Tuesday, June 17, 2008

Energy Conversion Devices (ENER) now Trades at Par with First Solar (FSLR) Valuation

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It looks like today is going to be solar day...

Just wanted to write a quick follow up on Energy Conversion Devices (ENER) a stock we highlighted on May 8, after an excellent earnings report [May 8: Energy Conversion Devices - is the Turnaround Finally Here?] I wrote

Energy Conversion Devices (ENER) is an interesting tale - this has been for many many years a "hope" stock i.e. more promise than execution - I remember the hoopla surrounding it at the turn of the century ... the last time people were all hyped up about alternative energies (at the time the big fuss was about new wave car batteries and the like). This company has morphed over the years with a confusing array of business lines (trying to decide what it wanted to "be"), but recently has added a newer and more business savvy executive team, and while they still have a few business lines .... the excitement is their solar business, which has turned into the dominant line at the company.

Much like
First Solar (FSLR), ENER has a thin film process so by staying away from the polysilicon shortage issue they have some potential to sidestep some issues currently facing the rest of the industry. This is a name I've been keeping 1 eye on, but with results like this it's time to put both eyes here.... another quarter like this and you'll get Cramer talking about how this is the next First Solar.

We'll be interested on a pullback, although the hype on a name like this could carry this one very far in a quick time.


So that pullback I was looking for? Never showed up. Sometimes you just have to jump on board and ride the freight train but my conservative nature sometimes makes me miss these rides, even though I point out the story....

After jumping from mid $30s to mid $40s on the earnings report, 6 weeks later we are talking about a stock in the mid $70s. I hope someone out there got on board; I certainly did not. (also I would like to quickly add congrats to some people who have owned this stock for MANY years - it is nice to see some very patient folks finally get rewarded)

I was tossing around the thought (keep in mind ENER is projected to make roughly $0.00 EPS in 2008 before spiking to $1.50ish in 2009) that if ENER got the First Solar (FSLR) thin film hype it could trade into the stratosphere, which seems to have played out. [Apr 30: First Solar Keeps Doing Enough to Satisfy Shareholders]

If you believe the $1.50 EPS for 2009 for ENER at $75 this stock trades 50x 2009 estimates. Thats not 2008 estimates. Thats 2009!

If you believe $1.50 is a joke and they will smash it and do $2.50 (meaning analysts are off by a factor of 67%) it still trades at a forward PE ratio of 30. (I do think the $1.50 will be surpassed quite easily in 2009; not sure if it will get to $2.50 but certainly $1.50 is conservative)

For comparison, thin film giant First Solar now trades at 96x 2008 estimates, and 49x 2009. So Energy Conversion Devices has now reached a "First Solar" type of valuation. After being left for dead on the side of the road for many years. Amazing how quickly things can change.

Meanwhile stocks like... well I won't mention its name, trade at 12-13x forward estimates. The difference? The market believes thin film technology is magic. Here is the kicker which I outlined earlier today - polysilicon has been the big stumbling block (shortages created massive price increases) in the traditional photovoltaic technology (non thin film). To put it in perspective polysilicon used to (pre solar days) go for about $40/kg. In under 5 years it had peaked at $500/kg (on the spot market). Now that's inflation. But we're now seeing reports of it falling back to $400ish. And with all the new capacity coming online in China (takes about 2 years to get a plant up and running due to relative complexity of process) we should be seeing $300s (or lower) in 6+ months. And only down from there. The main input for polysilicon? Sand. No shortage of that. So that worm is beginning to turn.

Then from there this "magic" of thin film technology (which has protected these companies from any exposure to the high polysilicon prices) begins to matter less and less. So either their PE multiples need to fall for the "magic" companies (whose efficiency is many times half that of traditional photovoltaic) or the photovoltaic companies PE ratios need to expand - or they meet somewhere in the middle. But as we know, "long term" on Wall Street is a few weeks out so none of this matters and we see this huge discrepancy. But if things play out as I expect, and this cost gap is sharply reduced in the next 18-24 months we should see a major narrowing of the valuation metrics from 1 technology to another. And the potential for some serious price wars (2-4 years out). But again that is the long run, for now Energy Conversion Devices (ENER) is even able to do convertible offerings and the stock still goes up. Now that's a hot stock.
  • Energy Conversion Devices just keeps looking better. By the end of trading on Monday shares of the Rochester Hills, Mich.-based solar company gained 14.7%, or $9.87, to close at $76.86. While the major indexes have slipped since the beginning of 2008, Energy Conversion Devices (nasdaq: ENER - news - people ) has gained no less than 128.4%. The lion's share of that growth has come since the company reported stellar third quarter results in early-May.
  • Monday's rise though comes in the wake of the Intersolar 2008 in Munich, the world's largest solar technology trade show. "It was apparent that demand for their products is doing very well," said Rob Stone, an analyst at Cowen and Company. Unlike standard solar panels, which are attached to rooftops, Energy Conversion Devices' solar laminates function as building material.
  • Energy Conversion Devices has historically struggled to obtain profitability. Since Chief Executive Mark Morelli took the helm in September of 2007, the company has turned its focus to commercialization rather than research.
  • "They've been managing the business in a more detailed way, and have been managing towards profit rather than technology development," Colin Rusch of Broadpoint Capital noted after the company reported its third quarter results. "For example they've been doing things like tracking the production process on a daily rather than quarterly or monthly basis, and cutting costs on the operation side."
  • Increased product demand and manufacturing efficiency is coupled by the company's scale expansion. Energy Conversion Devices looks to increase its capacity to 300 mega watts by the end of its fiscal 2010 year. Stone expects that to translate to sales of $690.0 million, well ahead of the $113.6 million reported at the end of 2007. By 2012 the company expects to produce one gigawatt worth of material. (this would still put them as a relatively small player in the big picture)
  • "Customers are saying they're happy to buy more of the product," Stone said, "backlog has increased significantly in the last couple of weeks and should go up more. They're increasing their capacity and the profit from that capacity will be materially higher."
  • In an indication of Wall Street's confidence in the company's future, Monday's rise comes only a few days after the company announced on Thursday that it would be offering 4.7 million shares and $225.0 million worth of debt. Although this kind of offering would usually lead to a drop in share price, the market demonstrating that it believes the growth in sales and margins will overwhelm the dilution.
Not long and not thrilled about that fact


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