Clean Diesel Technologies, Inc.
Clean Diesel Technologies, Inc. (NASDAQ:CDTI) bills itself as “a cleantech emissions reduction company that designs, develops and manufactures sustainable solutions to reduce emissions and lower the carbon intensity of on- and off-road engine applications.”
In other words it designs, develops and manufactures emissions control systems and products. In addition to the on- and off- road vehicle engines, Clean Diesel’s products are used for stationary and marine engines; and utility and manufacturing plants. And not only diesel engines: the company’s products are also used to reduce emissions from devices that burn gasoline, natural gas and propane. And its products use industry-leading, internally-developed, state-of-the-art technology.
Why We’re Profiling CDTI
We are introducing CDTI to our readers as a potentially good long term growth stock, with the added possibility of a big jump in price within the next year or so. As with most nano cap stocks offering such opportunities for profit, an investment in CDTI also carries a large risk of loss. CDTI is for investors with a larger than average risk appetite.
CDTI has been trading recently at around $4 per share and has a very small market cap of approximately $30 million. Prices jumped significantly a few weeks ago when the company released better than expected 4th quarter and full year 2011 earnings.
More on the Company and Industry
Clean Diesel Technology is a global leader in the business of manufacturing and distributing heavy duty diesel and light duty vehicle, along with stationary and marine engine, emissions control systems. They sell to both new equipment manufacturers (including Honda) and to retrofitters. Retrofitting trucks is an extremely important part of the company’s business as some US states (primarily California and New Jersey) and many areas in Europe are beginning to set standards that require older trucks to retrofit, stay off the road, or pay heavy fees to drive in the areas covered.
The industry’s growth is driven largely by increasingly tough emission standards for internal combustion engines around the world. Unfortunately, some government regulations and programs can lead to irregular ups and downs in sales. For example, London’s Low Emission Zone (LEZ) program concentrated a large number of retrofits (and huge sales for Clean Diesel Technology) in the 4th quarter of 2011 and the first part of 2012. So it may be difficult for Clean Diesel Technology to show increased 4th quarter sales in 2012 over 2011.
The company’s products are subject to regulatory tests and approvals in different markets around the world. The company has been very successful, and importantly become very experienced, in obtaining such approvals internationally. On the plus side, these regulatory hurdles form a barrier to entry for new competitors. And Clean Diesel’s recent, successful participation in London’s LEZ program gives it a lot of credibility all over Europe, especially when it comes to future LEZ programs on the continent.
Clean Diesel Technology also has nearly 300 issued or pending patents. They have a world class technology portfolio.
For example they have invented and patented material technology for their catalysts. This technology, complete with nanostructures, significantly improves performance and is highly durable, cost-effective, multi-functional and requires very small amounts of expensive platinum group metals.
Clean Diesel Technology’s headquarters are in California and it has operations in the United States, Canada, the United Kingdom, France, Japan and Sweden. They have nearly 200 distributors globally.
The company operates primarily through two divisions, called Heavy Duty Diesel Systems and Catalyst Clean Diesel. They are successfully increasing the proportion of Clean Diesel Technology catalysts used by the heavy duty diesel systems division. This is having the effect of increasing company revenues and increasing gross margins.
Clean Diesel Technology benefits from experienced, strong management and hopefully has strengthened it further by the recent addition of a new President and CEO after the retirement of its former President and CEO. The new CEO has a great background, both operationally and industry-wise, for this business and has a reputation for increasing revenues and bottom lines.
In short, Clean Diesel believes its competitive advantages include its broad portfolio of verified heavy duty diesel systems, its superior catalysts, its cost advantage in the catalyst market due to its lower platinum group metals requirements and the fact its products are compatible with existing automotive manufacturing processes (i.e., manufacturers don’t have to redesign their shop floors to accommodate Clean Diesel products).
On the financial side, Clean Diesel has announced 2011 sales of $61.6 million, which were 28% over the prior year. But part of that increase was due to the London LEZ program which pumped around $8 million in sales into the 4th quarter alone. On the plus side for 2012, 2011 catalyst sales were negatively impacted by the effects of the Japanese tsunami. Those problems are over. The company was slightly profitable in 2011, but there is no assurance that it will remain profitable for 2012.
The balance sheet looks fine, nothing really remarkable either positive or negative. The company did significantly improve its working capital position in 2011. Most importantly, the company now believes it has enough financial resources to operate and grow through 2012, which in prior years has been a concern.
Factors Specific to CDTI Which Could Depress its Price
The company’s results depend largely on, and may fluctuate from, a variety of government actions over which Clean Diesel has little or no control. Increased regulation of emissions generally contributes positively to the company’s business. On the other hand, reductions of funding for emissions control programs can have a negative impact. Budget crises around the world tend to reduce funds available for these programs. In the US, a takeover of the government by Republicans this fall might lead to a weakening of elimination of many environmental regulations and significant cuts in funding to emission control programs.
The company derives a significant portion of its revenues from a limited number of customers. In 2011, Honda alone accounted for 19% of sales. Any disruption in these relationships could have a negative impact.
The company’s three largest supplier accounted for over 30% of raw material purchases in 2011. Clean Diesel also utilizes rare earth metals in the production of some catalysts. Any failures by one of Clean Diesel’s suppliers, or restrictions on rare earth metals by China, could affect the company’s ability to produce and distribute their products.
Clean Diesel has suffered losses and negative cash flows from operating activities since inception. Although the company did post a small profit in 2011, there is no guarantee the company will remain profitable.
The dollar amount of a major financial resource now held in reserve is based on CDTI’s price. Any reduction in the price of CDTI reduces the cash available under the agreement governing this source of funds. An associated risk is that dilution, real or perceived, associated with this agreement may depress the price of CDTI.
While not necessarily depressive, the company’s very small market cap could also have an effect on the price of CDTI. It would not take too many dollars on the buy or sell side to affect CDTI’s price. This potential for fluctuation in share price could increase the chances for gains or losses.
So in spite of the downside risks, we believe CDTI offers the potential for long term growth with the added possibility of extraordinary gains within the next year or two.
This should be considered a speculative investment. Make sure it fits your risk appetite and other aspects of your trading strategy – and that you can afford to take a significant or total loss if things go wrong.
For investors interested in CDTI, always remember to do your own due diligence, checking up company filings and consulting with an investment professional.
Additionally, remember our disclaimer.
NOTICE: This article was based on research of stock market information and other sources of information, found both online and in print media. Neither StockTips.com nor any of its owners, contributors, officers, directors, consultants, or employees take responsibility for the accuracy of the information contained in this article or the accuracy of the information on which this article was based. StockTips.com was not compensated by any of the companies mentioned in this article for the preparation of this material, nor were the materials approved by the companies which were mentioned.