Tuesday, May 24, 2011

3 Alternative Energy Stocks Set for a Major Rebound

For clean energy investors, 2010 finished on a dismal note. A change of political control in Congress signaled diminished support in Washington for any kind of major financial incentives in alternative energy. In Europe, fiscal challenges led countries such as Italy and Germany to scale back their previous commitments to clean energy subsidies.
But a trio of factors has started to boost the outlook for the clean energy sector:
  • First, oil prices have spiked and are now at a level that makes technologies such as wind and solar much more competitive without the aid of subsidies. If oil prices stay aloft for a sustained period, then a fresh wave of solar and wind power programs is likely to begin. 
  • Second, the nuclear disaster in Japan has led many to question whether it would be wiser to focus on environmentally-friendly technologies such as wind, solar and biofuels. 
  • Third, the U.S. dollar continues to weaken, making U.S.-based clean energy plays look far more appealing in the eyes of foreign companies.
These factors help explain why French energy giant Total (NYSE: TOT) has made a 60% investment in California-based Sunpower (Nasdaq: SPWRA) for $1.37 billion. Total's offer for that stake was at a 44% premium to where shares had been trading. That got investors' attention.
As a result of the acquisition investors are now starting to sniff around other clean-energy plays in the United States, wondering which will be next. There are three U.S. clean-energy stocks -- two in solar and one in wind -- that could start to pop up on more radars. They're inexpensive, poised for strong growth and could be the target of mergers and acquisitions (M&A) hunters. Here they are…
1. First Solar (Nasdaq: FSLR)
To complement its $6 billion wind-power business, GE (NYSE: GE) announced plans in April  to become a major player in the solar power market within the next five years. Why did GE wait until 2011 to make such announcement? It's because the industrial giant has finally been able to boost its own technology, by achieving a 12% sunlight-to-energy conversion ratio using thin-film technology. This will enable GE to keep up with Chinese rivals, most of which focus on traditional silicon-based technology that costs more to produce but yields higher energy-conversion rates. GE executives figure the 12% ratio for the company's cheaper approach is still a market-beater.
If that's the case, then First Solar -- the pioneer of thin-film technology -- can really boast. On a May 3 conference call with analysts, the company's executives noted the cost-effectiveness of thin-film using a slightly different measure. First Solar can make a panel of power that produces one watt of power for just $0.71. It's hard to compare that with GE's 12% energy conversion target, but First Solar believes its approach will remain as the most inexpensive. Any potential suitor would be able to immediately establish technology leadership.
Right now, First Solar is feeling the ill effects of the late 2010 industry slowdown. Demand slumped and industry inventories built up, leading the company to issue second-quarter guidance below analyst forecasts. A key 290 megawatt (MW) project, known as Agua Caliente, has also been postponed from the second quarter to the third quarter of this year.
It will likely take until the end of the third quarter for results to appear robust relative to forecasts again. As a result of the tepid outlook observed in the recent conference call, First Solar shares are back below $130, the lowest level in nearly six months. The stock now trades for just 12 times next year's projected profits, the lowest forward multiple in a number of years. With shares down $50 from the 52-week high, potential buyers may spot a bargain, especially foreign suitors that can take advantage of the weak dollar.
2. GT Solar (Nasdaq; SOLR)
When it comes to actually producing traditional solar panels made of thick, silicon-based modules, it's hard to compete with Chinese manufacturers. Investors need to focus on the companies providing the advanced technologies used by these high-volume manufacturers such as N.H.-based GT Solar, which provides reactors and furnaces used at major Chinese factories. GT Solar is considered by many to be the industry's leader. 
Anyone looking to acquire GT Solar would inherit a very stable business. Current backlog of $1.2 billion represents about 18 months worth of business. And unlike many solar businesses that are hoping to grow their way into positive free cash flow GT Solar is already there, having generated roughly $150 billion in free cash flow in fiscal (March) 2010.
Despite the healthy backlog, strong free cash flow and solid technology base, GT Solar could be acquired for a reasonable price. Shares trade for less than eight times projected fiscal (March) 2012 profits. A buyer could pay a 50% premium and get the business for about 12 times projected 2012 profits. Alluding to the recent positive developments for the solar-power industry, Brean Murray analysts note that "small-cap niche stocks such as GT Solar are likely to benefit from the broader macro improvements in the solar industry." They see shares rising from a recent $10.50 to around $15.
3. Broadwind Energy (Nasdaq: BWEN)
Shares of this wind-equipment maker are getting a decent lift on Monday (May 9) from solid first-quarter results. Sales of $43.5 million were roughly 10% ahead of forecasts, enabling the company to eke out a small operating profit against expectations of a small loss. Management also noted that orders in the quarter were strong, setting the stage for an improved second quarter as well. Although shares have slumped badly in the past two years thanks to a slowdown in wind-turbine spending, the worst looks to have passed. Backlog looks stable at about $225 million, the company has sufficient cash on hand to deal with the lean times, and it is likely to see rising interest as investors focus deeper on M&A possibilities in the sector.
As I noted back in December rumors circulated that GE and others may be looking at acquiring the company. Even in the absence of M&A activity, shares look attractive at less than one times projected sales.
Action to Take --> As noted earlier, solid reasons are emerging to take a fresh look at clean-energy stocks. M&A opportunities help, but the fundamentals alone make this sector more appealing to investors now that oil is pricey and nuclear power's prospects have become dicey. Any of the three stocks discussed above are solid candidates for investors.

