“The Smart Grid: Bigger than Bill Gates”

By Travis Johnson, Stock Gumshoe, October 28, 2009

Those of you who’ve been around the block with the Gumshoe a few times know that I’m always a little bit skeptical of most of the newsletter promotions I read, but I tend to give a wee bit of extra scrutiny to the stuff from Untapped Wealth — partly because they are responsible for the “forever battery” teaser (that one is so over-the-top and has had such a huge impact on the share price over the last couple years that I’ve used it in examples when I give lectures or presentations), and partly because their publisher pushes the envelope more than most in taking endorsements from companies to profile them in advertising that, while separate from their “real” investment ideas in their newsletters, comes across as distressingly similar.

They’re not the only ones, of course, but as far as I can tell they’re among the most aggressive marketers who do both the “real” newsletter and the company-sponsored ads, and I get their emails forwarded from my readers as often as I do any other firm. So I thought we might take another look at one of their tempting teases today, especially because it’s apparently about a “smart grid” company, and after the government’s first round of stimulus-funded smart grid payments were announced yesterday lots of investors are thinking about these companies. The ad comes in over the signature of Tim Fields, editor of Untapped Wealth, and it’s roughly (or maybe exactly, I didn’t parse every word) the same ad they’ve been running for most of this year, but I’ve never written about it before — and just to be clear, this is apparently one of their “real” newsletter recommendations, not a paid promotion.

That stimulus funding, by the way, was $34 billion as announced yesterday [correction: $3.4 billion, this article got it wrong], so although that’s a drop in the bucket compared to what it would cost to actually switch everyone over to a smarter grid, it is a big push to accelerate that modernization — most of the funding will be going to utilities, which makes sense, but a lot of that money going to the utilities will also flow through to the smaller suppliers and innovators who are developing products to manage and monitor electricity usage.

The ad is as filled with hyperbole as any I’ve read in a while, though it’s hard to split hairs in a world where the oceans of overstatement lap over the floodwalls every day — here’s how they pitch the idea of the “smart grid”…

“Opportunities like this only come around once every 10 years or so…whenever technology is ready to take that next leap forward.

“Take Google for example… or Microsoft… or Facebook… Youtube… each of these companies have created scores of millionaires.

“These weren’t just Wall Street big wigs…we’re talking regular folks, like us, who bought in early and experienced a wealth juggernaut…

“But the Smart Grid is different.

“Not only is it going to pioneer the next wave of the electricity industry… more importantly…it’s going to be bigger than the above mentioned companies…combined!

“Can that be possible… Bigger than Bill Gates?

“Yes…because unlike Google, Microsoft, and Youtube…this amazing innovation affects every single aspect of our lives.

“You’ll be using it while you sleep…while you’re awake… virtually every minute of your day will be changed by what this tiny company has cornered the market with.

“Take a penny from one person and you’ve got nothing… but take a penny from 305 million people every day… now you’re filthy rich.”

And they even pull in a couple of the founding fathers of our electric world …

“Thomas Edison couldn’t have imagined what’s secretly happening to his invention right now…”

and “not since Tesla invented AC current has energy become so efficient.”

So there you have it, our gazillions are all but guaranteed, right? Or at least jillions?

So which “smart grid” company are we dealing with today? We start with a wee clue about the place where some say the smart grid is being “born.”

“… recent events(some are calling them covert) in Colorado are so important…

“Because what’s about to happen there is the reason they’re receiving up to $154 Billion of Stimulus funds.

“Wall Street Journal says, ‘A groundbreaking “smart grid’ test in XXXXXXX, Colo., is delivering some surprises for both consumers and utilities’

“And as nice as Colorado is… it’s not just the beautiful scenery that’s getting Uncle Sam’s attention…

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

“It’s the fact that the single greatest transformation of American power in history is about to happen in one of its quiet little towns.

