Seeking Alpha on Ormat

12.28.07 | Comment?

Ormat’s Brady Hot Springs Plant
Brady Hot Springs Ormat Geothermal Plant east of Reno Nevada
Photo Credit: Mike Harding

Via Seeking Alpha:

On December 17, Ormat Technologies Inc. (NYSE:ORA) announced a 20-year agreement with Southern California Edison for the sale of energy from ORA’s 30 megawatt plant at Imperial Valley, CA, that is expected to come on line by mid 2012. On December 18, Ormat announced the execution of agreements in the 340 MW Sarulla Geothermal Project in Indonesia where Ormat will design and supply the power generating units. These agreements indicate that ORA will not only remain as a leading geothermal power producer in US, but is also expanding its international presence.

The stock has been making good gains (almost 70%) since June ’07 lows. This gain has resulted in the stock breaking out of a prolonged consolidation that extended for almost a year and a half. The lofty PE (95 and 45 – Trailing and Forward respectively; Source: Yahoo Finance) makes the stock appears expensive at current levels. Nevertheless, considering the business opportunities available for ORA, any dip on the stock can be a buy opportunity for short and medium-term players. The Reno, NV based company’s policy of targeting an annual payout ratio of at least 20% of its net income (ORA has been distributing regular quarterly dividends for the last three years) makes the stock attractive for those who want a steady stream of income.

Read the whole article.

We agree that Ormat is an impressive player in the geothermal space, and the largest and most stable pure play. However, we believe the stock is tremendously expensive (even accounting for prospects and growth) at present levels.

One aspect of the company not covered in the article is the split between the equipment and electricity generation segments. We believe the equipment and electricity operations segments in the same company will prove to be problematic strategically as customers of the equipment segment increasingly see the electricity segment as a competitor. The equipment segment is about 20% of the company’s revenue and is “lumpy” from quarter to quarter. The electricity segment is where the growth is occurring. We wonder if it might not make more sense to spin out the equipment business as an “arms” dealer to all, including a separate Ormat run electricity generator.

All that being said, geothermal is the renewable that has yet to be discovered in the mainstream and it may be that there is substantial upside still possible in the stock given the overall heat of the segment. As an additional data point, traditional electricity generators trade at a PE of around 15 (Source: Yahoo Finance.)

Disclosure: The author holds no position in Ormat.

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