Description
WaterFurnace Renewable Energy, Inc. manufactures heating and cooling systems for commercial and residential application using solar energy trapped just below the earth's surface. Headquartered in Fort Wayne, IN, but traded on the Toronto Exchange, it sells products primarily in the US through a dealer network. Their products have substantial economic and environmental appeal: residential owners can reduce their energy costs by up to 70%, and virtually eliminate their carbon footprint. Of course, future performance will be based on housing/ commercial construction (and retrofit), oil prices, and valuation levels. While WFI is certainly not a blue- chip name, it is interesting to compare its valuation to Coca-Cola:
WFI KO
ROA 37.0% 13.9%
ROE 65.4% 27.5%
ROC 64.2% 20.2%
Div 3.0% 2.8%
EV/ EBITDA 12.4x 13.8x
P/ FCF 16.6x 20.2x
Est l/t Growth 25.0% 8.9%
Sales 5yr Growth 22.0% 8.7%
EBIT/ Interest 659.2x 19.0x
TD/ EBITDA 0.0x 1.0x
CFO/ TD --- 0.9x
Gross Margin 35.1% 64.0%
Operating Margin 17.3% 26.3%
Net Margin 11.0% 20.5%
Quick Ratio 2.1x 0.6x
P/ Sales 2.2x 4.5x
P/ E 20.1x 19.6x
P/ E 2009 20.1x 19.4x
P/ E 2010 17.3x 17.4x
PEG 0.8x 2.2x
Not an entirely unflattering comparison to one of the greatest businesses in history - especially as margins have been compressed by the worst housing slump in history. I do not expect the housing market to improve dramatically in the next two years, either in units or pricing. But the story here is not dependent on that recovery. The economics are enough. Waterfurnaces have a use-life of about 24 years, vs. about 15 years for conventional systems, and the energy savings are considerable (think 65%+). Consequently, the entire unit is "free" at some period between four and seven years. Remember that the systems can heat and cool, and run a hot-water heater. For the "sharp-pencil" crowd, the unit can be financed, and the savings will more than cover the interest from day one.
Congress, in its infinite wisdom, has a 30% tax credit (uncapped, expiring in 2016) for installing the system, and numerous federal and state shovel-ready funds will be available to pay for DOD and school/ municipal installation. These funds are not yet advanced, and not incorporated in my projections. If, or rather when, solar or wind energy becomes economic, the systems could be paired (to drive the WFI fans). Not insignificantly, the carbon footprint is zero which may even appeal to Al Gore.
Dealers are required to build a loop field. In many residential applications this requires digging a shallow field in one's back yard. In densely populated areas, the fields can be vertical, which adds to the cost. In major commercial applications, a ponds is created, under which the cables are run. In winter, cold are is run through the coils and heated (47% of the sun's energy is stored just below the earth's surface). In summer, hot air is cycled out into the coils, which helps cool the air. No noisy, or corroded air compressors.
There is a little quirk in the numbers at WFI: the stock is quoted on the TSE, thus expressed in CAD, while the data are reported in USD. So a look at EV requires an adjustment from CAD to USD, at the rate of $0.945:
Last trade 25.37
CADUSD .945
Common Price 23.97
Shares Out 12.09
Mkt Cap 289.85
Cash & Equiv 14.13
EV 275.7
| |
|
09 ltm Q3
|
08 ltm Q3
|
07 ltm Q3
|
06 ltm Q3
|
05 ltm Q3
|
|
Revenue chg.YOY
|
8%
|
21%
|
16%
|
36%
|
|
|
Revenue
|
132.40
|
123.10
|
101.80
|
88.00
|
64.90
|
|
- Cost of Revenue
|
64.9%
|
65.4%
|
69.0%
|
63.8%
|
71.0%
|
|
- Selling, General & Admin Expense
|
17.8%
|
17.8%
|
17.4%
|
19.6%
|
16.3%
|
|
Operating Income
|
17.3%
|
16.9%
|
13.6%
|
16.5%
|
12.7%
|
|
- Interest Expense
|
0.0%
|
0.0%
|
0.1%
|
0.1%
|
0.1%
|
|
- Income Tax Expense
|
6.3%
|
6.1%
|
5.2%
|
6.3%
|
5.2%
|
|
Net Income
|
11.0%
|
10.9%
|
8.6%
|
10.4%
|
7.5%
|
|
Basic EPS
|
1.20
|
1.10
|
0.72
|
0.77
|
0.41
|
|
Basic EPS chg.y/y
|
9%
|
53%
|
-6%
|
88%
|
|
|
Dividends per Share y/y
|
6%
|
13%
|
35%
|
7%
|
|
|
EBITDA
|
17.8%
|
17.3%
|
14.2%
|
17.1%
|
13.3%
|
|
+ Capital Expenditures
|
0.6%
|
0.4%
|
0.6%
|
1.5%
|
0.6%
|
|
FCF
|
17.2%
|
16.9%
|
13.6%
|
15.6%
|
12.7%
|
My estimates for the next three calendar year results are as follows:
| |
|
est 2009
|
est 2010
|
est 2011
|
|
Revenue
|
|
133.68
|
147.05
|
179.40
|
|
- Cost of Revenue
|
86.76
|
96.17
|
117.51
|
|
- Selling, General & Admin Expense
|
24.06
|
26.17
|
30.50
|
|
Operating Income
|
22.86
|
24.70
|
31.39
|
|
- Interest Expense
|
-
|
-
|
-
|
|
- Income Tax Expense
|
8.56
|
9.41
|
11.30
|
|
Net Income
|
14.30
|
15.29
|
20.09
|
|
Basic EPS
|
1.18
|
1.27
|
1.66
|
This idea is one that VICers will not like: too simple, too expensive. (By the way, if you think it is too expensive, wait until it gets cheaper.) I like it because it is so simple, and logical, and because it will have long legs. To me, an apt analogy is the automobile industry. Today, hybrid engines are all the rage in the US. But the superior technology, with much better performance is the diesel engine; over the next ten years diesel will grow significantly, and the hybrid will languish. As heating oil and nat gas continue to become more expensive, and as the inevitable required replacement cycle unfolds, more people will see geothermal as sensible. (The extra cost is not in the unit, but in the trenching, and the ground loops which need to be installed.) Management is now "second generation" and very high quality; no back-dating or accounting gimmicks for these guys.
It should be noted that 28% of the 12.09m shares are closely held, some 25% by the Shields family. As a result the trading volume averages 8700 shares per day.
Catalyst
1. Higher heating costs
2. Company sold by family
3. Green awaremness
4. New jobs/ housing/ energy stimulus packages