The relatively low price of natural gas and its clean image have made it a favorite fuel source for an increasing number of industries. Add trains to that list, with General Electric Company (NYSE:GE) and Caterpillar Inc. (NYSE:CAT) looking to get into the market.
Regulations
The world is increasingly concerned about the emissions produced from using carbon-based fuels. That’s led to a crackdown on power plants that use coal, as well as increasingly stringent rules on trucks and cars. While some have pushed alternative fuel sources as an answer, Clean Energy Fuels Corp (NASDAQ:CLNE) is suggesting new uses for an old fuel—natural gas.
While some may balk, the idea is starting to catch on. For example, Waste Management, Inc. (NYSE:WM) has been increasingly using natural gas-powered trucks in its fleet. It has more than 2,000 such vehicles and around 40 natural gas fueling stations, some of which are open to the public or are shared with other fleet vehicles. It has plans to build dozens more natural gas stations.
Clean Energy Fuels Corp (NASDAQ:CLNE), meanwhile, has relationships with around 350 such stations that it either owns, operates, or supplies with fuel in 32 states. However, the money-losing company has bigger aspirations. It knows that switching over the country’s consumer vehicle market is a non-starter because of the scale of the gasoline infrastructure. So, it has built around 70 natural gas fueling stations on the U.S. interstate highway system.
The goal is to get trucking companies to shift to the fuel. No long-haul trucker, however, is going to buy a natural gas powered rig if he can’t find enough fuel stations. So, Clean Energy is making the big upfront investment. If truckers do make the shift, the company will be well positioned. That said, since natural gas is the company’s only business and it isn’t making any money right now, it is a risky and leveraged play on a shift to natural gas on U.S. roads.
A Different Kind of Fleet
However, natural gas can be used to fuel a lot more than just cars and trucks. In fact, General Electric Company (NYSE:GE) and Caterpillar Inc. (NYSE:CAT) are both working on natural gas powered locomotives for the train industry. William Ainsworth, CEO of Caterpillar Inc. (NYSE:CAT)’s Progress Rail Services unit, recently told Bloomberg that customers have “already run models on the fuel savings. It’s not that we have to pitch the fuel savings. We’ve just got to get the technology right.”
For these two industrial giants, this could be a big business. Both are important makers of locomotives and such a switch could result in a large and long sales curve as train companies switch over aging fleets.
Old Yellow
Caterpillar Inc. (NYSE:CAT) is best known for its deep-yellow earth moving equipment. That’s been a good business for years as Asian growth has spurred demand. The company’s sales have nearly tripled over the past decade to almost $66 billion dollars last year. However, Asian growth has slowed and sales have fallen year-over-year in the last two quarters.
If the North American market starts a global trend toward increased use of natural gas as a fuel for locomotives, CAT might find additional support for its top line to offset slower sales of earth moving equipment in Asia. Despite the drop in sales, however, CAT is wildly profitable and has a long history of annual dividend increases.
The shares have pulled back from their all-time highs and yield around 2.9%. If Asian markets continue to weaken, look for Caterpillar Inc. (NYSE:CAT)’s shares to remain weak, too. That said, this could be an interesting entry point for long-term growth and income investors, natural gas locomotives or not.
Turning Things Around
General Electric Company (NYSE:GE) shares have more than doubled since the lows they reached after the company’s financial arm led to a government bailout and dividend cut during the 2007-2009 recession. That said, they remain well off of their all-time highs. The company is still working to prove that it is an industrial giant worth owning.
Things appear to be going in the right direction. The company is hitting management targets and working to shrink its finance business, though it still accounts for a disproportionate share of the top and bottom lines. The improvement includes earnings and dividend both trending higher again. The top line, meanwhile, has seen a lot of noise as GE refocuses its business, including the sale of NBC.
One of the big pushes for GE is in the environmental arena. Building natural gas powered locomotives is right in line with that. Although this single product isn’t going to turn the giant’s results overnight, like Caterpillar Inc. (NYSE:CAT), it would be a solid business for GE and help it move beyond its troubled past. The shares recently yielded around 3.2% and still hold turnaround appeal.
Looking Beyond
Natural gas is an increasingly abundant fuel and is being considered for more and more applications. While there are direct plays like Clean Energy, there are other companies that will feel the benefit of a shift, including Waste Management, Inc. (NYSE:WM), General Electric Company (NYSE:GE), and Caterpillar. This trio offers a much safer way to get involved in the transition.
For GE, the recent financial crisis struck a blow, but management took advantage of the market’s dip to make strategic bets in energy. If you’re a GE investor, you need to understand how these bets could drive this company to become the world’s infrastructure leader. At the same time, you need to be aware of the threats to GE’s portfolio.
The article Is This Natural Gas’ Next Big Market? originally appeared on Fool.com.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels Corp (NASDAQ:CLNE). The Motley Fool owns shares of General Electric Company. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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