“‘Inevitable’ disaster erases 117 years of American progress…” Motley Fool

By Travis Johnson, Stock Gumshoe, February 9, 2010

This teaser starts, as so many of them do, by drawing a picture of the horrible future that a chosen stock can prevent …

“On a hot summer day, just after the sun reaches its highest point, it begins…

“Within minutes, cell phones go silent. Oil refineries shut down. Flights are grounded. Assembly lines grind to a halt.

“America is paralyzed. But not by an act of terrorism. Or a devastating hurricane.

“The richest nation in history is brought to its knees by a tiny flaw hidden somewhere in a 250,000-mile-long labyrinth of wires that twist through every city in the U.S.

“Impossible? According to scientists from Carnegie Mellon, it’s inevitable’…”

So yes, today’s teaser, which comes in the name of the Motley Fool’s Hidden Gems newsletter, now edited by Seth Jayson and Andy Cross, is all about the horrible state of our ancient power grid … something that typically comes to mind in the summer when we have a huge blackout, but which we conveniently tend to ignore the rest of the time.

We’ve seen smart grid and power grid teasers before — Untapped Wealth has been teasing Xcel Energy with the “smart grid” angle for months now, and in some ways the Fredonia Reactor teaser I wrote about last month touches on this stuff, too, with their big new power transmission lines now in the planning process.

But today, thanks to the Foolies, we’re looking at something a bit different and quite a bit smaller. They tease us about a special report they’ve concocted called “Bigger Than the Internet: 3 Undiscovered Grid Stocks Ready to Rocket!” … but unfortunately, they really only get into mentioning one of the specific stocks that’s in that report. So if you feel like speculating about other “grid stocks” that they’re likely to pick, have at it in the comments section below … but for today’s Gumshoeing adventure, we’re going to identify the one stock that they do actually hint at with a few sketchy clues.

“a fast-growing high-tech manufacturer that already has more than 30 manufacturing facilities in 16 states…

“I’m not talking about GE here. Rather, a company that makes the highly specialized mission-critical parts that GE simply can’t function without…

“In the past three years, revenues have doubled on exploding demand for its relay panels, switches, buses — the high-quality parts necessary for the generation, transmission, and distribution of electrical power.

“And to make absolutely certain it seizes this historic opportunity, this small company actually acquired its own steel business, in order to galvanize its own products — boosting margins and ensuring that it can keep up with demand.

“Of course, like almost every profit opportunity you’ll hear about from Seth Jayson and Andy Cross, this company’s stock has been quietly paying off for its investors, too — smashing the S&P 500 over the past five years.

“Yet, with a market cap still under $500 million, it’s still small enough to grow — with its most explosive growth ahead. In other words, it’s in the perfect position to help investors like us cash in on the $200 billion smart-grid build-out.”

I know, it’s not a lot of clues — but rest assured, the mighty, mighty Thinkolator chews up this kind of stuff for breakfast. Who is it? This must be …

AZZ Incorporated (AZZ)

This is a company that’s primarily known for electrical equipment — here’s how they describe themselves on their website:

“AZZ incorporated is a multifaceted enterprise providing essential products and services to global industrial markets with emphasis toward
the generation, transmission and distribution of electrical power and the expert application of hot-dip galvanizing to prevent the damaging effect of corrosion in steel products.”

And yes, they do have 30 facilities in 16 states, sort of — you actually have to throw in Ontario to get to the 30, but they are in 16 US States as well. The market cap is well under $500 million at about $370 million. And it has certainly clobbered the S&P 500 over the past five years (though timeframe makes a big difference, of course — it has done far worse than the S&P over the last six months, for example).

AZZ was quite high on Forbes’ list of America’s 200 Best Small Companies last October, and they released a profile of them at the time that’s worth reading — it also talks about the fact that AZZ is essentially awaiting a windfall from all the necessary grid and electrical infrastructure work that’s required.

While they await that work, or position themselves for growth (they’re doing more selling of their most advanced stuff overseas as well), they’re actually in a bit of a rough patch — because while there’s clearly a need for more electrical grid work, there’s also a lot less industrial activity right now than there was two years ago, this is certainly a company that takes a hit in a recession, when industry slows down or when state and local governments stop ordering new galvanized light poles and such. They came out last month and told analysts their earnings expectations were way too high, giving guidance with a midrange of about $2 a share for 2010 versus the analyst expectations of a bit over $2.50. That’s not terrible for a stock that’s hovering just under $30, you get a forward PE of 15, but it does mean that earnings are likely to shrink rather than grow for at least a little while, which no one likes to see … and which goes a long way toward explaining the stock’s fall of 25% since hitting recent highs in the low $40s back in October. A Reuters article at the time noted that the company’s guidance for FY2011 (just about to begin) is for worse results than the current fiscal year, that margins should shrink, and that their key electric utility and oil and gas customers are being very cautious right now for both regulatory and economic reasons.

