Thursday, 17 March 2011

Waterfurnace Renewable Energy YE2010 - Trudging Along

The 2010 annual report and conference call (on for WaterFurnace Renewable Energy (TSX: WFI) are now available. What do they tell us (I do own some) shareholders?

The financial results bring no great surprises. Earnings in the last quarter followed the trend of 2010, being down from 2009, which itself was down from 2008. Sales went up a bit, at much lower profitability, as the company only in late 2010 implemented a price increase to try to recoup some of the input price rises, notably copper.

The company has continued its fairly dramatic shift away from the moribund new US residential housing market to the residential replacement and commercial sectors.

Strangely, given the big drop announced today in US housing starts (to 480k in February from 620k the month before and the analyst forecast of 580k) the tone from management on the conference call (yesterday) was quite positive. They said they expect an upside of 15 to 20% in 2011 from residential new construction.

Apart from the upside uncertainty of housing starts, the major downside risk is that US government cost-cutting may remove the 30% tax credit for geothermal home installation that is supposedly in place till 2016. Management said they feel the tax credit is relatively secure based on their lobbying contact with lawmakers.

Another upside uncertainty that would increase the financial attractiveness of geothermal is how much, if at all, natural gas prices will go up.

The acquisition of Hyper Engineering sounds like a reasonable move. Its technology for limiting the inrush current on startup of electric motors can both be integrated into its own products and continue to be sold, even expanded, as a separate business. WFI managers even said that Hyper is a profitable business right now.

Due to the removal of the federal retrofit rebate program, Canadian sales kept falling through 2010 (now under 15% of total sales) and according to WFI management, have now hit a solid bottom. Some provinces continue to support geothermal for residential.

WFI continues to fly under the radar - only two analysts, one for CIBC and another whose affiliation wasn't stated - took part in the conference call.

One of the Board directors, Thomas Dawson, even bought 100 shares in February at $25.25. There have been no sales by insiders for over 12 months so that is positive.

All in all, maybe things will get better in 2011 as WFI management expects, but at worst it is still a waiting game, perhaps another year or two before growth resumes. Other investors in the last two days seem to like the results - the stock is back up over $26. I am comfortable holding onto my WFI shares.

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