This Limited-Time Trading Opportunity Could Gain 20% or More

When a company decides to split its stock, it's usually a good sign for shareholders. For one reason or another, the company has decided it would like more shares outstanding on the market. This is usually accompanied by a run-up in the share price in anticipation of the split. And for traders, this is where an opportunity for profits is to be had...
Gorman-Rupp (NYSE: GRC) is a worldwide designer, manufacturer and seller of pumps and pump-motor controls.
The $653-million company offers a rising dividend, shows solid growth and displays bullish technicals.
Technical analysis suggests shares can return more than 20% in a short amount of time. However, your opportunity to enter the trade near current prices may be limited.
That's because only shareholders on record as of May 13, 2011, are eligible for the company's five-for-four stock split, which takes place on June 10, 2011.
I believe the stock may move higher in anticipation of the upcoming split.
But it's not only the split that makes the company attractive.
It's also that this Ohio-based company is seeing increased global demand for its products: pumps and pump-motor controls.
The company's pumps are used for a variety of applications, including construction, petroleum, agriculture, fire protection, waste management, heating and air conditioning projects.
Although the global economic downturn hurt Gorman-Rupp, the company responded in 2010 by lowering its operating costs and fine-tuning its products to better match demand.
Gorman-Rupp also last year acquired a competitor, private specialty water and petroleum pump supplier National Pump Co., to gain further dominance in this segment of the pump market.
Technically, Gorman-Rupp appears strong.
The stock is in a major uptrend and looks to be on the verge of bullishly breaking out of an ascending triangle formation. The triangle is marked by resistance -- which is currently being challenged -- near $40 and a second, rapidly ascending uptrend line off the stock's January 2011 low of $30.40.
This triangle is the second ascending pattern that has been formed in the past two years.
An initial, larger triangle formed as the stock climbed from its June 2009 low of $17.96 to a higher low of $24.59 in August 2010. Off this $24.59 low, the stock formed an accelerated uptrend line, breaking through old resistance, which has become new support, around $31.25.
If the stock can definitively break through current $40 resistance, then the measuring principle,calculated by adding the height of the triangle to the breakout level, projects a price target of $48.75 ($40 - $31.25 = $8.75; $8.75 + $40 = $48.75). This represents a potential 21.9% gain from current levels.
As I've mentioned, the company has announced a five-for-four stock split, set for June 10 to shareholders on record as of May 13. The stock could run up during the May 9 trading week in anticipation of this split.
Fundamentally, the company appears strong.
In late April, Gorman-Rupp released upbeat first-quarter results. Revenue for the period increased 27.8% to $84.1 million, from $65.8 million in the year-ago quarter, due to stronger sales in the industrial, agricultural, and construction markets.
With a large number of pump orders on backlog analysts expect upcoming second-quarter sales will increase 25.6% to $82.6 million, from $65.8 million in the comparable quarter a year ago.
As the pump market continues to expand, analysts' project full-year 2011 revenue will increase 15.8% to $343.7 million, from $296.8 million in 2010. By 2012, continued economic growth could help the company see a further 8% revenue gain, with sales totaling $371.3 million.
The earnings outlook is equally solid.
Driven by international market expansion, first-quarter 2011 earnings surged 55.6% to $0.42 per share, from $0.27 in the year-earlier period.
For the upcoming second-quarter, analysts expect earnings to increase 48.2% to $0.40 per share, from $0.27 in the year-ago period.
For the full 2011 year, analysts' project earnings will increase 16.1% to $1.80, from $1.55 in full-year 2010.
In tandem with reporting strong first-quarter results, the company raised its quarterly dividend by about 7.1%, to $0.11 per share on its post-split common shares, payable to shareholders of record as of May 13.
Given that GRC shows fundamental and technical strength, along with a rising dividend and an upcoming stock split, I plan to go long on the pump manufacturer.
I will enter a position at the opening of trading on Monday, May 9. My stop-loss is $31.70, near current support. As projected by the measuring principle, my target is $48.75.
The risk/reward ratio is about 1.05:1.
Action to Take --> Given that GRC shows fundamental and technical strength, along with a rising dividend and an upcoming stock split, traders should consider going long on the pump manufacturer.
If you enter a position during trading on Monday, May 9, my recommended stop-loss is $31.70, near current support. As projected by the measuring principle, my target is $48.75.

