Energy Sample Interview Question 5: Pitching a Stock

“Tell me about an energy stock that you think is a good investment.” 

Pitching a stock is central to equity analyst interviews.  However, in almost any energy sector job interview, it is conceivable that someone might simply ask you:  

•  “Which of our competitors should we be most concerned about?” 

•  “You said you’re interested in energy because it’s dynamic and fast- growing – which companies are you referring to?”  

In such cases, you can give a detailed answer similar to the one below, just minus the stock price assessment at the end.  In addition, you should generally read up on M&Atrends and regulatory rulings that affect the particular field you are targeting.  Demonstrating that you actively follow the industry and the companies that shape it is a compelling way to prove your passion – and passion for the industry is one of the top things many companies seek. 

For either an equity analyst or other interview, you should have a story like the following one on deck for 2-3 stocks or companies that truly interest you. Remember that, particularly when talking to hedge funds, discussing an over-valued or poorly-performing company can be a compelling vehicle to show off your analytical ability. 

Be sure to think through ahead of time how you will communicate your pitch. In the following answer, for example, the interviewee uses an intuitive structure that would be easy for an interviewer to follow:  quick summary of who the company is and why it’s compelling, market size, competitive positioning, and current/future financial performance.  

“A company in the energy sector that I have followed with particular interest is ABC Batteries, which manufactures batteries that power cell 

phones, and is in the process of commercializing a battery designed to power hybrid-electric cars.  Currently, Japanese battery manufacturers dominate the hybrid-electric battery market, but U.S.-based ABC is poised for explosive growth as it enters this new market in the United States.  

First of all, ABC’s new target market is growing.  Sales of hybrid-electric cars are likely to increase dramatically in the next few years: 

 •  Demand for hybrid-electric cars is growing: Oil prices recently topped $50 per barrel, which is a 20-year high.  The operating 

 cost savings between hybrids and gasoline-powered cars is directly correlated to oil prices:  as oil prices rise, high fuel 

 economy cars offer greater savings to consumers and become even more appealing.  Importantly, consumer preference for high 

 fuel economy cars is driven by expectations of future high oil prices, in addition to actual high oil prices.  So, even if oil prices 

 rationalize over the short term, long-term concerns about mid-East instability and declining world oil reserves should support 

 strong consumer demand for hybrids. 

 •  Hybrid-electrics are now competitively priced: Hybrids tend to be priced a few thousand dollars more than their standard 

 counterparts.  However, the lifetime cost of these cars is actually lower than that of standard gasoline-powered cars when 

 gas prices exceed $1.75 per gallon. 

 •  More hybrid-electric suppliers are coming to market:  Hybrids are a proven commercial success, thanks to Toyota’s recent mass- 

 market release the Prius, which had the fastest-growing sales of any car the year it was launched.   Low sales for the Honda 

 Insight suggested that the market would be small, but Toyota has demonstrated otherwise.  The ‘Big Three’ U.S. auto makers 

 have focused on designing SUVs for the past several years, but with all of the public backlash against gas-guzzling SUVs and  the advent of more stringent fuel economy standards (particularly in California), they are all introducing hybrids. 

Secondly, ABC  is well-positioned to be successful in the hybrid-electric car market: 

 •  ABC’s product is the standard: ABC licensed the technology for its nickel metal hydride battery product from Energy Conversion 

 Devices, as did all of the Japanese hybrid-electric battery manufacturers.  Rechargeable NiMH batteries last twice as long 

 as traditional lead-acid batteries, and are lighter weight, which makes for a lighter car and thus higher fuel efficiency.   All 

 hybrid-electrics on the market today use NiMH batteries.  Over the long term, we expect to see hydrogen-fueled fuel cell cars 

 come to market, but such technology is far from commercially viable. 

 •  ABC has sufficient production capacity: ABC just completed expansion of one of its cell phone battery plants to include capacity to  produce 100,000 NiMH car battery modules per year.   The company also has the option to convert some of its cell phone  battery production capacity to accommodate car battery production if needed. 

•  ABC has no U.S. competition: Sanyo and Panasonic currently have a duopoly on the hybrid-electric car battery market. However, U.S. automakers have previously stated their preference to use U.S. parts suppliers.  ABC has a first-mover advantage in the U.S. – as soon as it signs a contract with Ford, GM or Daimler-Chrysler, it will have a lock on the U.S. hybrid-electric car battery market.  

•  ABC’s product can expect good margins: The commercial success of a hybrid-electric car is primarily driven by the availability of a reasonably-priced, energy-efficient battery. Therefore, auto manufacturers have leverage to negotiate lower prices for their hybrid-electric batteries, and there is some concern about a ‘race to the bottom’ among battery-makers. However, with no other U.S. battery makers in the market, ABC should be able to launch its product with good pricing.

•  ABC is in a strong financial position: ABC’s current operations generate enough cash to enable successful commercialization 

without relying on the debt markets.  

Finally, ABC’s current stock price does not yet fully reflect the company’s substantial growth potential: 

•  ABC is trading around $10 per share right now, with a P/E ratio of 20x that is consistent with other relatively mature technology 

manufacturing companies.   Assuming that (1) ABC captures half of expected U.S. automakers’ hybrid-electric sales going 

forward, and (2) the market applies a P/E ratio of 40x to reflect the higher-growth profile of ABC’s new business, a price as high 

as $30 would be reasonable. 

•  In fact, an even higher P/E ratio may be reasonable.  The stock prices of oil producers, oil services companies, and energy 

efficiency businesses react disproportionately to rising oil prices (while, refinery, power generator, and other heavy petroleum 

consumers’ stocks suffer disproportionately).  Under a high oil price scenario, I would expect the market to enthusiastically 

value a company supplying the hybrid-electric car market.”