Tag Archives: apple

Summary HTM showed up on a screen for long ideas, but I find the stock unattractive: Slow growth, potential dilution, no dividend, and no EPS. My attempt to value the stock valuation relies on EV/EBITDA, and it’s a messy affair to reconcile the minority interests and company adjustments. The biggest risk to this short idea is that a strategic buyer might make a bid, since HTM is a pure play in geothermal. US Geothermal (NYSEMKT: HTM ) recently showed up on a micro-cap screen designed by Marc Gerstein, Director of Research at Portfolio123 . The screen uses a combination of value and momentum factors to identify attractive stocks while avoiding what Marc calls “dumpster fires.” As a side note, Marc and I started our careers three decades ago as stock analysts at Value Line. His stock screening process is not only sound, but it is far better than anything I could design. So the first step was to take a quick look to see if the screen had netted a fish or just an old tire. (Finding junk in the net is usually caused by bad data, and does not indicate a flaw in the screening process.) (click to enlarge) Minority Interests Dilute Earnings U.S. Geothermal , Inc. operates power plants in the Western U.S., and is a pure play on geothermal energy. Unfortunately, HTM only owns a 60% interest in its largest, most profitable plant: Neal Hot Springs in Oregon. Likewise, it has a 50% interest in the plant located at Raft River, Idaho. For a granular analysis of the plants at HTM, please see All Quiet on the Geothermal Front .The minority partners take a big cut of earnings, so potential investors should keep this in mind as they read HTM’s financial statements. Capital Constrained It is hard to see the firm growing significantly without raising capital or diluting current shareholders. This article on SA described it well: U.S. Geothermal Is an Open-Ended Story . I cannot add much to this well-written analysis, except to say that it the author used a value approach that makes sense to me and didn’t conflict with anything I discovered about the firm. The firm has a number of projects in the pipeline, but these take a long time to develop and do not always come to fruition. HTM gets government incentives to develop plants, including a $65-million loan at 2.6% interest from the Department of Energy. The reliance on tax breaks and government loans is both an opportunity and a risk that is inherent to renewable energy projects. Valuation I find HTM a hard stock to evaluate, since it has no dividends and GAAP EPS hover around $0.00 (that’s not a typo). So I had to resort to EBITDA (earnings before interest, taxes, and amortization). As of August 11, 2015 the company is guiding analysts to net income before taxes of $3 to $6 million–quite a wide range. This works out to adjusted EBITDA of $11 million, so the company maintains that stock is selling for about 6x EBITDA. (Source: Page 22 of company presentation here .) But this excludes net debt, as we shall see below. Total assets of U.S. Geothermal as of 6/30/15 were $231 million. Total debt was $97 million, and minority interests were $45 million. Throw in some short-term liabilities of $6 million and miscellaneous items, and total liabilities come to $145 million. Shareholder equity was $86 million, so I calculate enterprise value of $231 million. The company presentation uses data from December 31, 2014, so the enterprise value would be $233 million, rather than $231 million. (click to enlarge) Then the adjustments start. As shown above, U.S. Geothermal adjusts the year-end assets and liabilities to reflect minority interests to come up with the “USG portion” of each. This makes sense to me. The firm also adjusts asset values upward from $233 million reported at year-end 2014 to $375 million. I cannot vouch for this, since I have not followed the trail of breadcrumbs to confirm whether or not this contains reasonable assumptions. So I will I use unadjusted asset values of $233 million, rather than $375 million. Granted, it is possible that the company has bona fide reasons to make adjustments to its asset base up to $375 million. If I were shorting the stock, I’d look into this to make sure that there weren’t saleable assets that are undervalued. But the problem with this logic is that if the asset base really is this high, then the company’s return on assets is even lower than I calculate. In any case, adjusted for minority interests, U.S. Geothermal has debt of $71 million and equity of $171 million. This comes to an enterprise value of $242 million. Based on this, and on the firm’s projection of 2015 adjusted EBITDA of $11 million, U.S. Geothermal is not earning a particularly good return on assets: $11 million/$242 million amounts to a 4.5% return on total assets. The company may have a higher return on equity, which came to 15% according to year-end 2014 numbers as calculated by Reuters. But for a highly-leveraged utility, we need to look at returns on total assets, and it is not encouraging. 4.5% seems like a low return, which may explain why the firm cannot afford to pay a dividend. (click to enlarge) Above is page 24 of a company presentation, and it shows that the current stock price is 5.8x forward EBITDA of $11 million. This seems cheap. But it does not include the company’s portion of long-term debt, which is $71 million. Personally, I find that misleading. Would a Buyout Make Sense? As of November 4, 2015 the stock had a price of $0.58, giving the firm a market cap of $62 million. Any buyer of U.S. Geothermal would assume the company’s liabilities, and this includes its portion of long-term debt. If we assume that a buyer would pay at least 10% premium for the stock, we have equity of $68 million. Add $71 million of long-term debt, and the buyer would have to pay $139 million for the whole shebang; this is the Enterprise Value that would matter to a buyer. Using the company’s forward, adjusted EBITDA of $11 million for 2015, a takeover offer of $139 million would amount to an EBITDA/Enterprise Value multiple of 12.6x. Not cheap, but not expensive. Therefore, I do not see a buyout offer as a big catalyst for the stock. Nevertheless, given the company’s tiny capitalization and niche focus, the stock could eventually become a takeover target: A large utility might buy HTM for strategic reasons, and a private equity investor might add value by injecting capital, buying out minority interests, or breaking up the company and selling off assets. I have no reason to think that a buyer is waiting in the wings, but short sellers should keep this risk in mind. Short Interest According to Nasdaq , as of 10/15/2015 HTM has a short interest of 780,207 shares. With daily volume of 190,000 shares, it would take 4 days for the shorts to cover. There are 107 million shares issued and outstanding, and the float is about 105 million. The fully diluted shares are 126 million. I have to note that it is notoriously difficult to short micro-cap stocks, and the services of a good prime broker will be essential. (There are no active options for HTM.) As a side note, insider purchases of the stock show up on Yahoo as positive, but the executives receive significant grants and gifts. This stock compensation is not cheap, and it reflects the skills of the current executive team. A strategic buyer of U.S. Geothermal may decide that it can consolidate operations and save money by cutting executive pay. This is a minor consideration, but worth mentioning. Bottom Line HTM shares may be suitable for investors who like renewable energy. There is no dividend, so investors have to be very patient. And there is no guarantee that the project pipeline will pan out, so investors have to be risk tolerant. Given current valuation and the potential for dilution, I think the potential risk/reward is tilted toward the short side. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.