Fuel Tech, Inc. (FTEK): 3Q disappointing, but story intact; maintain Neutral on valuation - Goldman Sachs - 11/11/07
What's changed
Key takeaways from 3Q were:
(1) FTEK posted a lower than expected $0.04 EPS vs. ours and consensus estimates of $0.08 and $0.06 driven by lower sales in both the APC and Fuel Chem segments,
(2) 2008 revenue guidance lowered to 76-79mm, below our estimate of 83mm,
(3) Management indicated positive traction for their APC business in China and Eastern Europe.
Implications
Fuel-Tech missed earnings due to slower ramping in both their business segments. However, given the backlog growth and Fuel-Chem orders, we still believe that there is good potential for earnings growth in the near-term and do not feel the story has materially changed. While we like the niche that Fuel-Chem’s products operate in, we are less certain of the long-term growth potential. Questions remain as to how much competition they may face in their APC business and just how many Fuel-Chem installations are really possible. We are updating our FY07-09 EPS estimates to $0.24, $0.61, $0.99 from $0.30, $0.62, $1.02 to incorporate the latest quarter’s reported information and updated guidance. Our estimates and key drivers are not materially different than before other than bringing down 2007 estimates due to the latest guidance.
Valuation
We are leaving our 6-month target price unchanged at $28 as our financial model is not materially different than before. Our target price is derived as an average of P/E on out year analysis and PEG analysis. We also take into account DCF analysis. We maintain our Neutral rating.
Key risks
(1) End-market not being large enough to continue their growth trajectory,
(2) increased competition hurting margi |