“And on XXXXX XX, 2009 at exactly XX:XX a.m., this little burg will go LIVE with the nation’s first ‘Smart Grid’… and forever change the way American’s receive their electricity.”

Just to let you catch up with the crowd as we move along here, I can at least tell you that this first “smart grid” is in Boulder, Colorado, the small college town outside of Denver (and a beautiful place, with lots of money and a liberal and environmentally conscious population, in general, which probably makes it a nice, hospitable place for this kind of initiative). The first stage of the test of what they call “Smart Grid City” went fully online last month, though the Wall Street Journal article that Fields cites is from February (you can read it here if you like).

So that is, at the least, a step forward for the “smart grid” concept, and I’m sure it will be a valuable test case as they try to figure out which technologies and strategies will be most accepted and workable — the idea of letting a utility step into your home and turn down your thermostat for you, after all, is a good, efficient concept on paper but might be hard to accept for the first people to experience it directly.

You can go read the whole teaser ad if you like, and get your fill of exclamation points as they tell us about the glories of the smart grid, but if you’re just looking for the actual stock they’re touting let’s dig into the clues a bit more …

Oh, wait: we really only get one more clue:

“Here’s why I’m so excited about this tiny company’s incredible growth potential…

“It’s market cap at this moment is at $8.4 Billion…

“Sounds like a lot, right?

“Well, it’s peanuts compared to the electric utilities sector average of $233 Billion…”

Hmmm … now, I don’t want to have a rain of lawyers come down upon me, so I’ll just say that sounds like a … “mistake.” Last time I saw an updated list, which admittedly had data from a few months ago, there were fewer than ten public companies on our spinning blue planet that had a market capitalization of near $200 billion (or more). In the US, the list is pretty much just Wal-Mart, ExxonMobil, and Microsoft. The largest U.S. electric utility I can think of, Exelon, has a market cap of just over $30 billion. The average for the sector might be as high as $10 billion or so, depending on how you count the smaller players, but it’s probably not dramatically higher than that. $8.4 billion is definitely not “peanuts” in my mind, not for a utility company — it’s not in the “top ten” largest American utilities, but it could easily be in the top twenty, and if it grew to even $100 billion it would, if you’ll pardon a little hyperbole of my own, be larger than any electric utility in the history of the world.

That doesn’t mean an $8 billion company can’t grow, of course — just that saying it has “incredible growth potential” because it’s market cap is “peanuts” is, well, ridiculous. If it grew to be the largest utility in the United States, that would mean the stock would climb roughly 300% from here, and of course that has a lot more to do with its footprint and the size of the population living there, and the regulatory guidelines it lives with (including price controls), than anything else. The “smart grid” is certainly part of that, for many utilities, but it’s not like this company will suddenly get to take over running the electric utility for a dozen large metro areas if it gets the smart grid “right.”

Enough of my spouting — who is this “tiny” company?

Given the focus on Boulder and that market cap, this must be Xcel Energy (XEL), a large utility company with a market cap right now of about $8.8 billion (it has been at $8.4 billion, and a bit lower, at a couple points this year). They have a bit over three million customers for their electric power, they run 50+ power generation stations, mostly gas and coal but with a bit of hydro, nuclear, and wind, and they serve assorted municipalities across a dozen states that sort of run through the middle of the country, from Texas up to Michigan and the Dakotas. Almost all of their business is as a regulated utility, including both electricity generation and natural gas delivery (they serve almost two million gas customers). There are a half dozen other major electrical utilities that have market caps in the neighborhood of $8 billion, but none that stand out as being more smart-griddy than the others, so we’ll take Fields at his word that he believes this Boulder project is revolutionary, and assume he likes the company that runs it.

And yes, Xcel is the company running the smart grid in Boulder, which seems to me, at a very quick glance, to be pretty advanced and comprehensive when compared to many other projects … but is certainly not the only utility-run smart grid project — pretty much every electrical utility of any size is implementing or testing various “smart” technologies to improve their local grids, and there are a good many utilities that would probably be called both “smarter” and “greener” than Xcel.

