The New Face of Energy

July 16, 2006

An innovative era of alternative forms of energy has been spawned by high energy prices and dependence on foreign oil

America’s insatiable energy needs and dependency on foreign oil has helped jumpstart the alternative energy sector. The high cost of R&D and low demand in the past deterred any significant inroads in the field. Recent threats to the uninterrupted supply of oil to America have created a boom in a new domain dubbed cleantech, referring to environmentally friendly technology. Companies are exploiting various mediums to create and store energy without relying on nonrenewable oil, which will inevitably run out one day.

Alternative forms of energy are drastically more environmentally friendly than pumping oil out of deep wells. Creating energy from the sun or agricultural products has the potential to supplement our energy production and decrease reliance on foreign oil.

SunPower (SPWR) is one of the leaders in solar energy. The company designs, manufactures, and sells solar panels, which use semiconducting materials to absorb sunlight and produce electricity. The process of converting light to electricity is known as the photovoltaic (PV) effect. The typical solar cell has an efficiency of 15-20%, meaning that one sixth to one fifth of the sunlight shining on the cell will translate into usable energy. SunPower boasts that their cells have a minimum efficiency of 20%. The first solar cells built in the 1950’s had efficiencies of less than 4%.

SunPower completed its IPO in November by going public at $18 per share. After running up past $45 in March on optimism about solar energy, the stock has come back down to under $25. The stock will likely experience some extra volatility in the coming week as it is expected to report earnings of 3 cents a share on Thursday, July 20th. Under current estimates, analysts are predicting earnings growth of 156% in 2006 and 137% more in 2007. SunPower also recently announced plans to build new facilities to expand its capacity to manufacture solar products; demonstrating the rapid growth it is experiencing.

A larger rival to SunPower is Suntech Power Holdings (STP), based in China. Suntech has current capacity to produce 150 megawatts a year to SunPower’s 100 megawatts. The company’s major customers include China, US, Germany and Spain. After going public in December, Suntech stock has traded in a similar pattern to SunPower, although it has often had more severe price swings.

The hotter stocks on Wall Street recently have been ethanol producers. The giant player in the sector is Archer Daniels Midland (ADM), a large and diversified agricultural company. The company has a biodiesel division, focused on manufacturing corn-based ethanol. Ethanol prices have gone through the roof lately as demand for the fuel rises. Similarly, Archer Daniels Midland stock has performed exceptionally over the past year rising steadily from $22 last year to $42 today. The company also pays a 10 cent quarterly dividend, giving back a portion of its profits to investors.

Unlike Archer Daniels Midland’s diversified reach, many new companies have gone public as pure plays on ethanol production. The first of many to go public in the sector was VeraSun Energy (VSE). VeraSun went public at $23, and is currently trading at $25. Many more ethanol producers tried to capitalize on the buzz of a hot IPO market, including Pacific Ethanol (PEIX), Green Plains Renewable Energy (GPRE), Aventine Renewable Energy (AVR), and many others.

The safest bet in the ethanol industry is a company like Archer Daniels Midland, or smaller rival The Andersons (ANDE). These companies offer proven profitability with earnings growth and dividends, while the pure plays are currently trading on hype and hopes for a brighter future. Although the pure plays may pay off in the long run, the risk and volatility they entail must be considered. The U.S. government is even promoting renewable energy use through tax benefits.

America is facing an energy crisis due to its dependence on global oil, and most consumers do not realize the hard truth that one day oil will run out. While some companies are hoping to capitalize on currently high oil prices (see: Bullish on Oil), others are positioning themselves for the next generation of energy. The implementation of solar power and ethanol to help meet the energy demand of the human race is a step towards preserving the world as we know it.

At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.