This Huge Company's Stock is Ridiculously Cheap

There's something more to insurance giant Aflac (NYSE: AFLthan just the funny (and wildly successful) duck mascot.
Weighing in at a hefty $26.8 billion market cap, Aflac (originally the American Family Life Assurance Co.) writes supplemental health and life insurance in the United States and Japan. The company's products are marketed through multiple channels in both countries, which add up to 80% of the company's revenue. I'll discuss its distribution model in greater detail later because, to me, that's one of Aflac's greatest strengths -- especially as the health care environment in the United States evolves.
The company's products in the United States include cancer policies and various types of health insurance, including accident and disability, fixed-benefit dental and hospital indemnity. Other products include long-term care, short-term disability and ordinary life. In Japan, the products are similar, also including hybrid products and stand-alone, whole-life medical plans.
Leveraging a strong brand and breakout numbers equal investor success…
So while the Aflac duck continues to quack and entertain while strengthening the brand, the numbers do the real heavy lifting. In the past five years, revenue has risen from $14.4 billion to $20.7 billion in 2010, a 12% compound annual growth rate (CAGR). Not too shabby for a company that large. The five-year earnings per share (EPS) growth story is even better: a 13.9% CAGR through 2010. The average annual return on equity (ROE) has come in at a little better than 21%. Typically, 20% and northerly is an indicator of good things.
Thanks to the leftovers of the 2008 financial crisis, there has been some persistent concern for the mortgage-backed securities (MBS) Aflac holds in its investment portfolio. However, the company has done a superior job of risk management by lowering MBS holdings to 1% of the portfolio from 1.5% the prior year.
So far, Aflac has come out of the gate strong in 2011. First-quarter operating EPS came in at $1.63 per share, which handily beat the consensus of $1.41. There was also marked improvement in the company's U.S. business: U.S. sales growth for the first quarter of 2011 was positive for the first time in nine quarters. But keep in mind that the United States represents only 20% of the business. Japan pays the bills, and Japanese sales grew by 13% for the same quarter.
Speaking of Japan, saying "Aflac" and "investing" in the same sentence lately makes the "Nervous Nellies" break out in hives. Is there risk to Aflac's Japanese business thanks to the earthquake and tsunami? Of course there is. Enough to knock the stock back nearly 10% or so (see chart below) in the trading days following the disaster. Shares fell from the $56-55 range to $50 and some change.
Huge natural disasters and markets made of jumpy, reactionary, fearful, wannabe investors don't mix. That means luck for smart, cool investors. The stock price has recovered nicely back to around $56. If you were bold, you made a quick 10%. If you panicked, you're better off selling all of your equities now and buy a certificate of deposit (CD) paying a whopping 45 basis points.
A lot of the Japanese fear was probably overblown. Much of the confusion has dissipated. Will it affect the business? Most likely. However, holding shares of Aflac is still a good idea. Here's why...
U.S. sales have improved noticeably. Is that a sustainable trend? I think so. In the United States, Aflac's distribution model, like most insurance companies, relies on independent contractors. This is a cost-effective way to get the product out there, but is it the best idea for quality when a good, solid brand is involved? 20 years ago I would've said "no." But with its branding efforts in recent years, Aflac has also put a lot of work into recruiting higher quality representatives and investing in education and training. As a result, the company has a smarter, more professional sales force and is able to recruit prospective employees with higher skill sets. The result will be deeper product penetration and better client retention.
While Aflac's U.S. sales force will drive distribution, a true need for the product will also help, thanks to pending imposition of the Health Care Reconciliation Act (aka "Obamacare") on thousands of small businesses. For those that can only afford the bare minimum or can't provide coverage, Aflac can fill in the gaps.
Aflac's supplemental plans are typically purchased through payroll deduction and are very affordable. Premiums for lower-wage employees are often as small as $6 or $7 a week. That sounds relatively small, but when you consider the huge number of small businesses with employees who fit that description, the opportunity is equally enormous. With this on the horizon, U.S. sales could play a bigger part, especially if the Japanese business slows as predicted.

