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The Gas Station of the Future?

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April 26, 2010 – Comments (22) | RELATED TICKERS: EXC , FPL.DL2

 

As someone who works in the auto industry, I get the privilege of attending the press aka media days for various auto shows throughout the year.  I recently attended the NYIAS, which is cool industry lingo for the New York International Auto Show.  One can tell that the product plans that the automakers are talking about today were developed a year and a half ago as the price of oil spiked to over $100/barrel.  The overriding theme of this year's show was fuel economy.

Every single press conference and presentation that I sat through talked about the issue.  Manufacturers are making their vehicles more aerodynamic, smaller, introducing new hybrid models, and last but not least either introducing plug-in electric vehicles in the near future or talking about doing so some time down the road.

Regardless of what your opinion is on them, plug-in vehicles are coming...and sooner than many people think.  General Motors is scheduled to introduce its first plug-in vehicle, the Volt, and Nissan is scheduled to introduce its, the Leaf, either later this year or early next.  Now that the arrival of plug-in vehicles is imminent, the questions is whether they will be successful (is the technology ready? and will consumers want them?).

Uncle Sam certainly wants them to be.  The government is providing a $7,500 tax credit on the purchase of one right off the bat.  Furthermore, it is raising its CAFE fuel economy standard for automakers so that vehicles (cars and trucks) sold in the U.S. must average over 34 MPG by the year 2016.  

One can debate whether plug-in vehicles are actually "greener" than regular vehicles, much like they can debate the merits of using corn-based ethanol for fuel (which I personally think is a joke), but the government has propped up the use of ethanol by throwing its muscle behind it.  If the government wants electric vehicles to succeed it will do everything in its power to assure that they will.

In a joint presentation at the NYIAS by Ford and Microsoft, Alan Mulally and several other executives from both companies mentioned one statistic that I found absolutely astonishing.  They claimed that the introduction of one electric vehicle to a household would essentially double its electricity consumption.  Thank about that.  If electric vehicles do catch on, the power companies would see a dramatic increase in the demand for their product.

The economic slowdown has taken its toll on power use and companies in this sector have not escaped the pain.  For the most part, power companies have been completely left behind in the recent massive rally in the markets.  That makes them an interesting contrarian place to consider investing.  Many amazing, well-run companies are trading at incredibly attractive multiples.  Take a look at these charts for two of my favorite companies in the sector, FPL Group (FPL) and Exelon Corp. (EXC).

 

These companies are trading at the lowest prices relative to their book values in a decade.  They're cheap.  So that passes test one in my stock evaluation process.  

The second quality that I look for in stocks is whether they pay sustainable dividends.  Both FPL and Exelon pay very solid dividends of near 4%, 3.8% and 4.6%, respectively.  

The downside of these companies is fairly limited because they are so cheap and we are being paid to wait for a number of potential events that could cause their share prices to soar in the future.  I already mentioned the possible introduction of plug-in electric vehicles as one catalyst.

The specific power companies that I mentioned have an additional potential growth kicker, they are two of the "greenest" power companies in the United States.  The vast majority of Exelon's power is generated by nuclear plants.  FPL uses all sorts of "green" sources for its power as well, including natural gas, wind, nuclear, hydro, and solar.  Why does this matter?  Because the very real possibility exists that the government will eventually introduce some sort of Carbon Tax.  

The Obama Administration has already made it clear that they want Carbon Tax legislation passed.  They even went as far as to rule that the EPA has the authority to regulate carbon emissions.  It's difficult to say whether they will be able to pass such a bill, after fighting extremely tough battles on healthcare and financial regulation and facing stiff opposition from a number of industries but this issue could be up next on the agenda.  I'm not saying whether I am for or against a carbon tax (though I do think that the potential exists for it to be devastating for the economy if it is done incorrectly), just that the passage of one would likely benefit FPL and EXC.

Add to that a possible increase in power usage if the economy continues to recover and there's lots of free call options that could yield significant gains in these stocks down the road.

Deej

Long FPL & EXC

22 Comments – Post Your Own

#1) On April 26, 2010 at 11:13 AM, TDRH (99.65) wrote:

Great to have you back.   Quality of insight and information was missed. 

