The Best Renewable Energy Company For Right Now

Like many of my readers, I subscribe to Peak Oil Theory - where depleting geological resources and the resulting higher market prices for hydrocarbons are going to change life on the planet as we know it.

My basic investing philosophy is to follow the big world-wide macro economic trends, and, as best as I can, keep my eyes open for the next major long term trend.

When I join these two convictions together I come to the conclusion that we are on the cusp of a long term bull market in renewable / alternative energy. After all, if we run out of hydrocarbons, or the ones left in the ground are no longer economically viable, we don’t have much of a choice if we don’t want to retreat to the Stone Age.

The problem with this industry is that it has enough vaporware, hype, obscene valuations and outright BS to make the excesses of the tech bubble look like responsible and restrained investing.

With about five months of research I managed to find a company that is an exception to the rule: WFI Industries Ltd. WFI manufactures and installs geothermal heating and cooling systems.

What is geothermal heat / ac system you might ask? Simply enough, WFI runs a loop into the ground that attaches to their unit. With ground temperatures (8ft & below) being more or less constant throughout the year, the unit exchanges the heat from your home into ground during the summer, and reverses the process in the winter.

Tech specs and physics aside, here’s what really excites me about this company:
• No debt
• Highly experienced management team
• Double digit growth in revenues, income and dividend yield
• International sales have doubled nearly every year
• Company’s products provides a real non-polluting solution to the world’s impending energy crisis

With my initial research giving me green lights across the board, I decided to call President and CEO of WFI, Bruce Ritchey, and dig into the details of his company. Here’s the transcript of my interview:

Newman: What is the track record and experience of your senior management team?

Ritchey: My team has been together for 9 years, best recommendation is to look at their track record. This is without doubt one of the best run companies on the stock exchange be virtually any measure. It takes good people to do that.

Newman: In a time of greater corporate scandals, how does the average investor know he can trust the management of WFI with his investment?

Ritchey: We are a very simple company with no complexities to our balance sheet, no debt, no good will, only common shares. We are a very conservative company in terms of governance, compensation and risk. It doesn’t get any safer than this.

Newman: James Kynge, in “China Shakes the World”, describes how both Yamaha & Volkswagen rushed into the China market and suffered disastrous results. Kynge described that in order to gain access to the Chinese market, they had to JV with local firms. In so doing, Kynge asserts that suppliers and JVs brazenly stole these company’s intellectual property, designs and methods. In under a year Yamaha & Volkswagen saw products bearing more than a passing resemblance to their own trademarks being sold in the China market at a third of their sticker price. In addition, Kynge tells us that even if these companies came to China to file suit for trademark / IP infringement in the local courts, they’d have no chance obtaining a fair trial. In light of the blatant piracy of IP in China and the indifference of the legal authorities to it, how do you plan to handle development in this market?

Ritchey: Our IP value is very low. Our product can and is copied by all of our competitors all the time. The key to our success is our focus on and support for this very small niche market.

Newman: What is your overall business plan for international growth?

Ritchey: We are taking advantage of the low hanging fruit in the international market. We sell only to distributors that exist in the markets, we sell in US dollars and we collect before equipment leaves our dock. We expect our distributors to develop the markets.

Newman: Relative to other green energy products like solar panels and wind mills, not many people in the U.S. know about your product. What is your plan to make your products the most recognized brand in green energy in the U.S. and develop your domestic presence further?

Ritchey: We’ll continue to invest with cooperating contractors and builders that want to sell geothermal. That multiplies our funds and makes sure that when someone hears about geothermal they have a willing party to sell them a system.

Newman: What kind of growth can investors expect from WFI over the short, middle and long term outlook?

Ritchey: We don’t provide guidance, but I would think the next 5 years would look a lot like the previous five in terms of growth curve.

Newman: What are the major threats and risks to WFI’s business plan? What can go wrong? And what specific contingencies do you have in place to counteract or mitigate those scenarios?

Ritchey: Product quality is important, remaining the best support organization for our customers is important. We concentrate on those. We are impacted by the economy, the currency exchange rates and the price of energy, we can’t do much about any of those.

Newman: Are your products the most energy efficient heating / cooling units on the market?

Ritchey: Yes, by a wide margin

Newman: Many prominent Wall St., Energy Industry voices do not believe in peak energy (peak oil). In fact, many state that energy prices are artificially high only because of speculators, futures traders and geopolitical events. What is your view on peak energy, the overall need for energy conservation and how these macro economic trends impact your business?

Ritchey: I believe in the theory of peak oil and think it will definitely drive our markets positively.

Newman: For the benefit of investors, and potentials buyers, how does your most efficient unit compare to popular solar panel or wind mill products? For comparison purposes, please provide metrics in terms of prices, life of unit, and return (energy produced in KW or BTU) for a 3,000 square foot home.

Ritchey: Our units pay back much more quickly and are much less expensive on the front end. To get the same amount of renewable energy with wind or solar you’d need to spend $80,000 or more and you’d have an ugly mess in your yard. The biggest single thing a homeowner can do to tap renewable energy is geothermal heating and cooling.

Newman: Your dividend increased nearly 40% from ’06 to ’07. Do you feel you can continue increasing the dividend 40% every year over the long term?

Ritchey: I think the dividend will go up at a slightly greater rate than our earnings per share.

Newman: What are a few companies in your industry that you admire?

Ritchey: Trane and Aaon

Newman: If you were standing in front of an audience of potential investors, what are three reasons you could give them to invest in your company?

Ritchey: We are a dividend paying company that has explosive upside growth potential and does well even in bad times (like now).

This makes up the very best I can find in the renewal / green energy sector. It just a great traditional Buffet style value play with a world of peak oil tail winds at it’s back. Think I’m full of it? Take a moment to post and make a case for your company of choice.

Here are a few sources for further due diligence:
• Database of financial statements for Canadian Listed Public Companies: www.sedar.com
• WFI Industries Ltd.’s IR Page: www.waterfurnace.com/overview.aspx
• WFI Industries Ltd.’s ticker symbol is WFI and it is traded on the TSX: www.tsx.com
• Want to go straight to the source? Call Bruce Ritchey for yourself. You can reach his office in Ft. Wayne, IN at (260)479-3295.

(Full Disclosure: as of publication of this article I own 100 shares of WFI Industries Ltd.)