This one actually looks pretty appealing to me, as long as you’re not too impatient — they’ve got a price/sales ratio of under 1, but still manage to run a double digit profit margin, which is fairly unusual (though that margin might shrink), and they do appear to have a pretty strong national business with their large number of manufacturing and galvanizing plants, so they’re not completely stuck riding the regional trends if one of their areas sinks further into this recession.

The forward estimates by analysts are for very strong growth in the next several years, which gives them a price/earnings/growth (PEG) ratio of .59, which usually indicates a screaming value — but I’d be cautious about those future growth estimates. Just because “everybody knows” we need a dramatically upgraded grid doesn’t mean we’re going to get one right away, and they’ve already experienced five years of torrid growth (50% a year). The analyst expectations are for 16% growth per year over the next five years, which is certainly possible, but this year’s going to bring, they expect, a drop of at least 25%, so it might not be a smooth ride. The analysts clearly have some difficulty getting it right for this stock, their numbers were beaten handily in the first and second quarter of this fiscal year, but they overshot in the third quarter, part of the beginning of the slide for the shares — analysts, despite the cautious guidance, now expect $2.25 in earnings per share for the year that’s about to begin (they’re on a February fiscal year), which is a nickel above the top range of the company’s guidance, so on analyst estimates they’re valued at a PE of about 13.

They do have a substantial debt position of $100 million but also have plenty of cash on hand, so net debt is close to zero, and they do now pay a decent dividend — they’ve paid a dividend somewhat consistently over the past 20 years, but generally a very small one, and not necessarily every quarter. They did declare .25 as a quarterly dividend when they announced it last month, so if that continues that’s a yield of 3.4% on the current share price, which is very solid and amounts to roughly a 50% payout ratio (paying out half of earnings as a dividend). If you can catch a small company that’s on the verge of steady and impressive growth, and that’s committed (though they may not be) to paying a dividend, you’re often going to end up in pretty good shape in the long term … and sometimes do spectacularly well (reference Wal Mart, one of the oft-cited examples of quiet small cap dividend-payers that grew and compounded like crazy over the past few decades).

There is a decent but not huge amount of insider ownership, and from a quick look at the recent transactions it looks like insiders bought up quite a bit when it fell to $15 and have been selling in the high $30s and when it hit $40, so that might give some idea of the valuation that the insider owners place on the shares (or it might just mean they wanted to buy a few boats, you can never tell).

That’s what I know about AZZ Incorporated from my quick gumshoe work, but I’m pretty certain that this is the one example the Motley Fool is teasing in their latest ad … if you’ve got guesses or suggestions for some other “grid stocks,” or an opinion on AZZ or their prospects, let us know with a comment below.

And Hidden Gems has been an investor favorite on occasion over the past several years, sometimes outdoing the market according to Hulbert, but reviewers have been less charitable about them more recently after their small cap value picks took a big hit in the market crash — if you’ve subscribed to Hidden Gems, either under Tom Gardner or under the newer guys now at the helm, let us know what you thought by clicking here to share your opinion with your fellow investors. Thanks!


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14 Comments on "“‘Inevitable’ disaster erases 117 years of American progress…” Motley Fool"

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Peter
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Peter
February 9, 2010 4:37 pm
Love your work and thanks. I also like AMSC American Superconductor as a grid play. Although the majority of their present revenue comes from the wind industry, they have a proprietary product which can carry an exponentially larger amount of power via a much smaller and safer cable allowing the power companies to move more power via less cabling and more securely, hence less power failues such as the one last year in FL. It was actually said somewhere that if FPL had been using AMSC cables then the outages would have never happened. Also, GE has been rumored to… Read more »
Michael
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February 9, 2010 7:15 pm

I just discovered this site and I have to thank you unveiling hyped companies and putting them in perspective. I’ve always been frustrated with services I subscribe to filling my email with great opportunities I can only get access to if I pay more money to the sister service.

What I’ve read so far mirrors some of my own due diligence and will save me a lot of time.

I’m curious if there are any opinions about or archived reviews of either PASO or NEOM?

