SolarCity (SCTY.DL) is at the cutting edge of the move toward cleaner energy. Rentech (NASDAQ: RTK), by comparison, looks like it's stuck in the stone age. But there could be opportunity in seeing value where others see boring.
Bleeding into a new world
SolarCity installs solar on residential and business rooftops. It handles all the hard stuff (permitting, installation, etc.) and even takes the brunt of the upfront cost. What it gets in return are long-term agreements from customers to buy the power their roofs generate. Better yet, excess power can be sold back to utilities in many markets at advantageous prices.
In 2010, SolarCity had about 30 megawatts of installed capacity. By the end of 2014, it's hoping to have a gigawatt. To be fair, that's tiny by utility standards, but the growth SolarCity has achieved shows that there's huge potential ahead. And that's buttressed by the fact that solar made up less than 1% of the power consumed domestically last year.
Source: EIA
What might be even more impressive about SolarCity, however, is the lead it's taken on the financial side. The company is wrapping its solar leases into bonds. During the company's first quarter conference call, CFO Bob Kelly noted, "we started the rating agency process to our next securitization transaction, which is expected to be considerably larger than our prior offerings."
Using the bond market to help fund growth via securitization helps create a self-funding model. That's financial alchemy and solar power all in one. SolarCity continues to lose money as it builds out its "power" system, and it's reliant on government subsidies to some degree. However, once it gets economies of scale, look for a dramatic bottom line improvement and a steady profit picture. There's no doubt that SolarCity is an exciting opportunity in the energy market.
Now that's a throwback
Now, take a gander at a less cutting edge option on the energy front—wood. Yes, we've been burning wood for thousands of years, but as far as fuels go it's pretty desirable. It does, literally, grow on trees. It's biodegradable. And while new trees are growing to replace the ones we cut down they help clean up the air around us. As long as sustainable forestry is employed trees and wood products are, arguably, the ultimate renewable product.
(Source: D-Kuru, via Wikimedia Commons)
That's why Rentech is an outside the box name to look at. The company operates in the fertilizer and wood spaces. In fertilizer, the company acts as the general partner of an LP. This relationship accounted for about 70% of revenues in the fourth quarter of 2013. The rest largely came from wood, which is a current focus area for Rentech.
In fact, Rentech just received a $150 million investment from Blackstone Group (BX) that includes two Blackstone representatives joining Rentech's board. Although this is a relatively small outlay for Blackstone, it's big news for $500 million market cap Rentech. And it's already put the money to good use buying a company with a 15% share of the domestic wood pellet heating market.
If you think this can't be a real business, you're wrong. Rentech highlights a 95% retention rate over the past 25 years in the wood businesses it now owns. And its customer list includes names like $20 billion market cap International Paper. Rentech is looking to "Become a global leader in wood fibre processing" and plans to set up a limited partnership along the way to help fund further growth.
Building it out
SolarCity and Rentech are both building businesses in the energy space. SolarCity's model is cutting edge, and growth has been impressive. With the stock off some $30 a share from its highs around $85, it might be worth a look. Rentech is an outlier, trying to build scale in an age-old, and boring, wood business. Its shares have muddled along in the low single-digits, but once it builds scale in wood it will have a solid core to pair with its more volatile fertilizer arm. And having Blackstone as a partner in the process is a pretty good endorsement.
