WATERFURNACE RENEWABLE ENRGY WFI CN
December 17, 2009 - 11:47am EST by
jsc60
2009 2010
Price: 25.15 EPS $1.18 $1.27
Shares Out. (in M): 12 P/E 20.1x 18.7x
Market Cap (in $M): 304 P/FCF 12.5x 11.1x
Net Debt (in $M): -6 EBIT 23 25
TEV (in $M): 270 TEV/EBIT 11.8x 10.9x

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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

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