Strip away all the technology that separates our era from that of the Revolutionary War heroes we feted with fireworks yesterday, and at the most fundamental level you will find the sparkling genius of electricity. Discovered and named by the ancient Greeks, but not meaningfully harnessed until a century after
stormy experiments with kites, electricity is undeniably at the foundation of modern life.
Is it not odd, therefore, that there have been so few ways of capitalizing on this wonder -- the lifeblood of everything digital? At the start of the 1900s, a few incandescent-light manufacturers and electricity distributors captured investors' imagination much as the Internet has today, yet the industry was quickly subsumed by a set of monopolistic utilities that were regulated by government fiat into shareholder somnambulation. Since 1950, the
Dow Jones Utilities
index is up just 670%, while the
Dow Jones Industrials
are up 5,210%.
The rebalance this month of our SuperModels QuarterTrader portfolio, however, presents us with a good excuse to own the first growth company that the power industry has generated in decades -- an electricity pure play called
. Wildly misclassified in most stock-market guides as a utility itself, this San Jose, Calif.-based independent power producer appears to have quietly engineered -- fiscally and mechanically -- an unusually scalable and profitable business plan by acquiring and building gas-fired plants in regional clusters nationwide.
More and More Dollars
A key measure of a scalable business is the ability to generate increasingly more and more dollars each year strictly from operations -- not sales of ancillary businesses, external investments or stock. The "cash flow from operations" line in companies' 10Q filings is where alpha gorillas like
pound their chests, and weaklings like
blush. So take a look at Calpine's operational cash flow, and you'd swear you were looking at a famous tech stock instead of an obscure industrial: In 1995, it generated $26.7 million in cash; in 1996, $60 million; in 1997, $108 million; in 1998, $171 million; and in 1999, $264 million.
The company borrows a ton of money with a revolving credit line to finance its ambitious plant-building program, yet doesn't resort to cable-industry tricks and ask to be judged on the basis of earnings before interest, taxes, depreciation and amortization. Calpine has recorded real year-over-year quarterly earnings boosts of more than 35% in the past three years, and forecasts at least 35% annual earnings growth over the next five years. It earned $110 million in the most recent four quarters on revenue of $937 million.
In Good Company
In case you've become jaded about these kinds of numbers, consider this: There are 630 companies today with a market capitalization greater than $5 billion. Of those, only 62 have recorded earnings and revenue growth over the past year greater than 35%, and of those, analysts expect only 24 to continue to do the same over the next five years. Of these two dozen, just
were trading last week within 10% of their 52-week high: Biotech juggernaut
, fiber-optic component maker
, application-software maker
Says Kevin Dodge, a research analyst at
in Walnut Creek, Calif., a major institutional owner of Calpine shares: "They have an incredible balance sheet. A lot of the challenges you see in mid-cap companies -- such as access to capital, management talent and industry positioning -- just aren't there in this company. They have attacked their market at a very opportune time and worked out all the kinks." Adds John O'Connor, global-power research director at debt-rating firm
, which last week upgraded Calpine's bond rating to investment grade: "Calpine could not be farther from a utility. They're an extremely aggressive and smart player that's focused on being the nation's lowest-cost producer of electricity."
The company has been rewarded for its good deeds by seeing shares rise 1,040% since its initial public offering in September 1996 -- five times better than the overachieving
Spurred On by Deregulation
So where's all this growth coming from? Largely from the way that Calpine executives figured out how to leverage the deregulation of utilities. In the past, regulated monopolies generated, transmitted and distributed electrical power from sky-blackening power plants fired by oil and coal. When federal rule changes in the early '90s allowed entrepreneurs to generate power independently and sell directly to utilities, corporations and governments, a few firms like Calpine got busy -- both acquiring existing power plants and enhancing them with modern equipment, and building efficient new power plants of their own, called "greenfields."
