The decline in the coal industry has been bad for Fuel Tech

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Bobby Raines 03/17/2014

As earnings season winds to a close, a number of smaller companies are still rolling out their quarterly reports. This includes a number of relatively small companies in the promising field of alternative and green energy.

The fuel-cell names ended up getting a lot of attention, although I'm still not certain I understand the market's reaction. What I am certain of is that I have no interest in investing in anything that nearly doubles and then gives it all back in the space of a week, as we saw from Plug Power ( PLUG ).

Since alternative energy encompasses a wide range of companies engaged in a wide range of businesses, results for companies in the sector varied widely. This is pretty normal as the group includes everything from solar panel -makers to companies who make pollution-control equipment that helps make traditional power plants cleaner. There are a wide range of technologies that seem promising, but some are not yet proven to be sustainable on a large scale.

Some of those new technologies will eventually demonstrate their worth, while others will prove to be unworkable and forgotten.

One company that seemed promising relatively recently, but may be falling victim to the rapidly changing landscape around it is Fuel Tech Inc. ( FTEK ). The company makes, sells and installs pollution control systems and other technology that help power plants operate more efficiently and with lower emissions.

The stock rallied sharply in November of last year after it walloped earnings estimates for the third quarter, with earnings per share of 15 cents, which compared pretty favorably to the 5 cents analysts expected.

This time around through, it was the analysts who posted the higher number, which is never a good thing for a stock that has swung wildly from $3.89 to $9.09 and back to $6.87 (where FTEK was trading prior to its earnings announcement) in six months.

Earnings from small companies, particularly those in niche industries can be very hard to predict, so I'd be willing to forgive the earnings miss. What is much harder to stomach are issues found deeper in the company's quarterly report.

The first and most obvious is that the backlog of capital projects in the company's air-pollution control segment fell to $22.4 million at the end of December 2013 from $46.7 million a year earlier. This means that the company is having trouble finding new work, which is always a bad sign.

Less obvious, but potentially more troubling was the statement that the company's FUEL CHEM business "Continues to operate in an environment challenged by low natural gas prices and low electricity demand."

Ouch! If you're in the business of selling things to coal-fired power plants, two of your biggest fears are continued low natural gas prices and low electricity demand. The company's CEO, Douglas Bailey, did say later in the release that the company expects to see continued growth in China, but recent news from that country shows an economy whose growth is undeniably slowing.

The unfortunate news for Fuel Tech is that the business of turning coal into electricity is on the way out in the U.S. While it will continue on countries like China for a while, that country's pollution problems could mean coal's days are numbered there as well.

Some portions of the company's business can still be used in power plants that burn natural gas, but that's not going to replace the business the company has done with coal plants in the past.


Chart courtesy of stockcharts.com

Investors who share my lack of optimism about Fuel Tech could consider a September 7.50/10 bear-call spread. This position yields a credit of 25 cents, which is an 11.1% return, or 21.7% on an annualized basis (for comparison purposes only).  This position will return a full profit so long as the stock is below $7.50 at September expiration, giving it about 39% protection.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com



This article appears in: Investing , Options

Referenced Stocks: PLUG , FTEK

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