Raser Tech: The Ugly Duckling of Alternative Energy
It’s difficult to imagine a more unloved stock than Raser Technologies (RZ). Motley Fool’s CAPS gives it a one-star rating, it has one of the highest short interests out there, it is suggested on a regular basis that the company has phony technologies, management is vilified like a candidate in a Virginia election, and their financial statements show a huge stockholders’ deficit and no significant revenues. It’s wise to be skeptical when it comes to stockpicking, but sometimes it’s equally wise to be skeptical of the skeptics.
Raser Tech may be an ugly duckling if there ever was one. If Raser’s technologies are a scam, they’ve done a magnificent job fooling Pacific Gas & Electric, Merrill Lynch, Prudential Capital, United Technologies (UTX), the City of Anaheim, U.S. Senator Orrin Hatch (R-UT) and New Mexico Governor Bill Richardson, just to name a few. If management has something major to hide, it’s worth noting that insiders are buying in heavily. If the company has a stockholders’ deficit, it seems to have very good cash flow prospects for the next few years if things are as represented. All in all, there are some reasons to believe that this ugly duckling might grow up to be a beautiful swan.
Raser operates in two different business segments, which isn’t the type of thing that normally gives investors confidence in a young company, but maybe it’s not such a horrible thing either. Raser originally launched with a Transportation and Industrial Technology segment which develops electric motor and plug-in hybrid vehicle (PHEV) technologies. Eventually, the company also formed Power Systems segment which develops and operates geothermal power plants. While the prospects for the former segment are not completely clear at the moment, the latter segment looks more promising than investors are giving it credit for.
Geothermal power has to date been one of the more overlooked viable alternative energy solutions out there. While solar has gotten most of the buzz and T. Boone Pickens has stumped in favor of wind power, there are very good reasons to believe that geothermal may be the best solution of the three. If nothing else, the oft-cited issue of energy storage is not a problem with geothermal since unlike solar and wind, it is not dependent on weather patterns or the time of day.
While geothermal many not be a viable solution for much of the nation east of the Rocky Mountains, it does have a lot of room for growth in the Western US. Moreover, Raser Tech seems to have some competitive advantages in this market including the ability to build and bring geothermal plants online in a relatively short period of time and their bottom cycling model that may generate additional power.
The ribbon-cutting ceremony for Raser’s first developed geothermal plant in Utah (“Thermo”) occurred on November 6th with U.S. Senator Orrin Hatch in attendance. The Thermo plant should give investors an early glimpse into the viability of Raser’s geothermal power segment, even if the economics for this plant are not as favorable as they are for future properties.
A quick look at Raser’s balance sheet shows an $11.2 million stockholders’ deficit. Any time a company has such a high debt level, it is frightening; however, RZ does operate in a capital-intensive industry with high up-front costs. Moreover, they expect roughly $55 million in net monetization for 2009. That’s about $1 per share. Raser’s target net monetization for 2010 is $175 million and $300 million for 2011. While I wouldn’t get too hung up on those numbers for ’10 and ’11 until Raser’s development begins more clear, even looking at 2009’s expectation might suggest that this stock is undervalued if things go even remotely close to plans.
The Case Against Raser
One of the primary reasons for skepticism about Raser appears to originate with a report from Citron Research in June 2005. While parts of that report raised legitimate concerns about Raser’s management at the time, I’d also have to question the smear job that the authors did; particularly linking Raser’s Jack Kerlin to a Nazi sympathizer based on what appears to be a few sloppily put together Google searches that are almost laughable in their attempts to draw a connection. The fact that Citron allowed some garbage speculation to be published constitutes one of the few blemishes on their record.
Regardless, since the Citron report, Raser’s stock has lost a significant portion of its value, they hired a new CEO (Brent Cook), and they entered the geothermal power business. While Raser still has not proven it can pull significant profits out of its electric motors, their geothermal operations appear to be going much better. It might be a bit foolish to simply assume because some people might have distrusted this company three years ago that this is a good reason to continue shorting it right now.
Another investor watchdog, the 10Q Detective, has seemingly been on a vendetta against Raser Tech, churning out negative articles at every turn. His best piece was run in March 2008, when he doubted Raser would be able to obtain financing (he was wrong) and he doubted Raser would ever construct a plant (he was wrong on that, too). However, that didn’t stop him from gloating in September ‘08. While I personally have a good deal of respect for the 10Q Detective, his attacks on Raser seem ill-informed and he has been rather one-sided in his proclamations of being right. After all, couldn’t you point to just about any company over September and October and say you were vindicated in your criticisms because the stock price plummeted?
There might be a strong case to be made against Raser, yet. Unfortunately, it seems most of the cases I have seen are relying on old cases and conditions have changed fairly dramatically since then. With Raser’s first geothermal plant up at this point and a revenue stream coming in very soon, how much longer can people claim this company is “phony”? How much longer can people imply that they’ll never get financing? Perhaps there’s a case to be made that the company is overvalued based on its revenue stream, but I have not heard that case yet.
The Case For Raser
I believe the case for Raser is fairly simple --- you have a beaten down stock with a high short interest with a company that now seems all but certain to recognize significant revenues from its geothermal operating unit soon. While it’s unclear to me just how good their future prospects are and it will be difficult to make a meaningful long-term valuation on them before seeing the results for the next few quarters first, if the company produces anything close to what it expects, this would seem to be a huge bargain in the $4-5 range even if the Transportation and Industrial Technology sector never produces much of anything.
Insiders are buying in heavily and the company expects about $1 net monetization per share for the first year of operations; that’s not bad. Even if you remain in the skeptic camp, I’d keep an eye on this company, especially after their next two earnings are released since that will give us a more clear glimpse at Raser’s future potential.
While I try to be skeptical when approaching companies, I’m finding more reason to be skeptical of the skeptics on Raser. If they are right, then they deserve a huge pat on the back for being able to see through this company; however, I would be interested in seeing a huge “I was wrong” piece if they do end up getting burned on this. So far as I can tell, there are much better shorting targets in the market than Raser right now and this almost feels like a reverse-momentum stock that might very well burst (upward). At the current price, there is limited downside if the company does not go under --- so essentially a short might be a bet on bankruptcy. On the upside, if the company’s revenues start looking good after these next few quarters, the stock could potentially jump through the roof.
From my perspective, I believe this company might be worth a gamble at this point as a small holding in a well-diversified portfolio. The downside is 100% loss, but the upside is tremendous enough that it might be worthwhile. And under that plan, even if the skeptics are right, it doesn’t wipe you out. Regardless of what your position on Raser is, it should produce some of the more interesting stock market drama over the next year. Keep an eye on it.