Tuesday, March 29, 2011

I Bought Shaw As A Nuke Growth Company, I'm Keeping It As A Nuke Retrofit Company

Prior to the Japanese earthquake, I was very content to own Shaw Group, the big Louisiana based construction company. I built a position several years ago in the mid $20s and its price had moved up nicely to around $42 on the back of the nation's anticipated, renewed commitment to nuclear energy. Shaw, a minority owner of Westinghouse [ the owner of the latest and best nuclear reactors], and the major nuclear construction company had a half dozen plants under construction in China and the USA and another batch approved by oners and regulators. The future was looking good.

Then Japan's problems occurred and Shaw's stock price dropped to the $30 range. Fortunately for me,PWER, the renewalable energy inverter company, moved up nicely over the same timeframe reducing my pain. At its present pricing, $35, I think Shaw is a reasonable purchase. We will likely proceed will all approved plants, but with adjustments. Those adjustments will mean change orders and work to Shaw's advantage. Nuclear power supplies about 30% of our energy and it can't be replaced over night or over a decade. We have to have it, but we will try to make it safer and that benefits the contractor. Many functioning plants will be retrofited and Shaw will be selected as contractor. Not only have they built more plants than the competition, but as a 20% owner of Westinghouse, they are connected to the world's most advanced reactors, and also own specialized piping facilities. I believe Japan's issues will create a wave of business for Shaw.

Shaw has some screwy accounting and reporting due to its minority ownership on Westinghouse and some currency issues that accompany that ownership, but the company does a good job of discussing the issues. That said, Shaw is selling for about 12 X forward earnings and has a decent balance sheet. While not a screaming buy, or a "fat pitch", $35 is a good entry point for this quality engineer/contractor that also happens to do disaster remediation and major construction jobs, like all the dike rebuilding after Katrina.

Friday, March 11, 2011

Not A PWER Expert Yet, But Getting In Deeper

I'm still learning about alternative energy conversion as I lose money on my initial Power-One purchases. So far I've convinced myself that I will still do well with the investment. But, it's starting to feel lonely as there are plenty of sellers and naysayers.

The three questions I constantly ask myself are: is solar/wind energy going away, is PWER a leader/survivor, and am I over-paying for the company? My recurring answers are No, Yes, No.

Economical or not, every country in the world is gravitating, to some degree, to alternative power generation. Subsidized yes, but becoming less so as oil prices increase. No one likes being hostage to oil producer states.

Alternative energy when produced needs to be converted into grid power and that's where PWER, and a slew of competitors, comes in. They also do about a $300MM business in power management for data centers and have about $200MM in cash, but evidently the market doesn't care! Power-One does about $700MM in inverter revenue and is the world's second largest inverter seller. New factories in Arizona and China are spearheading expansion into those two large markets for renewable projects. With a number two industry position, new factories, plenty of cash, and virtually no debt, I don't think PWER is facing failure. They could get acquired though by an Emerson or GE if they wanted to get serious about the market.

At a $7 share price, I can live with a poor first half of 2011 as plants are started up and inventory gluts are worked out. The company and analysts are still very upbeat about the full year performance, but if wrong, it's been priced into the share price. If margins fall dramatically and SGA gets out of control, causing net income to fall to $.50 a share, that 's only a P/E of 14 for a leading growth company.

Today I upped my ante and bought some January 2012 $5 calls. I paid about $2.85 for the options so I'll start, hopefully, breaking even at about $7.85. PWER finished the day at about $7.25. I liked the company in the $8s range, so I was happy to add to my position at an even lower price. PWER has 10 months to prove the naysayers incorrect and Crusty wise. In the meantime I continue to learn more about the industry.
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