Thank you,

 James

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#2) On April 26, 2010 at 11:14 AM, TMFDeej (99.43) wrote:

Thanks for the kind words, James.

Deej 

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#3) On April 26, 2010 at 11:40 AM, Option1307 (29.69) wrote:

Another solid post Deej!

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#4) On April 26, 2010 at 11:48 AM, Rehydrogenated (32.23) wrote:

That sounds like a good idea. Low-risk, dividend paying industry with a major growth catalyst over the next three years.

I still need to do some due-diligence, but this idea just jumped pretty high on my research list.

So what do you think are some of the pitfall in the industry, now and over the next 3 years?

 

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#5) On April 26, 2010 at 11:54 AM, ocsurf (< 20) wrote:

Good info Deej...Nice Work!

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#6) On April 26, 2010 at 11:54 AM, ocsurf (< 20) wrote:

Good info Deej...Nice Work!

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#7) On April 26, 2010 at 11:54 AM, ocsurf (< 20) wrote:

Good info Deej...Nice Work!

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#8) On April 26, 2010 at 12:19 PM, chk999 (99.97) wrote:

Nice insight on potential winners if electric cars get some traction. (Pun intended.)

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#9) On April 26, 2010 at 12:33 PM, SockMarket (40.70) wrote:

great post Deej.

Incidentally where did you get those charts?

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#10) On April 26, 2010 at 12:35 PM, leohaas (32.11) wrote:

Nice inside info into the working of an industry (maybe one of the best since floridabuilder stopped blogging).

From the Government's perspective, this is not so much about the environment. It is all about national security.

We import way too much oil from countries where many people and some of their dictators hate us with a passion. A few of those idiots even hate us so much that they are willing to commit suicide in order to kill as many of us as possible. We should disengage from these countries completely for our national security. It is our addiction to foreign oil that prevents us from doing this. After all, as long as we need their oil, we need to "protect our interests" using our military might...

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#11) On April 26, 2010 at 12:46 PM, lemoneater (81.83) wrote:

Any idea on what the pricing will be for either the Volt or the Leaf? How will they compare to the Smart Car in performance?Also with normal use about 40 to 50 miles a day how long will the batteries last before they need to be replaced?

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#12) On April 26, 2010 at 1:41 PM, TMFDeej (99.43) wrote:

Thanks for reading everyone. 

I clipped the charts from a cool site called http://ycharts.com/ that I found by surfing around the web.  You can create charts for stocks using all sorts of interesting metrics there.

I completely agree, leohaas.  My original blog post had an entire section dedicated to how even if they aren't any more energy efficient than gasoline vehicles, or even any greener (many argue that they aren't), there is a lot of merit to using domestic energy sources, like coal, nuclear, and natural gas to power our transportation needs instead of oil that is imported from abroad. 

Not only do many of the people in the countries that we get oil from hate us, but looking at the situation from a purely economic standpoint why ship jobs abroad when we could stimulate the demand for domestic products and create additional jobs in the U.S.?

Hi lemoneater.  I can't stand the Smart Car.  If they would have asked me about whether they should import it to the U.S. or not a couple of years ago I would have told them not to and saved them millions of dollars.  The Smart car is doomed.  It isn't selling well right now and it faces a ton of A-Class and B-Class smaller vehicles entering the market over the next several years, including the Mazda2, Ford Fiesta, Chevrolet Cruz, Scion iQ, on, and on, and on.  When I was at the show I was amazed by how many super small vehicles manufacturers have in the works.  There isn't currently enough demand in the market to absorb all of them.  Perhaps that will change if oil spikes to $100 again and gasoline prices explode as many are predicting (I'm not so sure that it will happen).

Nissan has officially stated that the "base" Leaf will be priced at $32,780, which drops to around $25,280 after the government tax credit is taken into account.

I don't believe that The General has officially announced pricing for the Chevy Volt yet, but it is rumored to be around $40,000, which would drop to $32,500 after the credit.

