Analysts Debate: Is Clean Energy Fuels a Top Stock?

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, and we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Clean Energy Fuels (NAS: CLNE) , a leader in natural gas fueling stations.

Clean Energy Fuels by the numbers
Clean Energy Fuels, founded by longtime oilman and current alternative energy booster T. Boone Pickens, is one of the vanguard companies in the nat-gas vehicle movement. Before we get into a spirited discussion on this company's future, let's first take a snapshot of its present:

Statistic

2011 Annual Result

Revenue $292.7 million
Net income / loss ($47.6 million)
Cash $242.9 million
Long-term debt $266.5 million
Market cap $1.7 billion
Fueling stations operated / supplied 273 (153 owned, 120 operated for others)
Fleet customers 530
Government contracts (% of revenue) 33%
Gallon equivalents delivered 155.6 million

Sources: Clean Energy Fuels 2011 annual report.

Alex's take
So much has been said of late about the high price of oil and the low cost of natural gas. But don't take my word for it; just take a look at this chart:

Brent Crude Oil Spot Price Chart


Brent Crude Oil Spot Price data by YCharts

Cheap natural gas should be driving customers toward it, boosting both Clean Energy Fuels and Westport Innovations (NAS: WPRT) . Both companies have grown revenue over the years, but Clean Energy Fuels has seen revenue grow at a faster rate coming out of the recession than engine-converter Westport -- Westport's doubled its revenue since 2009, while Clean Energy Fuels' revenue has tripled. Despite the discrepancy, Westport's stock has soared to far greater heights than Clean Energy Fuels' has in that time frame. What gives?

One easy point on this discrepancy is that engine technology is patentable and licensable, whereas fueling stations have (at least when it comes to gasoline) razor-thin margins, and frequently endure brutal competition from other stations sitting practically next door. The lack of real competition should be helping Clean Energy Fuels to profit, or at least bring it nearer to the black. But, that has yet to happen, despite an increase in retail pump prices for three consecutive years and despite a net price decline at the extraction stage. If and when competition makes earnest moves into the fueling-station market, that thin level of control could quickly evaporate.

Pickens may have made his fortune in oil, but his batting average in other energy markets is less than stellar -- the billionaire "lost his [rear end]" in wind power, as he bluntly revealed to Joe Scarborough this month. That makes me even more leery of this company's long-term potential. I'll be avoiding Clean Energy Fuels until I see some evidence that it can turn a profit.

Sean's take
T. Boone Pickens is someone for which I have the utmost respect. He is often correct in his predictions on energy prices, but this is one instance where I'm going to gravitate quickly in the opposite direction.

Clean Energy Fuels is essentially a big bet that General Motors and Ford will eventually drop big bucks on the development of natural-gas-powered cars. There are, however, two fatal flaws in this mode of thinking.

First, the infrastructure just isn't there, and it could be decades before it finally is! CNBC reports that there are just 505 CNG stations in the entire U.S. compared to well over 150,000 gasoline fueling stations. Those overwhelming figures are just insurmountable on a psychological, as well as financial, scale.

Secondly, the competition in natural gas fueling stations is expected to be fierce. Just last month General Electric (NYS: GE) and Chesapeake Energy (NYS: CHK) signed a collaborative agreement which will bring 250 new CNG stations online beginning in the second half of this year in direct competition to Clean Energy Fuels. And it's not as if Clean Energy has been lighting it up either. The company hasn't turned an annual profit since 2005, and it has an accumulated cash outflow of $348 million since 2006.

The push toward natural-gas-powered vehicles is a noble idea, I'll give it that, but I think it's far too early to think about investing in fueling stations. I'll pass.

Travis' take
This is a company that I could make a strong bullish or bearish argument about depending on which direction the wind is blowing. Sean is right that the infrastructure isn't there for natural gas to become a major force in the fuel market yet, but that's what Clean Energy Fuels is all about. In any emerging market someone has to be on the leading edge, which is exactly where Clean Energy Fuels is; I just wonder if it's a bleeding edge.

The best thing Clean Energy Fuels has going for it is that CNG and LNG are built on a solid financial foundation, unlike electric vehicles. Cost savings of up to $1.50 per gallon equivalent is driving the conversion, not an environmental agenda, so the business is built to last.

But the challenges are too big to ignore. Betting on an emerging industry before it emerges can lead to wild stock swings and disappointed investors, something I'm leery of here. Clean Energy Fuels has to put a lot of capital into building a fueling infrastructure and then expect truckers and bus companies to transition to natural gas, leading to a return on its investment.

But if you build the infrastructure too quickly, you could run out of cash before you get a return on that investment. I've seen too many companies fail -- most recently battery makers -- from building capacity based on hoped-for demand, only to see customers ramp up too slowly. GE's entry into the market may help this problem, but it's too early to tell if a few hundred stations across the country will cause a quick and meaningful shift to natural gas fuel.

I like Clean Energy Fuels' position in the long term, if the industry emerges; I just wouldn't put cash into it until we start seeing profits instead of losses and shrinking margins. For now, I'll stick to the sidelines.

The final call
With two of us firmly skeptical and the third sitting it out, this roundtable debate gives Clean Energy Fuels the thumbs-down of disapproval. We'll be issuing an underperform CAPSCall for this company, which you can track on our collective Young Guns CAPS page.

The Nat Gas Act's defeat might have hindered Clean Energy Fuels' potential, but some companies are sitting on explosive gains ready to be unlocked when 2012's election is in the history books. Politics and investing might make strange bedfellows, but you can't ignore opportunities like these. Curious? Find out everything you need to know about the stocks that could skyrocket this November in The Motley Fool's brand new free report. Click here now to get every detail.

At the time this article was published Fool contributors Travis Hoium, Alex Planes, and Sean Williams have no positions in any companies mentioned. You can follow Travis on Twitter at @FlushDrawFool, Sean at @TMFUltraLong, and Alex at @TMFBiggles.Motley Fool newsletter services have recommended buying shares of Westport Innovations, Chesapeake Energy, and Clean Energy Fuels. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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