Markets
Five Green Up-And-Comers
These small companies are a bit speculative, but they could someday grow into green giants.
By Katy Marquardt, Staff Writer
Thomas M. Anderson, Associate Editor
From Kiplinger's Personal Finance magazine, October 2007
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Render unto biodiesel
Rising 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.
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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.
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.
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.