These small companies are a bit speculative, but they could someday grow into green giants. By Katy Marquardt, Staff Writer and By Thomas M. Anderson, Contributing Editor September 30, 2007 < Render unto biodieselRising food prices throw a major roadblock on the biofuel highway. To make biofuel production profitable, even with government subsidies, you need a steady supply of cheap, raw material. That's where Nova Biosource Fuels comes in. It takes slaughterhouse leftovers -- hardly a hot commodity -- and turns the rendered fat into diesel fuel. Rising prices for the raw materials used to make biodiesel, known as feedstock, work in Nova's favor. At least 75% of U.S. biodiesel is made from soybean oil, which costs about 31 cents per pound, up from 23 cents last year, and is expected to rise to as high as 36 cents per pound by 2008. But animal tallow, the fatty waste from meat processing, costs as little as 20 cents a pound, in part because there aren't as many commercial uses for tallow as there are for soybean oil. Nova's patented process can use 25 different feedstocks, including animal tallow, to produce biodiesel. RELATED LINKS 25 Stocks to Invest in a Cleaner World Green Investing is the Next Big Thing Because feedstock expenses account for about 80% of a biodiesel plantUs operating costs, profit margins are sensitive to swings in those costs. "Nova can buy whatever is cheap," says analyst Walter Nasdeo, of investment bank Ardour Capital Investments. "That gives the company a great advantage." The Houston company has begun to prove that it can produce biodiesel on a large scale. Its first commercial refinery, in Comanche, Iowa, started production in October 2006. The company eventually wants to build six refineries. With $40 million in cash on hand, Nova plans to raise an additional $200 million to complete its projects. Advertisement Still, Nova is a risky bet. It has a history of losses, and its prospects depend on the ever-changing prices of oil and tallow. But Nasdeo expects Nova to earn $70 million, or 64 cents per share, in 2008 as its biodiesel production takes off. The stock (symbol NBF), which has a market value of $319 million, traded at $2.90 in mid August. Based on his earnings estimates and the outlook for biodiesel, Nasdeo thinks the stock is worth $5 and rates it a buy. High-tech cleanup How would you like to clean the inside of a coal-fired power plant? Fuel Tech would gladly accept that dirty job. The Stamford, Conn., company has come up with a technique for reducing slag, a hardened sludge that accumulates on boiler walls and pipes during the coal-burning process. The resin, which is difficult and costly to remove, lowers a boiler's efficiency and can cause shutdowns when boulder-size chunks break off and damage pipes and other equipment. The cleanup isn't as messy as you might think. Fuel Tech's low-cost, proprietary method uses a computerized model of the fire to pinpoint areas where slag is likely to build. Workers then insert nozzles directly into the boiler and spray a chemical compound on the problem areas, making it difficult for residue to gather. Aside from boosting efficiency and combating slag, the process helps curb emissions. "This is a technology where the payback is very, very high," says Jack Robinson, manager of Winslow Green Growth fund. Slag-busting is actually a small part of what Fuel Tech does. The company's flagship business makes pollution-control equipment for utilities and industrial firms. Although that segment is expected to post impressive growth, it's the slag-reduction business that's kindling the most buzz on Wall Street. So far, 60 coal-fired utilities in the U.S. and Europe are each paying Fuel Tech $1 million annually for its chemical-treatment process. The potential market is much greater: There are 1,500 coal-fired plants in the U.S. and many more overseas. In June, the company announced a partnership to sell its slag-reducing system in China, the world's largest coal consumer. Advertisement Fuel Tech isn't cheap. At $30 in mid August, the stock (FTEK) traded at 100 times analysts' 2007 earnings estimates of 30 cents a share, according to Thomson First Call. But analysts see earnings soaring to 63 cents a share in 2008. Robinson thinks the stock, which has a market value of $668 million, could reach $100 in the next three to five years. The lure of fuel cells The market's enthusiasm for alternative-energy stocks these days tends toward wind, solar and biofuel companies. But if a small Danbury, Conn., company gets its way, fuel cells may soon have their day in the sun. FuelCell Energy has carved out a niche producing fuel cells that power large facilities, such as hotels, universities and hospitals. So far, it has more than 60 power plants up and running worldwide. Fuel cells generate energy by creating a reaction between hydrogen and oxygen. Because the technique doesn't involve combustion, fuel cells produce energy more efficiently and with fewer greenhouse-gas emissions than conventional generators do. FuelCell's devices provide a reliable on-site energy source, which eases a facility's reliance on the power grid and is crucial for customers such as hospitals and hotels. It's also important