This column was originally published on RealMoney on Feb. 17 at 10:34 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
Fueled by growing electricity demand, tax credits and cash-laden corporate balance sheets, a major upgrade push by electric utilities is taking shape as producers work to expand capacity and improve distribution.
Major improvements to the nation's energy infrastructure have been anticipated by investors since the blackouts of August 2003, but few capital commitments followed the hype, and interest waned. Then in 2005, investors again rallied behind the Energy Policy Act, but it wasn't until recently that enough major projects were planned, proposed or initiated that investors can finally capitalize on the opportunity.
On Feb. 2, the
Wall Street Journal
reported that $108 billion in coal-generation projects, representing 135 new plants, are currently proposed in the U.S. Furthermore, the Department of Energy suggests that about $225 billion in new coal-fired power plants will be needed during the next 25 years.
On Jan. 31,
American Electric Power
filed plans to build the first major electrical grid upgrade since last year's Energy Policy Act introduced tax credits intended to encourage such improvements. With an estimated price tag of $3 billion, the proposal calls for a 550-mile line from West Virginia to New Jersey.
The company is currently siting its proposed 620-megawatt (MW) integrated gasification combined cycle (IGCC) clean-coal technology power plant in Ohio. The estimated $1.2 billion plant will employ the first commercial-scale use of the technology for power generation, and it represents the largest IGCC plant announced to date.
In an unrelated announcement, American Electric Power said it is raising its projected 2006 capital-spending budget by $400 million to $3.7 billion.
has begun constructing its first new coal-fired electric generating unit in nearly 30 years. The 750MW Colorado facility, when completed, will provide enough electricity for about one-third of Colorado's communities at an estimated cost of $1.3 billion.
, which reported on Feb. 2, experienced a 12% rise in annual revenue and outlined its plan to invest "heavily" in its power generation fleet by adding more coal-generating plants and creating a "smart grid" for its transmission and distribution.
Where's the Money Going?
The recent spate of project initiations and proposals is likely to boost sales at
McDermott International provides engineering, procurement and project-management services to energy producers. Its Babcock & Wilcox subsidiary is the leading supplier of scrubbers, with 30% of the market for FGD scrubbers and 25% of the market for SCR scrubbers, which are what you need for clean coal. It is No. 2 by market share for new boilers, with 35%, and No. 2 by market share in plant construction.
Babcock & Wilcox is projected to contribute over one-third of McDermott's total revenue in 2006 and one-fourth of its total operating income. As a function of its market-share dominance, Babcock & Wilcox is well-positioned to benefit from both increased environmental restrictions on plant emissions and new coal-fired plant production.
McDermott has a market capitalization of $3.33 billion and is currently generating $246 million in operating cash flow on $1.93 billion in sales. On the balance sheet, it has over $433 million in cash and $264 million in debt. In 2006, the company is forecast by analysts to earn $2.85, giving it a forward P/E of 16.3. McDermott International shares closed Thursday at $47.15.
Specialty contractor InfraSource Services provides infrastructure-related services primarily to electric power utilities. The company assists electric utilities with the design, engineering and construction of major electrical transmission and distribution systems.
InfraSource has a market capitalization of $714 million with $2.5 million in cash and $112.1 million in debt. Although revenue is forecast by analysts to remain nearly flat in 2006 at $862 million, EPS during the period is expected to jump by some 67% from 33 cents to 55 cents per share, attributable to margin expansion and merger-related expenses in 2005. In 2007, sales are forecast to ramp some 10% to $944 million on growth in grid infrastructure investment.
InfraSource Services shares closed Thursday at $19.05. Please note that this stock is somewhat illiquid, with an average volume of 94,500 shares traded daily.
General Cable makes cable products for various industries, but most importantly, the company makes low-, medium- and high-voltage power lines. While not glamorous, the company's products represent one of the simplest components of the electrical power grid, and with over 5,600 miles of new transmission lines planned for installation through 2008, General Cable is situated in a real sweet spot.
The $1 billion market-cap company has $51.3 million in cash and $352.3 million in debt. General Cable grew revenue by 20.8% to $2.38 billion in 2005 and is forecast by analysts to grow the top line by another 18% to $2.8 billion in 2006 on higher volumes and price increases. Analysts forecast EPS growth of 26.2% in 2006 to $1.25 from 99 cents, giving it a forward P/E of 21.
General Cable shares closed Thursday at $28.25.
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