Clean Energy Fuels (Nasdaq:CLNE) Beginning to Look More Compelling

Jun 23, 2008
Author: SCP Editor

June 23, 2008 - We think Clean Energy Fuels (formerly Pickens Fuel – yes, of the Boone Pickens notoriety) is getting more attractive at current levels given our longer-term outlook for the natural gas driven auto market (see “Market Drivers” below). We would be buyers of the stock anywhere under $9.20, all things being equal (see “Valuation and Analysis” below). The stock has suffered recently due to relatively poor performance in the first quarter where volume was down due to delays in a few key projects. In addition, the company was challenged by negative variance in margins on fixed price sales contracts due to increases in natural gas prices. The company has guided that margin pressure as a result of rising natural gas prices will likely have adverse consequences for financial performance in the second quarter as well. We see these dynamics likely to create further softness in the stock price that will be a great opportunity to accumulate in the next quarter or so.

Recent Financial Results

·         Revenues up nominally for the Q1 to $29.9 million from $28.2 million, or 6% on a Y/Y basis;

·         Net loss for the Q was $5.4 million, or $(0.12) per share compared to a net loss of $0.9 million, or $(0.03) last year;

In addition to the margin issues discussed above, financial results were also negatively impacted by several one-time issues, including $2.5 million in stock-based compensation expenses, higher than usual marketing expenses of $1.3 million related to supporting the California bond initiative, and an increase in salaries due in large part to increasing manpower.

The positive news is that management has indicated that the company’s largest fixed price contracts will be expiring at the end of June. So the drag on margins that is being caused by a long-term contract being fulfilled at a loss will be off the books.

So what will drive the stock going forward? Several things.

Manufacturers anxious to bring larger volumes of fuel cell vehicles to the markets are going to need the infrastructure in place to support it, and Clean Energy appears to be extremely well positioned on this front.

·         Announced June 12 that it is opening a hydrogen fueling station in Los Angeles with support from General Motors Corp. (NYSE:GM). It will be used by drivers taking part in Chevrolet’s Project Driveway (the largest market test of fuel-cell vehicles). GM and CLNE are discussing further opportunities to expand into a network of hydrogen fueling stations. 

In terms of competing at the pump with oil, CLNE is also well positioned. For example, at recent prices in Los Angeles for diesel at $4.60 per gallon, CLEN is selling natural gas to its fleet operators at about $3.00 per gallon.

Market Drivers

·         High price of diesel.

·         Meeting emission standards.  For example, the California Renewable Energy and Clean Alternative Fuels Act which supposed the low carbon fuel standard. It is estimated that the passage of this act could displace as much as 1.2 billion gallons (29 million barrels of oil) annually and would allocated more than $3 billion for the purchase of 70,000 medium to heavy duty trucks and more than 150,000 passenger vehicles that would run on clean fuels (such as natural gas).

·         The “clean” truck plan at the Ports of Los Angeles and Long Beach where they will require at least 50% of the trucks to be replaced in the next five years by alternative fuels to be cleaner than diesel such as liquefied natural gas (LNG).  This represents about 8,000 LNG trucks.

·         Its LNG plant under construction in California is on track to start commercial production this fall.

·         International expansion – Natural gas is a global opportunity as 2 million natural gas vehicles were added last year. CLNE recently opened first overseas station in Lima, Peru. 

Valuation and Analysis

The stock is currently trading at 4.84x P/S (ttm). We are forecasting a modest 10% growth for the business in 2008 but do believe that growth will accelerated in 2009 and going forward based on the trends discussed above. In any case, based on our 10% estimated top-line growth in 2009 we have established a target stock price of $14.15, an 18% premium to current levels – not enough to be get us to begin accumulating yet. However, if we discount a target 35% (minimum desired ROI on target stock price) we come up with a target entrance point of $9.20.

We still don’t see the company posting operating and/or net income for 2008 so we aren’t able to provide an EBITDA and/or earnings-based valuation model at this point, but will look forward to resetting this analysis when we get better visibility on those levels.

Here’s What the Analysts are Saying:

·         April 11, 2008 – Lazard Capital initiates with a Buy. The stock closed at $12.92.

·         December 13, 2007 – Broadpoint Capital initiates with a Strong Buy. The stock closed at $15.34.

Notes:

·         Chevrolet’s Project Driveway consists of getting 100 Equinox fuel cell vehicles into the market where it can better understand the real world dynamics and challenges to bringing the vehicles into the market place on a mass scale.

·         General Motors intends to have 1,000 hydrogen fuel cell vehicles in California between 2012 and 2014.

Disclosure: SCPEditor does not hold any position in CLNE.