Morningstar | Ormat's Lack of Margin Improvement Leads Us to Lower Our Fair Value Estiamte
Ormat Technologies' geothermal plants offer utilities a more appealing source for renewable energy than wind and solar, which are less reliable--provided you can find the geothermal resource. As the industry leader in lower-heat geothermal power, Ormat's growth will come from development at more proven geothermal sites. However, a cost-effective battery storage and renewable energy combination providing similar around-the-clock capacity benefits as geothermal poses a long-term risk for Ormat's growth opportunities.There are ample opportunities for global expansion. Ormat has established a major operating presence in critical emerging markets like Indonesia and Kenya. There are also development opportunities in Chile, Ethiopia, and New Zealand. Ormat's lengthy operating experience and technology edge should keep the company competitive in landing projects.Ormat's exposure to emerging markets where lower-heat geothermal resources are abundant supports cash flow growth and could provide significant upside to our growth projections. Global expansion comes with greater risk, but Ormat mitigates the exposure through guaranteed project financing through Overseas Private Investment Corporation and political risk insurance. Existing plants provide a healthy profit stream that should grow with new construction at a rate unmatched by Ormat's independent power producer peers and without dependence on fossil fuels, supporting consistent cash returns on invested capital and a narrow economic moat. Efficiency gains from investment and continued modernization of older plants should continue to aid profitability through the next few years.Ormat Technologies is a holding company. Through its subsidiaries, the company is engaged in the geothermal and recovered energy business. The company's segments include: Electricity, which develops, builds, owns and operates geothermal and recovered energy-based power plants in the U.S. and geothermal power plants in other countries and sells the electricity it generates; and Product, which designs, manufactures and sells equipment for geothermal and recovered energy-based electricity generation and remote power units and provides services relating to the engineering, procurement, construction, operation and maintenance of geothermal, Solar photovoltaic and recovered energy-based power plants.
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