Michael

Jacquie Cosford
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Jacquie Cosford
February 9, 2010 8:38 pm

Did you get something wrong here?? AZZ.to is still trading on the TSE under ticker AZZ – Azcar technologies and closed at .16 cents.
AZZ on the NYSE is called AZZ Incorporated and closed at 29.91. I think there’s 2 dif companies. AZZ on TSE used to be involved with radio station broadcast equipment. Not completely sure, because I haven’t followed the company for years.

If I’m right, it warrants a corrected Gumshoe report.

thanks

Jacquie

StockGumshoe
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StockGumshoe
February 9, 2010 8:51 pm

You’re right, one of the galvanizing businesses was formerly named Aztec, not Azcar, mixed ’em up in
my head while going through some older info, sorry. Will correct.

Ed
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Ed
February 9, 2010 10:18 pm

Hi Travis.

You are a blessing to the small and novice investor. I admire your honesty and integrity. I recommend You to everyone I know because You save many novice investors from getting scammed. Keep up the Great work.

Regards, Ed.

Herach
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Herach
February 10, 2010 9:44 am

No question of our power vulnerability. I lived in beautiul Hot Springs Vge. AR for 20 years after retiring. Lots of trees–that would ice over every couple years and bring down power lines. No power for several days is not much fun. Lots of generators purchased. Had hopes for Ballard Powers home generator-not to be.
Held Calpine for years, went bust. New Calpine is doing well for now.
I like ABB,a Swiss company. Globally respected, well managed.
Have made and lost with them, but they are a class outfit.

Myron Martin
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Myron Martin
February 13, 2010 5:44 pm
Echo Herach, ABB is a class outfit and while I no longer own it I made excellent profits trading it over several years. As an expedite courier I am always intrigued by companies we handle imports and exports for. This past year a company I visited regularly suddenly moved to a much larger facility so I did some further investigation. Rugged.com RCM-V is a supplier of very high quality electrical equipment designed for very rugged conditions (hence the name) and i have handled shipments going all over the world where ABB has projects, (Siemans is also a major customer) and… Read more »
JimMplsMN
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JimMplsMN
February 13, 2010 6:28 pm

Looking at AZZ specifically, from a technical perspective, it is trading very weakly – in a downtrend even while the market was peaking and most recently exhibiting high volume down spikes and low volume retracements. Looks like a good short candidate from this perspective IMHO.

who noze
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February 13, 2010 7:17 pm

tobin smith said he was backing up the truck on this one “neomedia less than one penny with a mountain of sh.dont see any hope for this one smiths truck must have exploded

who noze
Guest
0
February 13, 2010 7:19 pm

does anyone have information on aeny 50cents to 5 bucks in a hurry its being touted on the internet sounds like a scam

abob
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abob
February 14, 2010 11:09 am

I once trusted Motley Fool letters and subscribed to Stock Advisor, Hidden gems, Million Dollar Portfolio; but there’s been a troublesome shift from the advice of the two founders to that of the army of salesmen they’ve since employed, who added one new letter after another and have transformed Motley Fool into another snake-oil huckster operation with those long-winded come-ons that are an insult to intelligent investors. Saddened and disappointed, I’ve cancelled my MF letters in self-defense.

AZZperson
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March 11, 2010 6:16 pm

The AZZ “insiders” have no clue of the value of the stock and from I can tell they all already own boats and second homes…

They are just cashing-in (well some of them, not all you should note).

I know, I work there.

A disgruntled employee
(who was told to “tighen her belt this year”.)

stockcrazy10
Irregular
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stockcrazy10
February 9, 2010 7:46 pm
Re NEOM… You can use the search function at the upper right and find links to comments from members who bought NEOM. This is one: “I have an account that I keep to remind me of the mistakes I have made and held the stock as icons of regret. Tobin Smith has the biggest picture on the wall for the microcaps I bought. I must say that there is a certain logic to each one. The best is NEOM,neomedia. Point yoour cell phone camera at a symbol, package goods brand label(which never happened), billboard (never happened) and you go directly… Read more »
Michael
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February 19, 2010 6:22 am

I too first was made aware of the stock by ChangeWave and it certainly nosedived from .25 to .001. That said, two things are interesting. One, they got an infusion of capital last year and, two, their main competitor ScanBuy (?) was bought into by three major tech companies including Motorola. I can’t remember where I say the announcement but it was in the last 10 days. It might have been in a news link to NEOM.

From its current levels it may be a new story of opportunity. Has anyone taken a fresh look?

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