Fuel Tech (FTEK) sells two main product lines: equipment that reduce NOx emissions and a chemical that helps prevent ash buildup in boilers. The company sells its wares directly to utilities. Fuel Tech's NOx products are designed to strip the pollutant directly out of plant smokestack emissions. By doing so, its products can reduce emission levels by 30-80%. The company's FUEL CHEM group injects a special chemical into boilers that reduces ash buildup -- known as slag -- and improves the efficiency of the burn process.
Competitive Advantages
Fuel Tech's NOx control systems model the coal combustion process within a particular plant. The system then releases chemicals at the appropriate times, spraying those chemicals directly into the combustion chamber. The cost of the system is roughly $1 to $3 million per plant.
While Fuel Tech's NOx system doesn't remove quite as much NOx as some of the competition's products, those more sophisticated systems can cost upwards of $100 million to install. For many plants, especially older plants or plants in emerging markets, that level of investment is simply not economical. Thus, Fuel Tech's NOx system has an important cost advantage.
Although another company could enter this market and cannibalize Fuel Tech's NOx business, the firm has installed its system in more than 400 plants worldwide, including several in China. Therefore, its NOx system is a proven, economical technology with a large, existing installed base. This gives Fuel Tech a significant advantage over any upstart competitor.
The company's FUEL CHEM anti-slag process has even bigger advantages. FUEL CHEM involves a proprietary mixture of chemicals. The company is the recognized technological leader in slag removal; in fact, not one of its existing customers in this business has chosen to defect to a competing system.
Growth Drivers
As noted above, Fuel Tech's NOx system is installed in 400 plants worldwide. However, there are more than 1,600 coal plants in the U.S. alone, and India and China combined plan to build more than 1,000 new plants over the next five to seven years. The FUEL CHEM process has even less penetration; fewer than 25 plants globally use the technology. Thus, Fuel Tech currently only has a small slice of a huge potential market.
FTEK also has the opportunity to sell more to existing customers. Specifically, utilities often test a technology on a handful of plants before rolling that technology out to more of their facilities. With a solid existing customer base, there's the potential for more rollouts.
In addition, not all types of coal are identical -- some coal naturally contains less sulfur and therefore, doesn't produce as much sulfur dioxide when burned in a plant. By burning low-sulfur coal, utilities can dramatically reduce their SOx emissions.
In the U.S., most low-sulfur coal comes from the western part of the country; coal from this region also tends to produce more ash. Thus, the trend toward burning lower sulfur coal could indirectly boost FTEK's FUEL CHEM business.
Valuation and Outlook
FTEK isn't a cheap stock, trading at 65 times 2007 earnings. However, the company should see particularly strong earnings growth between now and 2009, the date when more strict emissions regulations start coming into effect in the U.S. Earnings growth in 2007, for example, should top +55%. Longer-term, FTEK should sport a growth rate of about +30% as it rolls out its products to an ever-larger customer base. Given that growth, FTEK's valuation appears somewhat more reasonable.
http://seekingalpha.com/article/25477