And aside from the fact that Xcel has this test “smart grid city” in Boulder, I’d have to say that it’s a fairly ordinary electric utility — it has numbers that look at home among similar utility firms, though there’s always some variation based on the mix of the business (many utilities offer both electricity and gas, and serve both regulated and unregulated markets). Right now you can buy Xcel for a yield of a bit over 5%, which is how many investors evaluate utilities, and that’s right in line with firms like Con Ed (ED), American Electric Power (AEP), or Centerpoint (CNP), a bit lower than Duke Energy (DUK) or Ameren (AEE) and a bit higher than Exelon (EXC), FPL (FPL) or Entergy (ETR). It’s also probably worth keeping in mind that for the foreseeable future the “smart grid” is going to be a cost center for utilities, not a profit maker — there are huge investments to be made, which is why the feds are making these matching grants available to speed up the adoption process and get stuff like smart meters out to the edges of the grid as fast as possible. It may well end up being a great thing for the utilities, and it should help make power consumption more efficient and the management of the grid more effective, but it’s hard to see it creating a windfall profit for utilities anytime soon … and utilities only compete against each other in a very limited way and are not creating this technology, so it’s not like any one utility will own the “smart grid” concept — if it takes off and it’s good for utilities, it seems very likely that it will be good for most well-run utilities, not just one. As far as I know, Xcel has not been a particularly acquisitive or growth-oriented utility, at least compared to the big and aggressive ones like Exelon or Duke.

More typically in smart grid teaserdom I see the suppliers and tech companies touted, which makes more sense if you’re hoping for a roll-of-the-dice breakthrough with one company that will see earnings balloon from the smart grid. Firms that are more often touted by investing pundits for their “smart grid” capabilities are Itron (ITRI), which is a profitable and “priced for growth” $2 billion company that makes smart meters, or somewhat smaller but still reasonably sized firms like Echelon (ELON) or ENERnoc (ENOC) that are also developing smart grid tools of various sorts and aiming to become profitable in the next year or so. I also sometimes see folks writing about the teensy firms like Comverge (COMV) or even Ambient (ABTG, trades over the counter and is really a penny stock, so be careful), but there are also any number of small companies, like GridPoint, that are also working on smart grid technologies but are privately held. And of course there is the big daddy of electric infrastructure, ABB (ABB), which will have plenty to do with any grid modernization, and plenty of other huge companies, like General Electric (GE) and Siemens (SI), that are likely to play a big role in “smartifying” the electric grid, but who are so gigantic that it probably won’t cause much of a ripple in their quarterly earnings statements anytime soon.

Other ideas for profiting from the “smart grid?” Let us know with a comment below. And if you’ve ever taken Untapped Wealth for a spin, let us know what you thought by clicking here (there’s only one review in so far, and it’s extremely, shall we say, succinct).



This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
Clifford Stettler
Clifford Stettler
October 28, 2009 2:51 pm

We have been customers of Commonwealth Edison (chicago) Exelon for over a year in their RESIDENTIAL REAL TIME PRICING program and also the program that turns off the air conditioner for 15 minute intervals when electricity costs exceed 13 cents per kwh. We have run the A/C mostly at night during high cost periods and also major appliances and our pure electric car.

October 28, 2009 3:14 pm

Currently an MBA at Tulane and had a speaker in my Energy Markets class who was with a major utility company. He said that Itron is a good company to invest in the smart grid. Also becuase utilities are so regulated, in order to grow in the future and things like smart grid can decrease their profits, they may diversify into equipment. They would not be regulated in the equipment space, so acquiring a company that supplies equipment for the smart grid not only helps with vertical integration, but it also gives them additional profit opportunities. Also, he was very high on a company called Silver Spring Networks. It is currently a private company, but he thinks it might go public in 2010. He said if it does, he thinks it would be a great investment.

Add a Topic
Add a Topic
Add a Topic