Hoku Scientific, Inc.: A small cap with big juice
Concerns about global warming, soaring energy costs and dwindling natural resources are very much on everyone's mind these days. So it comes as no surprise that alternative energy companies are vying for investor dollars to develop cheap and clean solar, wind, hydrogen and biofuel technologies.
As the United States looks to reduce dependency on Big Oil and cut greenhouse gas emissions, small outfits focused on developing viable replacements for conventional energy sources are creating more excitement on Wall Street than any time in recent memory.
One well-positioned small cap is Hoku Scientific Inc. (Nasdaq: HOKU), a Hawaii-based maker of hydrogen-powered fuel cell components and polysilicon for solar panels for the generation of electricity. While none of Hoku's customers has yet to commercialize any products containing its technology, the company has formed strategic relationships with some impressive names: Nissan Motor Co. Ltd. (Nasdaq: NSANY), Sanyo Electric Co. Ltd. (OTC: SANYY) and the U.S. Navy.
Although Hoku posted first-quarter losses and is bracing for another hit when second-quarter numbers are released on Tuesday, analysts remain bullish. The company expects revenue of about $239,000 and a net loss of between $1 million and $1.2 million for the period ended Sept. 30; analysts project a loss of $1.3 million with revenue of $350,000.
Jon Kolb, a senior analyst with Zacks Equity Research, maintained his "buy" rating last week, saying, "Successful execution of existing contracts, including a new poly-silicon supply agreement with Suntech Power valued at up to $678 million over up to 10 years, as well as other significant contracts, large order bookings with potential customers, and higher revenue recognition, collectively make HOKU a compelling growth story.”
Kolb noted that HOKU has delivered strong stock-price performance with the stock trading up 60.39% over the last six months, up 158.57% over the last 12 months and up over 255.20% year-to-date, leaving the broader S&P500 and all other indices in the dust.
“Looking ahead over the next six months and into 2008, we expect this upward trend to continue as financial metrics continue to improve in-line with company fundamentals. Accordingly, given significant new contracts, particularly the $678 million ten-year poly-silicon supply agreement with Suntech Power, we believe that HOKU remains undervalued,” Kolb said. “We maintain our “buy” recommendation with a six-month target price of $13, representing 32.7% upside potential and only 13.3 times our forward fiscal year 2009 EPS estimate."
Hoku Materials recently inked a deal to build an almost $300 million polysilicon plant in Pocatello, Idaho, in an effort to capitalize on a worldwide shortage of polysilicon for solar panels. The subsidiary expects to produce up to 3,000 metric tons of trichlorosilane per year. On Monday, CEO Dustin Shindo said excavation of the site would begin this month, and the plant, which is being designed by Sturgis, Mich.-based Dynamic Engineering Inc., is scheduled to be completed in 2010.
Last Tuesday, Hoku announced it amended its polysilicon reactor contract with GEC Graeber Engineering Consultants GmbH and MSA Apparatus Construction, for Chemical Equipment Ltd. to include an option for Hoku to purchase additional chemical reactors for 6.7 million euros, or $9.5 million, which could produce up to an additional 500 metric tons of polysilicon annually. Company brass also amended Hoku's polysilicon sales agreement with Sanyo, extending the date to Dec. 31, 2007 to complete the financing for construction of the new plant.
Given the general turmoil and political uncertainty in the Middle East and the ever-rising crude oil prices, "energy independence" has become a buzz phrase in a decidedly more green-friendly Washington, much to the advantage of "clean-tech" companies.
Congressman Bruce Braley, a Democrat from Iowa, chaired a hearing on Wednesday in an effort to get congress to consider a range of new tax incentives and reduced red tape for renewable and alternative energy companies.
"I'm very pleased that we're going to be focusing on some creative ideas to providing tax incentives to encourage small businesses to enter the renewable energy field ... Congress has already taken some significant steps along those lines to encourage renewable energy production," Braley said. "Although there's been significant growth in renewable energy, it continues to make up only seven percent of the energy produced and consumed in the country."
Braley, who wants to boost the number of "green collar" jobs in America, says more than three-quarters of the country's renewable energy is produced by small firms like Hoku.
Demand for energy alternatives is strong, and as the alternatives move more into the mainstream and become less expensive to produce, huge growth potential exists. While oil, coal and gas will remain important for some time to come, the sun has begun to set on the fossil fuels era, and renewable energy and alternative power are clearly the wave of the future. Audacious little Hoku is well-positioned to be a part of that future.
But despite enthusiasm for clean energy, a key challenge will be maintaining investors’ interest over the long-term, since market cycles for newer energy technologies—from early-stage development to mass implementation—often have longer time frames than their traditional counterparts.
Hoku shares closed at $9.57 on Friday. The stock has traded between $2.52 and $14.55 in the past 52 weeks.