for customers such as the Sierra Nevada brewery in Chico, Cal., which relies on round-the-clock power from fuel cells to keep its beer chilled. The generators can use a variety of fuels, including gases that are byproducts of wastewater treatment, of food processing and, in Sierra Nevada's case, of the brewing process. Lately, FuelCell has seen a surge in orders. The company recently inked a ten-year manufacturing-and-distribution agreement with South Korean power company Posco. A deal is also in the works with the state of Connecticut for what could be the largest order in FuelCell's history: six projects requiring a total of 68 megawatts of fuel cells. Advertisement Although revenues are rising rapidly, FuelCell is losing money. Analysts estimate a loss of $1.35 per share in the fiscal year that ends in October. Chief financial officer Joseph Mahler says FuelCell needs to produce 75 to 100 megawatts per year to make money. "We've crossed the big threshold, and now we're trying to penetrate the market and gain volume,S he says. Analysts at Lazard Capital Markets think the stock (FCEL), which recently traded at $8 and has a market value of $541 million, will hit $11 within the next year. Power controller Small efforts in energy conservation can lead to big savings. That's the philosophy behind Echelon. When you forget to turn off the lights at the office, Echelon's technology flips the switch. McDonald's sees the opportunity for cost-cutting. In July, the fast-food chain selected Echelon technology over rival systems to control the power supply for the lights, fryers and other equipment in its new and refurbished restaurants. Echelon estimates that the multiyear contract will bring in $20 million -- not an insignificant amount for a company with $93 million in revenues over the past 12 months -- and McDonald's expects the move to reduce its energy costs by 10%. More important, the deal will help Echelon win business with other restaurants, says analyst William Gibson, of investment firm Nollenberger Capital Partners, who owns Echelon shares. Echelon's contribution to more energy-efficient Golden Arches masks the bigger prospects. In addition to control systems, Echelon makes "smart meters" for utility companies. The meters improve efficiency by allowing utilities to control electricity service remotely and prevent blackouts by automatically limiting power usage. "The market for EchelonUs products could reach billions of dollars per year later this decade," says Gibson. Advertisement Echelon's meter business is erratic. Sales often depend on the decisions of slow-moving governments and utilities. The San Jose, Cal., company has lost money for two straight years as it's been developing its next generation of meters. Gibson expects Echelon to turn a profit in the fourth quarter of this year. The global demand for energy efficiency will give Echelon shares a tailwind, but it will be a wild ride for investors. The stock (ELON) has soared 44%, to $23, since early July alone, bringing its market value to $905 million. But it's nowhere near its record high of $113, set in 2000. Still, it might be prudent to wait for the shares to surrender some of their recent gains before buying. Eyes in the sky As they say in business, you can't manage what you can't measure. This rings especially true for companies that are expanding their operations into remote parts of the globe, where monitoring equipment, productivity and energy use can be difficult. A small wireless company headquartered in Fort Lee, N.J., has a space-age solution to this problem. Orbcomm (ORBC) owns and operates a fleet of 30 satellites that help companies track and monitor their goods anywhere in the world. These satellites, which orbit the earth in less than two hours, can monitor corrosion in pipelines, track cargo containers, and report the location, speed and fuel economy of vehicles. Orbcomm's feedback, which can be sent to an e-mail address or even a cell phone, helps companies and government agencies enhance productivity, cut costs, repair equipment and improve security. Orbcomm generates about half its revenues from the sale of transmitters, iPod-size beacons that attach to trucks, trains, oil wells and other objects. The remainder come from average monthly subscriber fees of $5 to $6 per device. That adds up, especially when you consider that some customers outfit thousands of vehicles with Orbcomm's beacons (most of which cost about $100). The number of billable transmitters has grown from 113,000 in 2005 to 278,000 at the end of June. CIBC World Markets analyst Tim Horan thinks that number could reach four million in the next five to six years. "A lot of things are coming together," says Horan. "The cost to buy the transmitting device has become quite cheap, and companies are figuring out how to make this information useful." Horan expects Orbcomm to turn profitable by the end of 2008 and to begin generating free cash flow (earnings plus depreciation and other noncash charges, minus capital outlays) in 2010, after it completes a round of satellite launches. He sees the stock -- which, at $8 in mid August, sports a market value of $325 million -- reaching $12 over the next 12 to 18 months.