see their fortunes rise with the development of this project. Below are three smart grid stocks that investors may be able to hang their hardhats on over the next couple of decades.
Elster Group SE (NASDAQOTH: ELTTY.PK)
An integral part of the smart grid system is the modernized electricity meter, aptly called a ‘smart meter’. Smart meters will allow homeowners to monitor electricity consumption, detect thefts and outages, remotely disconnect their power, and even prepay bills. By 2015, it is estimated that there will be over 250 million active smart meters in the world, representing nearly a $4 billion market. Elster Group SE is the world’s leading supplier of high-end power meters, and has been involved in the energy industry for 175 years.
In the past year, shares of ELT have returned a modest 7.9 percent, compared to a negative 3.03 percent return for the scientific instrument industry as a whole. Over this same period, Elster grew its revenues by 6.3 percent and earnings by 1.1 percent. Currently, shares of ELT are trading at a Price-to-Earnings ratio (18.2X) below the industry average (20.8X) and below its own post-IPO historical average (26.25X). Additionally, ELT’s Price-Cash Flow ratio (8.1X) is below the industry average (12.2X) even though the company grew its free cash flow by over 40 percent last year. We like Elster over competitors like Badger Meter and Itron due to a more attractive valuation, stronger top and bottom line growth, and better cash flow generation.
Riverbed Technologies (NASDAQ: RVBD)
As a network optimization company, Riverbed is an obvious player in the smart grid industry, as power companies turn to centralized computer systems to manage their operations. While it is not the largest company in this industry – that title would go to Cisco Systems (NASDAQ: CSCO) – it may be the most promising. Since the recession, shares of RVBD have returned nearly 50 percent, driven by exceptional revenue (29.7%) and earnings (75.8%) growth on an average annual basis. It’s worth noting that the company recently met Q1 earnings estimates of $0.20 a share, though the stock currently trades at a PEG ratio of 0.7; typically a number below 1.0 signals undervaluation. Moreover, RVBD’s current P/E (45.9X) is trading way below its 5-year historical average (132.5X). Using a modest year-ahead EPS forecast of $0.45 in conjunction with the stock’s historical P/E, we can set a price target of $59.62 by next summer. Heck, even if earnings stay constant, fairly valued shares of RVBD would eclipse $45, which it hit in early 2011. With a current stock price in the $15 range, this would mark a 200 percent return.
ABB, Ltd. (NYSE: ABB)
This Swiss mega-cap manufactures and installs power automation systems for aspiring smart grid companies. Over the past year, shares of ABB are down over 40 percent, as Eurozone anxiety has pushed the IT company’s stock to a level not seen since the recession. These fears seem warranted at first, as around one-third of its sales come from the EU. Upon closer inspection, however, it is worth noting that ABB has actually ridden this storm quite nicely, growing its revenue (20.3%) and earnings (23.2%) over the past year. In fact, the company recently exceeded Wall Street’s Q1 earnings and revenue estimates. It seems that investors may be undervaluing ABB, as noted by the stock’s below average P/E (11.2X), P/B (2.1X), and P/S (0.9X) ratios, along with a PEG below 1.0. Over the past decade, ABB’s earnings have historically traded at a 65 percent premium relative to the S&P 500’s average. This year, they are trading at a 20 percent discount.
As the electric grid in the United States continues to deteriorate, there will be an increased demand for a number of companies to shore up the system. While it is up to the individual investor to determine if they want to have exposure to this emerging industry, it seems likely that the stocks mentioned above will be leading the proverbial pack.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of ABB and Riverbed Technology. Motley Fool newsletter services recommend ABB and Riverbed Technology. 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.If you have questions about this post or the Fool’s blog network, click here for information.