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Fuel Tech: Clean Coal, Carbon Credit and 'Chindia'

August 31, 2007

By Steven Halpern
BloggingStocks.com

From his ChangeWave Investing newsletter and regular appearances on Fox TV's "Bulls & Bears," Toby Smith is one of the most widely followed newsletter advisors. AS growth investors, he seeks stocks poised to benefit from enduring trends, which he calls "Changewaves".

To help isolate these trends, he turns to his ChangeWave Alliance, a group of thousands of business leaders in a wide range of fields who respond to ongoing surveys regarding developing industry trends.

Three such trends, which he considers among his favorite macroeconomic ChangeWaves are Clean Energy, Carbon Credits, and Chindia (China-India) Infrastructure. And one of his latest stock recommendations -- Fuel Tech (FTEK) -- plays into all three of these waves.

The advisor explains, "Coal is the fuel of choice for power generation. It's a cheap-and-abundant fuel that produces more than 40% of the world's electricity, including about 75% of China's and more than 50% of U.S. fuel."

However, he adds, "Coal is not the cleanest way to provide energy, and the need for China (and the rest of the world) to clean up its emissions in their coal-fired plants is the opportunity."

Fuel Tech, he states, has a solution that's "spreading like wildfire" He explains, "It developed proprietary air-pollution-control technologies that utilities and industrial facilities can use to cut nitrogen-oxide (NOx) emissions." Its NOx system, he notes, is installed in more than 400 plants worldwide, including China and India.

Further, he adds, the company's Fuel Chem anti-slag/CO2 reduction process has even bigger advantages. He suggests, "Cutting carbon-dioxide emissions affordably and without dilution of production is the key issue here. The Fuel Chem process is only installed in 25 plants, and every installation is worth hundreds of thousands of dollars in new renewable high-margin revenue."

Smith continues, "Fuel Chem is a great business because there is a razor-and-blades business model affiliated with their emissions-reducing installations -- they get to sell chemicals to each site at very high margins. In fact, Pat Dorsey believes the endgame for FTEK is a GE take-out, and I do as well."

He points out that he Edison Electric Institute estimates that U.S. utilities alone will spend $40 billion during the next decade to clean up the air. Says Smith, "Extrapolate that figure to all the plants in China, India and other growing industrial nations around the world, and you can see the opportunity is enormous."

The company will also get a boost from China's focus on environmental issues ahead of the 2008 Beijing Olympics. Smith explains, "And with the rapidly approaching 'Green Olympics' games, there is a heightened sense of urgency for China to get its environmental house in order and the nation will be investing tens of billions of dollars in solutions."

The company is also poised to benefit from the "ChangeWave" created by carbon credits, whereby utilities can earn money from the installation of emissions-reducing equipment.

Smith explains, "The carbon credits that China earns by installing the carbon dioxide emission reduction equipment can be sold in Europe and help pay for the installations. This means Chinese utilities are able to purchase the systems at little or no net cost."

He adds, "And let's not miss the point that Fuel Tech is not only a great China play but also a great domestic play. Currently, Fuel Tech equipment is used by less than 2% of the more than 1,500 coal-fired plants in the United States.

For the current year, Smith expects Fuel Tech to produce 43% growth in its earnings per share on a 19% increase in sales. For next year, the advisor's model suggests a 70% profit jump on a 36% improvement in sales.

Smith explains that the initial idea for this recommendation came from his "Bulls & Bears" colleague Pat Dorsey from Morningstar Research. He notes, Pat turned me on to Fuel Tech last year, and I have been following it ever since; now it's time to strike."

He concludes, "We can ride the Clean Energy Wave, the Carbon Credits Wave and the Chindia Infrastructure Wave with Fuel Tech, in a very rare triple wave riding stock."

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