Calpine found success, according to O'Connor, largely by "sticking to its knitting" with tried and true technology: natural-gas-fired power plants in the U.S., where demographic and industrial trends are accelerating demand for electricity. O'Connor says he raised his debt rating because the firm "hasn't been paying exorbitant amounts for new assets -- they're acquiring at good prices, and they are blocking and tackling. It's focus that sets Calpine apart."
The firm had set a goal in January of having 25,000 megawatts of power in its fleet, or portfolio, of plants by 2004. But it raised the bar to 44,000 megawatts in four years after its acquisition last week of private competitor
of Illinois and the formation of a new alliance with
Panda Energy International
of Dallas. It currently has 4,400 megawatts in operation, with another 26,000 megawatts either in development or under construction. (A typical individual plant generates around 500 to 800 megawatts, and there are 790,000 megawatts of power currently in operation nationwide -- about 45% of which comes from plants at least 25 years old.)
Just as important as the additional wattage, the SkyGen and Panda deals give Calpine access to 58 more
gas turbines; it now has 198 in inventory or on order, enough to generate 53,000 megawatts of power. A shortage of turbines is one of the key barriers to entry in the business, as capacity at the two major manufacturers (
of Germany is the other) is booked for the next half-decade.
In a way, Calpine's strategy is similar to
, which advanced from modest roots in Arkansas into a $240 billion goliath over the past 30 years by methodically placing discount department stores in backwater places with high demand and by leveraging an awesome back office. Calpine likewise tries to lock up medium- and long-term contracts for its power before construction of a new plant is complete by offering a low-cost, low-polluting solution in places where the incumbent utility has the demand but not the incentive to build. Customers that were used to paying $2 million per megawatt of installed capacity for a coal-fired plant, or $3 million per megawatt for nuclear, are delighted to see Calpine offer to build a gas-fired plant for $550,000 per megawatt. Likewise, neighbors are largely happy to learn that the new plants cut airborne nitrogen oxide emissions by 95%, carbon dioxide by 60% and sulfur dioxide by virtually 100%.
Meanwhile, pricing for its output is "very stable," according to Ron A. Walter, Calpine's senior vice president and co-founder -- unlike commodities such as aluminum or oil that fluctuate wildly in price from year to year. Lately all the surprises have been to the upside, said Walter, who noted the firm's budget currently projects pricing of $30 to $35 per megawatt hour, even though air-conditioning demand is pushing prices in some places to anywhere from $100 to $700 per megawatt hour.
Risks include a growing roster of competitors, including well-financed firms like
, as well as the potential for a slackening demand for electricity in a slowing economy, falling prices in the event of a power glut, higher interest rates and the difficulty of finding enough good engineers to hire. To be sure, doubles in the stock price will come a lot harder from here, but earnings estimates continue to be revised upward. For now, at least, it looks like full steam ahead.
At the close of the first half of 2000 trading, our main portfolio -- the 20-stock YearTrader -- was up 5%, a decent if unspectacular premium to the
, which was down 1%, and the Nasdaq Composite, which was down 6%. Our best portfolios were Redwood Growth and MVP Growth, up 30% and 25%, respectively. Worst were Flare-Out Growth, down 33%, and MVP Value, down 28%. Best stocks were
, up 114%, Siebel Systems and
, up 79%. Worst were
, down 69%, and
, down 62%. ... We rebalanced the MonthTrader, QuarterTrader and HiMARQ portfolios at the close of trading Friday. All three portfolios enjoyed a market-walloping June, but be very careful over the summer, as late July and August have never been kind to momentum stocks.
At the time of publication, Jon Markman owned or controlled shares in the following equities named in this column or listed in the SuperModels portfolios: AES, BroadVision, Cisco Systems, Digital Lightwave, Emulex, Kopin, Maxygen, Microsoft, Nokia, Nortel Networks, Oracle, Qualcomm, Siebel Systems, SDL, Superconductor Technologies, Veritas Software and Xcelera.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He welcomes your feedback at
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