Description
Fuel Tech’s main business is providing technology for the control of pollution emissions from utility and large industrial boilers. (Referred to as NOx reduction technology) In addition to several different NOx reduction systems, FTEK offers accompanying engineering services and proprietary fluid dynamics technology to help customers reduce pollutants more efficiently and to decrease maintenance and down-time. This is somewhat of an un-glamorous industry, but FTEK is good at what they do and is very well positioned to gain significant market share in an exploding market.
A review of FTEK’s recent operating performance reveals nothing spectacular, but the EPA’s latest NOx reduction rules will soon give a massive boost to the pollution control industry through 2004. The federal mandate says utility and large industrial boilers in 22 states must reduce NOx emissions by 85% from 1990 levels. (This is approximately a 40-50% reduction over today’s levels, and must be completed by May 2004, and earlier for some states) The new rules are a windfall to companies like FTEK. The rules affect 700-800 utility boilers and 400-500 large industrial boilers in the US.
The final legal appeal by the utility industry was denied by the supreme court early this year, effectively setting in stone the EPA’s regulations. FTEK’s sales stagnated while the case worked itself through various court appeals, and will pick up significantly starting Q4 2001, soon after utilities must submit detailed plans of compliance with the EPA.
FTEK’s recent financials are unimpressive, in large part because the aggressive spending to ramp up for accelerated NOx business was not timed right with the 14-month legal appeals process. But over the next 3 years, 50% annual sales growth should be a layup, and FTEK will enjoy more economies of scale. Margins should expand significantly, with a 20% net well within reach by 2004. 100MM in sales is attainable by 2004, compared to a current run rate of 25MM. The icing on the cake is that there are $46MM of NOL’s to be used during the sweet spot of the NOx market surge.
The barriers to entry in this business are high. FTEK enjoys firm patent protection on many of their products, technical expertise, and key alliances with 2 major utilities.
FTEK’s success will likely continue beyond the 2004 EPA emissions deadline due to both increasing international regulation and the diversification of the customer base.
International Regulation—
Currently, 20-25% of sales are international business. Looking beyond 2004, the European Union has similar NOx reduction rules with a 2005 deadline, and Canada with a 2007 deadline.
Diversification of Customer Base—
The company has developed value-added products and processes for use in other, non-regulatory driven industries. FTEK sells its Fuel Chem line to the paper industry and solid waste industry, and has demonstrated its effectiveness in the Powder River Basin Coal industry. In Q3 2001, Fuel Chem sales increased 49% year over year.
With 18.5 million shares outstanding, $2 million of debt, and almost $10 million in cash, EV is approx. $59.5 million. Barring a major disaster, FTEK will earn north of $.50 in 2003 and close to $1.00 in 2004. Unlike most high-growth stories, this one has a fairly certain earnings stream, driven by the new EPA regulations. Once again, there are $46 million in NOL’s which should zero out nearly all taxes through ’04 or ’05.
Catalyst
Recently upheld EPA regulations will drive significant growth in high-margin NOx business through 2004. Favorable international regulatory environment will continue long-term.
Fuel Chem business has shown high growth and extremely promising results in non-regulatory driven business.