“‘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.