Monday, March 1, 2010

Wise Bets on a Smarter Grid (ABB; COMV; CSCO; ENOC; ITRI; GRID)

From Barron's:

Special Report -- Green Investing: From Cisco to EnerNOC, many stand to cash in on the modernization of the power grid.

AMERICA'S ELECTRIC-POWER GRID, designed a century ago, is in desperate need of a 21st-century facelift. Just ask anyone who survived (by candlelight) the Northeast blackout of 2003, caused by a sagging power line in far-away Ohio. On a daily basis this Neanderthal shows its age, in summer brownouts, sporadic blackouts and sky-high utility bills that attest to the system's inefficiency and waste. Is this any way to power up a superpower?

Modernizing the grid, with its 150,000 miles of power lines and 10,000 power plants, is a monumental but necessary undertaking, and potentially a hugely profitable one for investors. A Cisco Systems (ticker: CSCO) executive shocked some listeners last summer by proclaiming that power networks eventually would eclipse the Internet as a business opportunity for the Web pioneer.

Spending on a "smart" grid, one that uses metering, monitoring devices and communications technology to help utilities and consumers communicate with each other and better manage energy flow, could reach $40 billion a year by 2015, compared with less than $10 billion today, according to Barclays Capital. By 2030, outlays for the requisite hardware and software could grow to $100 billion a year, the bank says.

Cisco is just one possible beneficiary of the predicted spending surge by the government, utilities and energy consumers. The dollars flowing into grid modernization could enrich other software giants, including Google (GOOG), Microsoft (MSFT) and IBM (IBM), as well as utilities such as Duke Energy (DUK) and FPL Group (FPL), that are installing advanced metering in their service areas.

Still other potential winners are engineering and construction companies such as ABB (ABB); small- and mid-capitalization meter specialists like EnerNOC (ENOC) and Itron (ITRI); and privately held companies Silver Spring Networks and Gridpoint, not to mention developers of technologies as yet unknown. "We expect significant opportunities for innovation and wealth creation as the next Googles and Microsofts are created in this sector," says Vishal Shah, head of Barclays' clean-technology practice.

Central to a smarter grid is demand response, or DR -- automated mechanisms that enable utilities' residential, commercial and industrial customers to reduce electricity use during periods of peak demand, usually in return for price breaks. In addition to helping utilities manage their power loads better, time-based pricing schemes could result in lower energy consumption -- and less money spent on new power plants.

Studies by the Electric Power Research Institute suggest energy-efficiency programs associated with grid modernization could pare the expected annual growth rate of U.S. energy consumption in the next two decades by 22%, to 0.83% a year. That might not sound like a lot, but the annual energy savings could total 236 billion kilowatt hours by 2030, about equal to the yearly energy use of 14 New York Cities.

The Obama administration has directed $3.4 billion in stimulus funds to 100 smart-grid projects, and requested $144 million in its fiscal 2011 budget for grid modernization. Yet the smart grid won't be an immediate gold rush for investors, given cost, technology and regulatory restraints.

But gradually adding smart-grid companies to build the green portion of your portfolio is probably a good idea. "Overall, we expect smart-grid companies to show superior earnings growth relative to other clean-tech sub-segments," says Barclays' Shah. "We expect the stocks to trade at a premium valuation.

Steven Milunovich, an analyst at Bank of America Merrill Lynch, calls the smart grid Merrill's "favorite" green-energy sector, because smart-grid companies are less capital-intensive than solar and wind-power companies, and generally deliver higher returns.

Besides, as Canaccord Adams analyst John Quealy notes, smart-grid upgrades in the U.S. and elsewhere are prerequisites to using solar and wind power in the most cost-effective and efficient ways....MORE

Plugging Into the Grid

From still-small metering outfits to forward-thinking utilities to technology giants, companies are working to make electricity systems around the world more efficient, reliable and cost-effective. Barclays estimates spending on a smart, computer-based power infrastructure could reach $100 billion a year by 2030.

Recent 12-Mo Mkt Val 2009E 2010E Lt Debt/
Company/Ticker Price Chg (bil) Rev (bil) EPS EPS P/E Capital
Itron/ITRI $66.89 41% $2.7 $1.7 $2.09 $2.92 22.9 35%
Comment: Leader in installation of advanced metering systems.
EnerNOC/ENOC 26.89 129 0.6 0.2 -0.32 0.31 88.2 0
Comment: Implements energy-efficiency technologies for commercial customers.
Comverge/COMV 9.91 128 0.2 0.1 -1.26 -0.30 NM 39
Comment: Energy-efficiency pioneer in the consumer sector.
Cisco Systems/CSCO* 24.33 65 140.0 36.0 1.35 1.54 15.8 27
Comment: Developing grid-related communications standards.
IBM/IBM 127.07 48 167.0 96.0 10.01 11.11 11.445
Comment: Will invest $2 billion in smart grid start-ups.
FPL Group/FPL 46.88 -1 19.0 16.0 4.06 4.37 10.7 51
Comment: Has largest wind, solar farms in U.S.; $200 million smart-meter project.
Exelon/EXC 43.81 -10 29.0 17.0 4.11 3.77 11.6 45
Comment: Nuclear-power leader is completing ambitious grid upgrade.
Duke Energy/DUK 16.38 16 21.0 13.0 1.22 1.28 12.8 42
Comment: Smart-meter projects and grid upgrades in Indiana, Ohio.

*Fiscal year ends in July.
NM=Not Meaningful.

Sources: Bloomberg; Thomson Reuters