Ormat Technologies Inc (ORA)

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Thu: Ormat and Solel's shining promise
The mountain has finally come to Mohammad, and people from all over the world are coming to see what solar energy pioneer Solel has to offer. Meanwhile, Israel's only serious contender in alternative energy is Ormat, but why did Lehman Brothers downgrade its EPS estimates for this year?

Shlomo Greenberg

Israel was a trailblazer in solar energy, and in this context, special mention should be made of Solel Solar Systems from Beit Shemesh. Solel featured prominently in "BusinessWeek" this week, as US President George W. Bush's decision to increase invstment in alternative energy will help the company to develop markets outside Israel. Regrettably, there's no chance of investing in ever-so-interesting Solel right now. It's a private company and belongs to a Belgian group that acquired the rights to its technology from predecessor Luz, which collapsed in the Nineties.
For 17 years now, Solel has been successfully operating solar energy collection plants in California's Mojave Desert that supply 350 megawatts (MW) per year to the city of Los Angeles. But the power plants are American-owned. Solel is responsible for upgrading the technology and supplying services, and that has been its source of revenue for the past several years. Still, the mountain has finally come to Mohammad, and people from all over the world are coming to see what the company from Beit Shemesh has to offer.

And it does have something to offer. Solel CEO Avi Brenmiller believes that within five years, the price of solar electric power production will be down to $0.06 per kilowatt hour. A price like that would enable Brenmiller to go out into the world and compete in electricity production. He claims that Solel's revenue will rise to $30 million this year, or eight times what it was in 2005, and will be $100 million in 2007. So, can a potential investor also get in on the action?

As far as I know, no. Or, to be more exact, not in the near future. "BusinessWeek" claims that an IPO will take place sometime in 2007, so we'll come back to the subject of Solel when that happens.

Meanwhile, Israel's only serious contender in alternative energy is A target=new href=http://www.ormat.com/>Ormat Technologies (NYSE:ORA), (a subsidiary of Ormat Industries (TASE:ORMT), which is traded on the TASE). I've talked about Ormat before, and I was even right about the share being a hit so long as fuel prices stay high. The fact that Ormat keeps winning contracts has played in its favor, as every contract generates more interest in the company. Companies buying geothermal energy are making a strategic decision to take a one-way ride away from their previous energy sources, so the potential client list is huge.

Which is why I was so surprised to receive Lehman Brother's most recent report about Ormat, which lowered profit estimates for the coming year. I wondered why that was. It could be that the current energy market crunch, coupled with Ormat's managerial and operational capabilities, resulted in an overly-high premium exceeding the company's actual value. Well, even in my dreams, I never thought the share would hit $44.

Lehman Brothers, which set a target price of $29, decided to retain that target but sliced its earnings per share forecast for 2006-7. For 2006, they lowered forecast EPS to $1.02 from $1.48, or 31% below the previous forecast. For 2007, Lehman Brothers lowered forecast EPS by 22% from $1.85 to $1.44. As far as I can tell, that's a pretty deep cut. It's hard for me to understand from the report what were the exact reasons for such drastic measures, but if it is justified, then $42 per share is very, very expensive.

Nonetheless, the good news is that if the share goes down in price, it will be a very worthy buy opportunity. Because everyone knows that Ormat is a long-term success story, I can't believe the share will go down to $25, which is where I would be very happy to buy it. There are way too many people who believe in the company and the field in which it operates, so I will be very surprised if it even goes down as far as $40.

Published by Globes [online], Israel business news - www.globes.co.il - on Thursday, February 16, 2006


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