Action to Take --> 
 Aflac shares currently trade at around $56, with a trailing price-to-earnings (P/E) ratio of 12.6 and a forward P/E of 8.4 -- quite cheap for a business of this size. There's also a nice 2.1%dividend that the company has raised for 28 consecutive years. That's a bonus. To me, Aflac is a longer-term story.
Aflac's projected earnings per share (EPS) for 2011is $6.03. Based on that, the forward P/E is around 9.3. If the company executes, taking Aflac's 13% annual EPS growth rate into consideration, I think a 12-month price target of $71 is in line. This would equate into a 26% expansion of the earnings multiple (9.3 to 11.7) and a total return of around 29% for the stock price (throwing in the dividend).
Again, if the 13% EPS growth trend persists, 2012 EPS would come in around $6.81. The P/E would only need to grow by about 8% (12.6 times) for the stock to get to $81. That's 44% from where the stock is currently.

Brokerage Firm Ratings + Price Target


CompanyTickerBrokerage FirmRatings ChangePrice Target
DSWDSWMKM PartnersNeutral » Buy$56
STEC IncSTECAvianNegative » Neutral
Mylan LabsMYLArgusHold » Buy$29
GladstoneGLADStifel NicolausSell » Hold
Gentiva Health SvcsGTIVFBR CapitalUnderperform » Mkt Perform$23 » $25


CompanyTickerBrokerage FirmRatings ChangePrice Target
Ternium S.A.TXDeutsche BankBuy » Hold$49 » $44
Niska Gas StorageNKABarclays CapitalOverweight » Equal Weight$22 » $20
GeokineticsGOKHoward WeilMarket Outperform » Market Perform$10
CBOE HoldingsCBOEStifel NicolausHold » Sell
Research In MotionRIMMWunderlichBuy » Hold$76 » $46
Longtop FinancialLFTBMO Capital MarketsOutperform » Market Perform

Coverage Initiated

CompanyTickerBrokerage FirmRatings ChangePrice Target
Box ShipsTEUUBSBuy$12.50
TMS InternationalTMSRBC Capital MktsOutperform$16
Integrated SiliconISSINorthland SecuritiesOutperform$11.50
Antares PharmaAISOppenheimerOutperform$3.20
CONSOL EnergyCNXDavenportBuy$59
Sonic AutomotiveSAHDavenportBuy$18
Zix CorpZIXIMorgan KeeganOutperform$5
LogMeInLOGMMorgan KeeganOutperform$60

Coverage Reit/Price Tgt Changed*

CompanyTickerBrokerage FirmRatings ChangePrice Target
Tech DataTECDBarclays CapitalEqual Weight$54 » $51
Vertex PharmVRTXSummer Street ResearchBuy$46 » $72
Dresser-RandDRCStifel NicolausBuy$59 » $64
CNinsureCISGBrean MurrayBuy$24 » $19

(a) Brokerage firm initiating coverage participated in underwriting the recent IPO.
(b) Brokerage firm resumes coverage.
(c) Brokerage firm participated in the secondary offering.
* This list of reiterations/target changes is not comprehensive.