Can you guess what single organization consumes the largest
amount of fuel in the world -- more than any airline, more than any
shipping firm and more than dozens of small nations? I am talking
about the U.S. Department of Defense (DoD), which has really felt
the pain of $100 oil as it conducts missions around the globe.
A convoy or army vehicles traversing Afghanistan is just one
example. A whole raft of extra fuel-guzzling vehicles must line up
at the front and the end of these moving supply chains just to
provide extra security. Or think about a fighter pilot going up in
the air to log his weekly practice hours. Each time, he's burning
dozens of gallons of pricey jet fuel.
The various U.S. missions really add up. Consider that the DoD
burns 135 million barrels (4.2 billion gallons) of oil every year.
To keep the lights on and run the computers, the DoD also must
spend scarce dollars to generate 30 million MegaWatt hours of
electricity each year. The total annual energy tab: $20 billion.
Thankfully, Washington has woken up to the problem. During the past
decade, a series of programs have been launched to help find ways
to sharply cut the DoD's fuel bill. A handful of companies stand to
benefit, and there is a clear opportunity for investors to
Key goals of these programs include:
• Sharply boosting energy efficiency at the DoD's 300,000
buildings by installing lower-power lighting, and better Heating,
Ventilation and A/C (HVAC) systems.
• Identifying and implementing clean energy sources at both fixed
and mobile locations.
• Advanced building automation that controls light and temperature
• Implementing micro-grids, which are self-contained islands of
power generation and transmission. This is especially important for
mobile camps where soldiers are far from the nearest base and any
• Supporting research to find ways to make jet fuel from biofuels,
that at scale, promise to be cheaper that crude oil-based jet fuel.
You haven't been hearing a lot about these efforts in recent years
because the DoD has mostly been laying the groundwork to make these
major changes. But in the next few years, as the DoD's budget
sharply shrinks, look for energy savings programs to scale up
Here's a broad (buy by no means comprehensive) look at the types of
efforts underway, and the companies that stand to benefit.
There has been a raft of companies looking to create fuels out of
abundant organic materials (instead of crude oil). Solazyme's
approach is getting the attention of the U.S. military because it's
algae-based approach can be modified to produce gasoline, diesel
and jet fuel, all of which are used on base and in battle.
As an example, the U.S. Navy has been testing the company's
"Soladiesel." The Navy and other branches of the military are
coordinating their efforts to help test and develop the biofuels
industry under its "green strike" initiative. Perhaps of greatest
importance, Solazyme has partnered with a range of firms, including
Tyson Foods (NYSE:
and others. These partners are expected to cultivate a range of
end-market opportunities for Solazyme that complement the current
pursuit of military contracts.
Shrinking defense budgets have pushed this stock down from $60 in
2007 and $40 in 2010 to a recent $23. The army is looking to shrink
the number of rugged trucks in its fleet, which pushed Oshkosh's
sales down 23% in fiscal (September) 2011 to around $7.6 billion.
Analysts don't expect sales to rebound in fiscal 2012 or 2013,
Yet Oshkosh is working to break out of the rut by developing
vehicles that carry fully-developed power systems onboard, enabling
troops to plug into it when deployed in the field. "Most military
trucks these days, including the ubiquitous Humvees -- function as
makeshift command centers, weapon launchers, ambulances, electronic
jammers, and perform other roles, all of which require loads of
electricity to run a smorgasbord of hardware," notes a blogger for
National Defense Magazine.
Oshkosh has already upgraded many of its vehicles to handle 400-amp
alternators, and current research is aimed at delivering 1,000 amp
units. Oshkosh focuses on medium-sized trucks (known as 7-ton
trucks) and not the Jeeps and Humvees that most people recognize.
have been oversold on the impact of near-term defense spending
cuts, according to Merrill Lynch. The firm suggests shares will
rebound back to $30 as investors start look out beyond 2012.
Ultralife Batteries (Nasdaq:
This provider of mobile communications and power systems for
soldiers in the field struggled in recent years in the face of
erratic sales and profits. The arrival of
veteran Michael Popielec at the end of 2010, however, should help
stabilize results and, eventually, garner rising sales. His
cost-cutting efforts have already taken root, and it appears to
boosting results. Gross margins rose nearly three percentage points
in 2011, to 30%. That gain came despite a pullback in sales that
would normally impede margins from reduced manufacturing
A delay in battery orders was a key setback, though the military
has resumed its purchasing, and Ultralife expects sales to rise by
double-digits in 2012. Based on management guidance, this should
help operating profits rise 50% this year. To back up the
outlook, Popielec recently bought roughly 40,000 shares at an
average price of around $4.80.
Risks to Consider:
If Washington gets gridlocked again in the next year, then
defense spending may take even deeper hits than are currently
anticipated. That would hamper the military's ability to support
these energy efficiency programs.
Action to Take -->
These companies are pursuing projects that could be worth hundreds
of millions of dollars in annual contracts. As these contracts take
shape, investors are likely to seek the most investable angles in
these key programs. You should keep tabs on these programs yourself
and be ready to invest in your favorite angles whenever you think
the time is right.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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