Lehman Brothers analyst Paul Cheng (who is, incidentally, an excellent energy analyst who predicted the situation I describe below long before most other analysts in the field did), has downgraded his rating for Alon USA Energy Inc. (NYSE:ALJ), and cut his target price. To be honest, I have no problem with this and I believe that Cheng is 100% right to downgrade his rating for Alon USA a second time. Alon USA climbed more than 121% during the period March-August, an achievement due in its entirety to everyone’s belief that oil was heading for $100 a barrel.
Opening his review which was appeared yesterday, Cheng states, “We are updating our assessment to reflect the bearish forecast for the demand-supply ratio, which is partially offset against a stronger sales forecast, indicating larger profit margins.” What is Cheng actually saying, with such eloquent verbal artistry? He is saying that he would have cut his rating for Alon USA even more were it since the supplies of oil for sale far exceed the rate of purchases, but Alon USA is an excellent company whose profits are influenced largely by the end link in the oil track - the consumer. By the time it reaches that stage, the price per barrel is important but not as important as the marketing operation, products and pricing skills.
Put simply, Cheng still doesn’t know how the fall in oil prices (something he is sure will happen) will affect the various stages in the marketing chain, and companies such as Dor Alon, which make most of their profit from conventional retailing activity. Incidentally whatever Cheng says about Alon USA also applies to Delek US Holdings Inc. (NYSE:DK), albeit with a slight difference. Delek US did not have the pleasure, fortune, or misfortune to rise as Alon USA did, so the blow it suffered must have been less harsh than that experienced by Alon USA. However, one thing should be made clear: Alon USA (and apparently, also Delek US about which I know less), is a company that has been managed outstandingly. Alon USA, as it happens, is currently 39% above its price at the beginning of the year. My advice to those who do not have Alon US or Delek US in their portfolios is to wait and see how things develop. There’s no need to rush. If oil prices continue to fall, (and I quite definitely believe that they will), stocks like Alon USA and Delek US will also be hurt, even if there is no financial reason for this.
It may well be that thanks to an amazing coincidence I have found out what the problem was with Arotech (Nasdaq: ARTX), which for some reason, has attracted substantial interest. As I see it, the combination of alternative energy, the line of business of Arotech’s battery and power systems division, Electric Fuel, and armored vehicles, police forces, rifles, marksmen and pistols animates the imagination, and with a combination like this many investors must be asking themselves ‘how can you go wrong with this company?’ Apparently, all that glitters is not gold and Arotech’s stock, to use the vernacular of the faithful, is ‘screwed up.’
Why is this case? How is it, for example, that a company such as Medis Technologies (Nasdaq: MDTL) is currently worth almost $900 million, despite repeatedly failing to deliver on its promises (like Arotech), with annual sales that have not even reached $500,000, while Arotech is barely worth $15 million, but has annual sales of at least $43 million. It looks like Electric Fuel is not getting any real credit and Arotech’s other lines of business are too small to be of interest to any serious investor.
I became interested in Electric Fuel after I happened to read an article by Stephen Ellis, one of the contributors to the business news site fool.com, about a company named Energy Conversion Devices Inc. (Nasdaq: ENER), which is active in the field of solar energy, hydrogen storage, etc. It has annual sales of $102 million, losses totaling $20 million, more than $400 million in cash, and a market cap of $1.5 billion. Ellis comments on the promises the company made five years ago. “How has the company fared since then? I am going to give them 1 for 6, and I think I am being generous here,” he says. Why? Because almost all this company’s revenue comes from the company’s United Solar Ovonic segment, which designs, develops, and manufactures modules that generate renewable energy by converting sunlight into electricity.
Ellis claims that its other five lines of business amount to nothing, and what surprised me were his views on alternative batteries, which is also Electric Fuel’s line of business. “Well, revenue-wise and profit-wise, they have delivered basically - bupkis. We have known that the battery technology has been a bust since 2001,” he claims, adding that all those awesome technologies from photovoltaic batteries to hydrogen-fueled vehicles aren’t expected until around the end of the next decade. Ellis concludes by saying that investors in companies such as Energy Conversion need quite a bit of faith to persevere with such investments, given the incredible patience required for some of these technologies to pay off. “That is patience I just don’t have,” he says.
So while it is true that Electric Fuel is getting orders and building up an impressive orders backlog, it appears that interest in these technologies is on the wane, at least on Wall Street. Over there they want to see results, and not just listen to stories. Medis for example, which had market cap in excess of $1 billion, has fallen recently, because the time is fast approaching when the company will have to start showing some tangible results, business wise. Medis, as it happens, is one of the few really interesting alternative energy companies, because it develops batteries that will be suited to cellular handsets, a massive and phenomenal market, which many believe that Medis will be the first to enter on a business track. If this is true, the stock undoubtedly deserves a higher value, but a $1 billion market cap for a company that has sales of less than $500,000, losses of $30 million, and $40 million left in cash? That’s way out of my league.
Incidentally, the falls in alternative energy companies, including Ormat Technologies (NYSE: ORA), should not be related to the falls in oil prices since all these technologies, including solar energy, oil shale, or wind energy are justified economically, even when oil prices are at $30 a barrel. Perhaps the falls in alternative energy stocks are a hint of something far beyond our usual way of thinking when it comes to oil prices?
It’s been some time since I had occasion to write about M-Systems Flash Disk Pioneers (Nasdaq: FLSH). “Forbes” magazine has a weekly report on the moves of the market’s leading gurus, and apparently M-Systems was their top pick for September. “Marketocracy” is a virtual investment portfolio administered by selected investment managers at “Forbes.” Their big move in September was the $188,000 they invested in M-Systems. They claim that the stock’s recent sharp gain still does not reflect the extent of the company’s qualities and its markets.
As it happens, many people now believe that the expected merger between M-Systems and SanDisk Corporation (Nasdaq: SNDK), will catapult the latter into the major league where it will compete head-to-head successfully with the leading players. It is claimed that it is still worthwhile buying M-Systems stock since the stock of the new combined company will gain strongly. Incidentally, the gurus offloaded Google at its current price, at the end of the month.
Published by Globes [online], Israel business news - www.globes.co.il - on October 5, 2006
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