Tom Konrad, CFA
Baldor Electric Company stands to benefit from new Federal energy efficiency standards and other efforts to improve industrial energy efficiency.
One of the lesser-known provisions of the 2007 Energy Independence and Security Act (EISA) will be to require efficiency standards for the majority of industrial electric motors. This will be a boon for motor manufacturers when EISA comes into effect in December 2010: efficient motors require higher quality materials and manufacturing, and so can be sold for higher margins.
A major beneficiary of this transition will be Baldor Electric (NYSE:BEZ). Baldor is the market leader for industrial electric motors in the United States. Almost two-thirds of Baldor’s sales are electric motors (the balance comes from power transmissions, drives, and generators,) and Baldor claims to have more motor types that are in compliance with the EISA standards than any other company in the world.
In addition to gains from selling more premium efficient motors, Baldor has opportunities to benefit from shifts towards energy efficient products, such as replacing single-speed motors and gearboxes with variable speed motors, producing both energy and maintenance savings. Their motors are also used in hybrid commercial trucks.
Financial Strength and Valuation
Baldor has more net debt than I like, but at about 8 times the last three year’s average operating cash flow, it looks manageable. The debt was mostly acquired in the purchase of another electric motor company at the start of 2007, and Baldor has been payed it down a quarter of it over the last three years. The company has good liquidity, with a current assets over three times current liabilities, even after last year’s very slow sales.
Baldor pays a $0.68 annual dividend, which management has said will not be raised until they have made more progress paying down their debt in order to comply with debt covenants. With the share price at $38.03 on June 9, the dividend yield was 1.8%. Compared to depressed 2009 earnings, the P/E is an extremely expensive 45, but I agree with the consensus that earnings are likely to rise significantly in 2010 and 2011, bringing the P/E to a more reasonable 15 or so.
Conclusion
Given my current bearish outlook on the stock market, I’d wait for a pullback to $25 before purchasing BEZ. I’d be surprised if the company achieves consensus 50% five year annual growth, mainly because I’m less optimistic about the overall economy than most analysts. Baldor has great growth potential, but industrial equipment is a very cyclical industry. Time the cycle right, and the stock will be a great addition to a clean energy portfolio.
DISCLOSURE: No position.
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