Investing in Alternative Energy
Posted on April 30, 2007
With continued high oil prices, there’s been a lot of investment interest in the alternative energy sector. However, because of the hype, it’s not always easy to find reasonably priced stocks with exposure to the industry. Magnetek (MAG, $4.56), though, is one stock that we found that appears to be a decent way to play this hot investing trend.
Major Restructuring Completed
A restructuring late last year, initiated by the divestiture of a major operation, allowed Magnetek to pay down all its debt, fund a significant pension liability, and still maintain a nice cash position to fund future growth from its remaining subsidiaries under the guidance of a reconstituted executive management team.
Exposure to the Wind Energy Industry
The smallest and fastest growing part of MAG’s current business is its Energy Delivery segment. This segment accounts for approximately 10% of sales and makes inverters that convert the dc power generated by fuel cells, wind turbines and solar arrays to ac power that can be used on a utility power grid. You can read more about it at MAG’s website: http://www.magnetek.com/
What is notable is that in December 2006, the company announced that that it had received an initial production order for calendar 2007 delivery of 60 wind power inverters valued at more than $7.0 million. In addition, MAG stated that, “Under a separate supply agreement, Magnetek will provide inverters for an initial period of one-year with customer options to extend the agreement in subsequent years. If exercised, the options could produce incremental revenues of more than $60 million for Magnetek through 2011.”
Solid Base of Additional Businesses Limit Risk Profile
Importantly, even considering the significant opportunities available to the company via its alternative energy segment, an investment in the company is not simply a bet on the growth of the alternative energy sector. Magnetek also operates in several other businesses, such as motion-control subsystems for elevators and power control and delivery systems for the material handling industry. Combined all of the company’s businesses are expected to post revenues of a little over $100 million in 2007. We believe that these additional, more mature businesses, provide a nice degree of downside protection for investors considering MAG shares.
Reasonable Valuation
The company’s valuation is also reasonable. On a very simplistic level, with about $30 million in cash and no debt, the company’s enterprise value to sales ratio is currently only slightly above 1, a seemingly fair valuation considering the growth opportunities available to the company in the years ahead from higher margin product lines in the alternative energy sector. In addition, with it’s now vastly improved capital structure, and the divestiture of non-profitable businesses, MAG is set to return to positive earnings this year. In fact, analysts expect the company to report breakeven results in the coming quarter and become EPS positive in the next. For fiscal 2008, analysts estimate EPS of between $0.30 to $0.40 per share.
Risk/Reward Seems Favorable
All in all, we think that the highly favorable year-over-year earnings comparisons and a growing investor awareness of this company’s role in the alternative energy sector, could increase MAG’s share price in the year ahead. At the same time, a stable set of additional, “non-sexy”, businesses, should limit downside risk, in the event that the alternative energy sector does not grow as expected.
Disclaimer:
This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.
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Disclaimer:
This site may include market analysis and we may own shares in the stocks mentioned in our reports. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.
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Can you give a price target on this stock?
Thank you,
Steven
Regarding MAG, in addition to the question above (target price)- could you elaborate on the management and “books” - specifically with regard to any “options wrongdoing” or other financial mishandling - ie: has there been any in this Company since new managemet took over?
Also, has the pension liability been fully “accounted for”?
Thank you,
Steven