Neither of these cars are cheap by any stretch of the imagination.  They will look even more expensive once options are added in, but this is the very beginning of this new market.  Like with any new technology, things are usually expensive at first.

I have no idea how long it will take for consumers to adopt plug-in electric vehicles in any sort of scale, or whether they will ever even catch on at all but it will be interesting to watch the situation play out and fun to have a little skin in the game.

How well plug-ins do will depend a great deal upon the battery technology that these companies have developed and what improvements can be made in the future.  I have absolutely no idea how long a life the batteries in the Leaf and Volt will have.  They certainly will make for expensive replacement parts.

Deej 

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#13) On April 26, 2010 at 3:07 PM, bullnada (< 20) wrote:

What happens when all the lithium from old batteries in the junkyards leak and goes to the water table. Oh well who needs clean water.. Any time you convert energy dont you lose like 20% of that energy? Thanks for the info.

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#14) On April 26, 2010 at 3:55 PM, TMFDeej (99.43) wrote:

Your point about the old batteries is a very valid one.  Chances are that the government will have to create some regulations that mandate the proper recycling of the batteries of junked plug-in vehicles.  I don't see why in today's day and age we couldn't recycle old batteries properly, but it is one more thing to worry about.

I'm definitely not saying that plug-in technology has been perfected or that it consumers will be willing to purchase said vehicles in mass quantities, just that it's something to keep an eye on.

The uncertainty surrounding the situation is why I'm advocating a conservative play like power companies rather than something more aggressive, like battery companies such as A123.

Deej 

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#15) On April 26, 2010 at 4:14 PM, USNHR (31.88) wrote:

If I could get a Tesla, I might consider an electric vehicle, but otherwise i'll stick to gas or maybe natural gas, or hydrogen if things ever go that way.

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#16) On April 26, 2010 at 4:15 PM, lemoneater (81.83) wrote:

Deej, very informative and interesting blog. Thanks for taking the time to answer my questions.

There are a good number of Smart Cars driving around Greenville so perhaps sales are better in this area than most. It goes to show that one shouldn't judge a company just on one's own impressions alone.

It sounds like we will stick with our Ford Focus for now. Those electric cars are out of our range. It will be exciting to watch what happens.

 

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#17) On April 26, 2010 at 5:05 PM, TMFDeej (99.43) wrote:

Here's a couple of other interesting articles on the subject that I came across today:

GE, Nissan agree to research vehicle charging

 

Nissan’s LEAF EV fetches 6,635 orders in just 3 days in the U.S.

 

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#18) On April 27, 2010 at 9:31 AM, drgroup (69.30) wrote:

Who makes the rechargeable batterys for these units?

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#19) On April 27, 2010 at 10:17 AM, lemoneater (81.83) wrote:

JCI makes some of them I believe, since my JCI stock has jumped on recent news.

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#20) On April 27, 2010 at 10:23 AM, outoffocus (22.84) wrote:

Good post. I actually advocate for cars to be powered by natural gas.

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#21) On April 27, 2010 at 10:29 AM, JakilaTheHun (99.93) wrote:

I like (energy) utilities right now, as well.  EXC and FPL have both made their way to my watchlist; in fact, I own a little bit of EXC. 

Any thoughts on Entergy (ETR)?  

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#22) On July 29, 2010 at 1:22 PM, MFOutlier (67.88) wrote:

One could do worse than to assess critically the claim that introduction of one electric vehicle to a household would double its electricity consumption.  All households are not the same size in either numbers of occupants, space occupied, or electric "appliances" used.  Substantially more electric power is consumed in all electric, single family homes than in those using natural gas for space and water heating, cooling, and cooking,  And, if most vehicles are driven less than 30 miles per day as some auto analysts have claimed, it strikes me as quite doubtful that introduction of an electric vehicle would, on average, double household electricity consumption.

 Over a year, my own household electric power consumption (with no electric autos and fuel oil heating) averages more than 35 Kwh daily.   Should we introduce an electric vehicle, say something like the Nissan Leaf, and drive it 30 miles per day our electricity consumption would rise less than 23% since the Leaf supposedly will deliver 100 miles of city driving from a 24 kWh Li-ion battery pack.

 

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