The new power players

Sticker-shocked Americans, reeling from rising gas prices, have boosted the stock of companies producing alternative fuels.


Steve Bodow
June 27, 2000 11:01PM (UTC)

To locate blame for our nation's petroleum addition, we might want to start with our $35,000 Explorer addictions. Nevermind that inflation-adjusted pump prices aren't even high enough to merit whining: The current freakout over gas prices is less about economics than psychology.

OPEC, which has only been behaving like a good capitalist, drew fire last week after its token production boost did little to lower crude oil prices. Meanwhile, the GOP demonizes too-strict environmental laws, while Dems vilify oil barons. Any of these straw-man targets sure beats talking about the real problem, which is that when it comes to oil, we're a nation of brats. We don't like to be told we can't have cheap gas. The last time someone tried, we promptly shipped him back to Plains, Ga., like he was a defective product.

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But one thing has changed since the Carter era. Two decades ago, most alternative energy technologies were little more than pipeline dreams. Now, many are much closer to reality, and within reach by mid-decade. Vice President Al Gore today is expected to call for billions in tax breaks, low-interest loans and other federal subsidies to encourage consumers to buy clean-energy products, such as alternative-fuel cars, to reduce the country's dependence on foreign oil.

And earlier this month, DaimlerChrysler announced that it would invest $1 billion in fuel-cell research and development. The carmaker's venture shows how alternative energy has evolved from a lefty fantasy to economic viability. And the faster oil prices rise, the better alternative fuels will look to ordinary consumers.

As usual, the stock market picked up on the trend early. From January to mid-March, eager buyers sent several alt-fuel companies' shares skipping sharply higher -- more than 100 percent in some cases. But with the subsequent tech sector decline, most returned to their January levels.

Then a few weeks ago, as news of drastic inflation at the pump recaptured headlines, these stocks began another run-up -- a rally we're in the midst of today. And with air conditioners to run, gas tanks to fill for summer vacations and an election cycle to endure, we'll have oil's intractably high price weighing upon us for the next few months.

Speculators are bound to seek out ways to profit from drivers' high-profile ire, and some will surely flock to alt-fuel stocks. "It has a ton to do with all the energy commodities having spiked," says Eric Prouty, an energy technology analyst at Robertson Stephens. "As much of this is investor perception as it is reality, but people are thinking that higher oil costs bring other sources' costs into line."

A few companies are particularly prominent in efforts to bring different fuels to market. They're all "pure plays" -- i.e., 100 percent involved in this area of business. They're stocks for investors looking to profit from the alternative-energy trend before it really gets underway.

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(A cautionary note: They are volatile, high-risk stocks. Anyone considering these investments should do a good deal of homework first.)

British Columbia's Ballard Power Systems (NASDAQ: BLDP) produces fuel cells that combine hydrogen and oxygen to generate electricity. These cells don't produce particulate pollution or carbon monoxide, so greenheads love 'em. Ballard's potentially breakthrough business is in the automotive industry, where it has deals with DaimlerChrysler, Ford and others to develop fuel cell cars. Ford and Daimler's latest Ballard-propelled prototypes can travel about 300 miles without refilling.

Along with high gas prices, state laws are driving Ballard's new-model engine technology. A California law, for example, calls for 10 percent of new car sales by 2003 to be "low-emissions," or at least partly dependent on alternative fuels. But many in the industry doubt that will happen. not least because Ballard doesn't expect to have engines ready for mass production before 2004. At a minimum, though, automakers have to show they're trying, which means continuing to support Ballard's R&D.

If -- and it's a big if -- Ballard ever does capture 10 percent of California's automotive engine market, its current $7.5 billion market cap (at $89 a share) will look like peanuts. Getting there will take even-higher gas prices in tandem with some crafty design and marketing from carmakers.

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Think of Ballard as equivalent to an Internet play: Profits remain pretty far off, but if it works, it works big.

Fuel cells from PlugPower (NASDAQ: PLUG) use the same chemistry as Ballard's, but instead of cars, the upstate New York company focuses on homes. By early 2002, the company will begin selling a natural-gas-based fuel cell to supply the electricity needs (and heat as well) to a 3,000-square-foot house. The cells, roughly the size of small refrigerators, sit outside and connect to the main power circuit, similar to a utility line. But once a PlugPower cell gets running, it's off the grid -- impervious to power outages.

PlugPower, like similar companies, has profited from a peace dividend. Both the Defense Department and NASA heavily subsidized early fuel-cell research and development, and today companies can redirect those technologies to consumers.

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The five Wall Street analysts who cover PLUG expect the company to lose $1.31 per share this year; that loss will nearly double to $2.45 in 2001 as production expenses mount. Sales should jump substantially in 2002 when its residential fuel cells hit the market in earnest.

Unless, of course, they don't. Product delays are the biggest near-term risk. After the company announced a delay in May, Merrill Lynch, Goldman Sachs and Bear Stearns immediately downgraded the stock to "hold," clipping its share value by more than 35 percent in the following days. Another such glitch could shake even long-view shareholders' confidence. The stock closed Monday at 57 1/16, up 3 1/16.

OK, so the notion of solar energy has an admittedly '70s crunch to it. And the photovoltaic (PV) cell business has pretty much reached technological maturity. But that doesn't mean demand has slackened. In fact, worldwide sales will grow by a steady 20 to 25 percent for many years to come.

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AstroPower: (NASDAQ: APWR), in Delaware, which makes some of the world's most popular PV cells, will do better than that. Its profits grew about 55 percent in each of the last two years and show no signs of slowing. Analysts expect the company to earn 42 cents per share this year and 66 cents in 2001. Trading at about $30, the shares have a forward price-to-earnings ratio of 44, which is not bad for a company growing more than 50 percent annually.

AstroPower's cells are in demand from telecom firms that need to power remote equipment such as wireless phone network equipment, as well as construction firms. Road signs, for example, increasingly get their power straight from the sun.

Robertson Stephens' Prouty has a "buy" rating on the company. "Just because you don't see solar cells on your neighbor's roof doesn't mean they're not out there," since three-quarters of its sales go to Europe and Japan, which have embraced alternative energy much faster than the United States has.

At least in the short term, AstroPower, Ballard and PlugPower stand to gain from this season's oil-price obsession. What happens when that obsession subsides? Check the astrology column.

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Steve Bodow

Steve Bodow is a writer in New York who has contributed to New York magazine, Wired and Feed.

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