Ormat: Cash Generation Justifies Earnings Multiple

Ormat Heat exchanger at GKW Landau. Geothermal water evaporates the carrier medium. Preheater and the evaporator. The steam line above connects to the turbine. Photo by Claus Ableiter via Wikimedia Commons

by Debra Fiakas CFA

Shares of geothermal power producer Ormat Technologies (ORA:  NYSE) are trading at 29.2 times the 2014 consensus estimate of $0.93 per share.  That multiple looks fair compared to growth expected at Ormat in the next year, but more dear against the company’s long-term growth prospects.  The stock has been flying off recent project developments. 

In early September this year, the company completed construction and commissioning of a 100 megawatt geothermal plant in New Zealand, making it the world’s largest geothermal power plant of its kind.  Straight off the job in New Zealand Ormat entered into a joint agreement with eBay (EBAY:  Nasdaq) for the development of a five megawatt recovered energy generation plant to supply power to eBay’s data center in Salt Lake City.  Just two weeks ago Ormat also signed a second agreement to develop a 60 megawatt geothermal project in Indonesia.

Ormat delivered $539 million in total revenue in the past twelve months. Unfortunately, the net result was a deep loss of $205.6 million or $4.47 per share.  Ormat recorded an impairment charge of $263.4 million related to its North Brawley power plant located in Imperial County, California.  The impairment charge was taken after the company made a decision to operate the power plant below maximum capacity.

Beyond the impairment charge Ormat has been a consistently profitable company.  Cash flow from operations totaled $323.6 million in the last three fiscal years, representing conversion of 24.4% of sales to cash.  In my view, impressive cash generation helps justify the forward earnings multiple.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.