8 Companies With Awesome Cash Flow

GREEN-LEANING INVESTORS might be too forward-thinking for their own good. Of 54 solar energy harvesters, battery specialists, sugar-fuel exporters and more in the Wilderhill Clean Energy Index, the median stock trades at four times sales — about triple the price of the S&P 500 index. Nearly half of them failed to generate a profit over the past year. While many hold long-term promise despite the high prices, some companies that will cash in on the current trend toward cutting fossil fuel use are already profitable and still cheap.

Consider motor makers. Motors turn watts into motion. Most of America's watts come from coal. Two-thirds of the watts used by manufacturers pass through motorized equipment. Hence, a shift to more efficient motors might, in the near term, do more for energy conservation than solar and wind farms combined. And like solar and wind, motors are getting an efficiency boost from the government. The Energy Policy Act of 1992 mandated efficiency standards for motors, but applied to a single type of general-purpose motor. The Energy Independence and Security Act of 2007 tightened standards and extended them to seven common specialty motors used for things like pumps and conveyor systems.

The new rules go into effect for motors made starting mid-December 2010. But manufacturers of motor-driven equipment are already shifting production to qualifying motors, certified by the National Electrical Manufacturers Association as "NEMA Premium." They cost a bit more. NEMA Premium motors, according to a recent report by Machine Design, an industry magazine, use high-grade steel to minimize magnetic loss and rely on more wound copper wire to reduce resistance. But for a motorized machine with a 20-year lifespan, more than 90% of its total cost goes for energy. At today's energy prices, plant owners are happy to pay up for efficiency gains (and will soon have no choice).

That should favor Regal-Beloit (RBC). Its stock has easily outperformed the broad market since I first recommended it nearly three years ago but has lagged the market by a hair since follow-up recommendations two years ago and last year. The problem, at least in investors' minds, is the company's large exposure to air conditioning motors, sales of which have slumped because of the housing downturn.

Regal-Beloit is doing better than its stock price suggest. Earnings per share in its first quarter, reported May 1, jumped 21%, beating estimates. Demand for high-efficiency motors helped. So did a string of acquisitions last year, which gave the company a much larger presence in industrial motors. New products are selling well, including energy-saving models for spas and food processors. Sales in the air conditioner business fell 3%, but might be due for a recovery. The company recently introduced a new motor for homeowners that can be swapped into existing heating and cooling systems to cut energy costs. Still-solvent McMansion owners might find it a worthwhile investment. Plus, the new NEMA Premium standard might pick up where the Seasonal Energy Efficiency Ratio (SEER) standard for air conditioners, last raised in 2006, left off. To raise their SEER ratings at that time, air conditioner manufacturers could buy better motors or simply use bigger condenser coils. Most opted to the latter, cheaper alternative. The new NEMA standard should guide them toward pricier motors.

I called Regal-Beloit's price/earnings ratio "modest" at 15, so I suppose it's now self-loathing at 10. Profits are seen increasing 15% this year and 10% next year. Shares also carry something that alternative energy investors might not be used to: a 1.6% dividend yield.

Regal-Beloit turned up recently in a search for companies that generate plenty of free cash relative to their market values — just the thing to fund acquisitions, dividends or share repurchases in a down market. Its price/free-cash-flow ratio of 7 is about half the broad market median. Have a look at the other seven screen survivors if you like and use SmartMoney's stock screener anytime to run the search for yourself.

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