AI Data Center Power Demand Will Drive Long-Term Emissions Control Opportunity

Catalysts

About Fuel Tech

Fuel Tech provides air pollution control, fuel treatment and water technologies that enhance efficiency and reduce emissions for power generation and industrial customers.

What are the underlying business or industry changes driving this perspective?

• Accelerating power demand from the build out of AI and data centers is creating a large, multi year need for SCR based NOx control. Fuel Tech’s $80 million to $100 million bid pipeline across 8 to 10 projects positions the APC segment for step function revenue growth and higher overall earnings power if even a portion converts.
• The shift toward distributed and smaller turbine and engine based power solutions to meet near term capacity needs favors vendors with scalable, modular emissions control offerings. This can expand Fuel Tech’s addressable market and support sustained APC revenue growth and backlog visibility.
• Heightened focus on environmental performance in water and wastewater, plus successful demonstrations and growing channel reach for Dissolved Gas Infusion, provide a pathway to add a third, higher growth leg to the model that can diversify revenue and improve consolidated gross margins over time.
• The strategic acquisition of Wahlco intellectual property and its installed base opens incremental aftermarket and retrofit opportunities with limited incremental investment. This supports a higher mix of spare parts and services and thereby structurally lifts APC segment margins and cash generation.
• Rising and more geographically specific emissions requirements for industrial and municipal customers, combined with the potential extension of life for coal and gas units that still must control NOx, underpins a longer runway for Fuel Tech’s legacy APC and FUEL CHEM offerings. This supports recurring revenues, stable or improved gross margins and resilient free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fuel Tech's revenue will grow by 22.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -12.2% today to 6.7% in 3 years time.
• Analysts expect earnings to reach $3.1 million (and earnings per share of $0.08) by about December 2028, up from $-3.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 51.5x on those 2028 earnings, up from -18.6x today. This future PE is greater than the current PE for the US Commercial Services industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The $80 million to $100 million data center SCR pipeline is still largely at an inquiry or budgetary stage. If power market dynamics, permitting outcomes or OEM design choices reduce the need for SCR on new capacity, conversion rates could be far lower than implied, limiting long-term APC revenue and earnings growth.
• Power technologies and regulations are evolving to favor lower baseline NOx emissions and alternative controls. If turbine and engine OEMs increasingly meet standards with in-cylinder solutions instead of post-combustion SCR, Fuel Tech’s role at the back end of projects could shrink, pressuring APC revenues and segment gross margins.
• The Dissolved Gas Infusion business is still pre scale and reliant on extended demonstrations and new channel partners. If adoption across water, wastewater and industrial markets is slower than expected, the company may carry elevated R and D and SG and A without sufficient offsetting sales, compressing consolidated operating margins and earnings.
• APC revenue already shows lumpiness from project timing. As the company leans further into large, complex global projects and platform relationships with OEMs and integrators, execution delays, permitting slippage or customer deferrals could create multi quarter volatility in recognized revenue and cash generation.
• While current EPA actions do not relax NOx limits, shifts in political priorities, legal challenges or prolonged uncertainty around environmental rules could dampen customers’ urgency to invest in new controls. This could slow order intake across APC and FUEL CHEM and constrain long-term revenue, backlog growth and return on the company’s sizable cash balance.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $4.0 for Fuel Tech based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $45.7 million, earnings will come to $3.1 million, and it would be trading on a PE ratio of 51.5x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $1.8, the analyst price target of $4.0 is 55.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.