Investment Conclusion: CLNE stock has not had a major move in a year. We believe that a breakout is possible, but first CLNE must start showing sustainable positive EBITDA. There’s a tension in the stock that keeps it from going lower or higher in the near term. As we see it, the tension exists over the cost to build an LNG station (~$1.8mm) and the time to realize a gain on the CapEx, which is a function of how many trucks are refueling. The number of trucks using the stations is a function of the number of engines on the market and the pace of fleet adoption. Fleet adoption has begun in earnest (see list, page 2). We believe CLNE’s potential remains misunderstood by the street, particularly CLNE’s access to debt capital, its growing relationships with major shippers, and the leverage in its business model. CLNE did not give an update on its consideration of debt instruments, but we assume it remains a possibility. CLNE is still a story stock tied to natural gas long haul trucking and progress is meeting expectations. We are maintaining our Buy rating and $16 price target, which represents a 12x multiple on our FY17 EPS estimate of $1.90, discounted back 3.5 years at 10%.
· Q2 revenue beats, EPS misses: Revenue of $88.1mm was up 26% YOY. It missed our $91.6mm estimate but beat the street’s $87.2mm estimate. Adjusted EPS of ($0.07) beat our ($0.15) loss estimate and the street's ($0.17) loss estimate. But that includes the $15.5mm benefit from the sale of BAF. Excluding that gain and excluding the one-time cost of an office move, the loss would have been ($0.20). SG&A was $6mm higher than our estimate. Gallons delivered of 52.6mm were up 8% YOY and up 13% excluding the year ago contribution from the Peruvian joint venture that was sold in March.
IMO the tension in the stock is they are going to need to raise funds in late 2014 when that is taken care of along with another year or so being down the road so to speak we will have a clear picture. Until then money can still be made trading around your core position.
No guidance; UPS adoption is positive: Management, as usual, declined to give guidance because sales depend upon the pace of adoption of natural gas engines. Management highlighted UPS’s decision to buy all LNG trucks in 2014. About 20 CLNE stations will support 1,000 UPS trucks. For more adoption progress, please see page 2.
· Close to break-even EBITDA: CLNE reported adjusted EBITDA of $11.1mm, but that includes the non-cash gain of $15.5mm from the sale of BAF. Excluding the one-time gain and the one-time $1.85mm cost of an office move, the adjusted EBITDA loss would have been ($2.6mm), which is close to break-even. CLNE results can turn quickly as truck fleets convert. CLNE’s new network of LNG fueling stations, America’s Natural Gas Highway, comprises 76 stations to date, but most are shuttered in anticipation of the trucks that will use them. These stations need to service just 20 to 25 trucks each to generate positive EBITDA cash flow. Stations break even selling fuel to ~10 trucks.
· We are adjusting our out year estimates to remove the revenue contribution for the BAF sale. We are also upwardly revising our margins accordingly.
Please see the attached research note for a discussion about LNG fuel margins and investment risks.