Thermal coal companies are getting pounded, as a warm winter left utility stockpiles higher than normal and utilities switched to cheaper natural gas. Amidst all that, though, ADA-ES (Nasdaq:ADES) is near its 52-week high as the company continues to ramp up its refined coal business and sees ongoing demand in its emissions control business. ADA-ES has risks that are well above average, but as a rare play on cleaner coal technologies, the stock could still continue to work.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Momentum Coming out of the Fourth Quarter
ADA-ES certainly closed out 2011 on a strong note, as revenue was well ahead of expectation. Revenue jumped 174% to almost $25 million, driven by 20% growth in the emissions control business, over 150% growth in the tiny CO2 (carbon dioxide) capture business and 244% reported revenue growth in the refined coal operations (to over $20 million).

Although the timing and recognition of revenue in refined coal is likely to be more challenging to model, the magnitude of the beat (and the fact that revenue was strong across the board) is still impressive.

Operating results were also fairly solid. Gross margin plunged on lower profits in the EC business and the impact of the lower-margin refined coal revenue, but operating costs were quite low. While the company did report a net profit, this was due to non-operating items and the company still reported a small operating loss. For related reading, see Stoke Your Portfolio With Coal.

Ready, Steady, Go with EC
Utilities and engineering companies have been waiting on new EPA rules pertaining to air pollutants produced by coal-fired power plants, and those regulations are now in place. The Mercury And Air Toxins Standards (MATS) looks like they'll produce 400-600 in incremental activated carbon injection system demand, with $500 million to $600 million incremental revenue, exclusive of ongoing follow-on opportunities.

With relatively few companies directly in this market (Alstom being one of them) and roughly a one-third market share, ADA-ES should be in line to reap some meaningful benefits. Of course, where there is the opportunity for profit, sooner or later there will be competition. Fellow small-cap Fuel Tech (Nasdaq:FTEK) is more of a play on NOx (nitrogen oxide), but engineering and equipment firms like Foster Wheeler (Nasdaq:FWLT) and Siemens (NYSE:SI) could become more active both in ACI and other control technologies.

Refined Coal - Will This Be the One That Works?
ADA-ES has an intriguing, albeit complicated, opportunity with its refined coal business. This is actually run as a joint venture with NexGen and Goldman Sachs, and it involves building facilities on site for the customer that treats the coal ((with chemicals and additives (CyClean) developed by ADA-ES)). When it's all said and done, this treatment reduces the NOx, mercury and other byproducts that are produced by burning coal (especially Powder River Basin coal).

More important, though, is that the facilities and coal qualify for tax credits (presently more than $6/ton) under "Section 45," and ADA-ES will benefit through its share of prepaid rent, rent and royalties. There's no question that this can be a lucrative opportunity, and the installation of 26 facilities in 2011 speaks well to that opportunity.

Playing devil's advocate, though, whatever the Congress giveth, it can eventually taketh away. While CyClean and the ADA-ES refined coal business could, perhaps, stand on its own, the tax credits are a huge part of the economic model at present. I don't necessarily believe that Congress is going to reverse this anytime soon; I simply offer the point that clean coal tax credits have been a political pinata in the past.

The Bottom Line
Working with Arch Coal (NYSE:ACI) is certainly a positive for ADA-ES, as is its focused position on reducing the emissions and pollutants tied to coal-fired power. While there is a lot of news now about coal companies cutting production and utilities switching to natural gas, there is only so far this process can go. Coal is still the dominant power fuel source in America and that will not chance for a long, long time.

Said differently, there's plenty of business in the coal utility sector to support a growth thesis on a company of ADA-ES's size. The significance of the tax credits to the business model makes long-term forecasting difficult, but there definitely seems to be strong near-term growth potential. While this is apt to be a volatile, risky stock, investors who can take on a little extra risk could see that rewarded in ADA-ES stock. For related reading, see 5 Coal Stocks To Watch.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  9. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
Trading Center