ENER - My Favorite Solar Stock

[rick_v]

Watching Charlie today made me decide to share another one of my ideas.

 

We have a position in ENER which is trading at cash.

 

I too believe that Solar will regain its place as the prevailing method of extracting energy and when it does the solar stocks will go back to commanding huge multiples. ENER used to be a 70$ stock.

[ExpectedValue]

I think ENER faces some real difficulties. Cash is down almost 50% for the year while losses are accelerating.

 

Someone on VIC referred to ENER as a 'truly crappy company' worthy of being shorted today (see comments of the RAX write up)

[rick_v]

Please do your research before responding. This isn't a competition as to who answers first.

 

Read the latest 10Q before saying something like "losses have been accelerating".

 

As you may or may not have noticed, I have been refraining from sharing my research lately on the board. Its more amusing to let you all figure it out.

 

I will own up to all my positions though... thus far the ones I have mentioned have been outperforming the market.

 

Cheers!

[ExpectedValue]

I just don't know Rick. These are some pretty big risks:

 

We have a history of losses and our future profitability is uncertain; the failure to maintain sustainable profitability could have a material adverse effect on our business, results of operations, financial condition and cash flows.

    Since our inception, we have incurred significant net losses. Principally as a result of ongoing operating losses, we had an accumulated deficit of $772.5 million as of June 30, 2010. Our goal is to operate our business in such a way that profitability is sustainable over the long term. Nonetheless, we may be unable to sustain or increase profitability in the future, which in turn could materially and adversely impact our ability to repay our debt and could materially decrease the market value of our common stock (and as a result, the value of our convertible senior notes). We expect to continue to make significant capital expenditures and anticipate that our expenses will increase as we seek to:

• continuously improve our manufacturing operations, whether domestically or internationally;

 

• service our debt obligations;

 

• develop our distribution network;

 

• continue to research and develop our products and manufacturing technologies;

 

• implement our demand creation initiatives, which may include project financing and strategic acquisitions;

 

• implement internal systems and infrastructure to support our growth; and

 

• retain key members of management and other personnel, and hire additional personnel.

    We do not know whether our revenue will grow at all or grow rapidly enough to absorb these costs and our limited operating history under our current business strategy and new management team makes it difficult to assess the extent of these expenses or their impact on our operating results. If we fail to achieve profitability, our business, results of operations, financial condition and cash flows could be materially adversely affected.

 

 

We receive a significant portion of our revenues from a small number of customers.

    We historically have entered into agreements with a relatively small number of major customers throughout the world. Our five largest customers represented approximately 42%, 46% and 50% of our total revenue for the fiscal years ended June 30, 2010, 2009 and 2008, respectively. Any loss or material reduction in sales to any of our top customers would be difficult to recoup from other customers and could have an adverse effect on our sales, results of operations, financial condition and cash flows.

 

We may incur future restructuring charges and long-lived asset impairment losses.

    We have recorded long-lived asset impairment losses, including impairment losses for goodwill and intangible assets, and employee severance and restructuring charges. Generally, we record long-lived asset impairment losses when we determine that our estimates of the future undiscounted cash flows will not be sufficient to recover the carrying value of the long-lived assets. During 2010, we recorded substantial long-lived asset impairment losses and wrote off the entire balance of our goodwill and

[rick_v]

Do risk disclosures always scare you this way? You do realize, they are pretty standardized for a public company with losses and debt?

 

Look at the latest, quarter year or year, look at their working capital, note the very low historical market cap, most of their loss is generated because of large debt servicing which I believe can be restructured. This is a growth industry in the USA and will be heavily subsidized as well. You are getting the business for free today, The net cash burn last quarter was only about 7m$ the rest were one time costs and non cash items.

 

Again here is how I see it: A wonderful, US based Solar Energy company trading at cash, generating over $300M in annual sales even in this environment, based in heavily subsidized Michigan burning an amount of cash which they can handle until things pick up. The business, which on a net cash basis is generally OK, is being given away for free. However, the intrinsic value of their technology and durable competitive advantage in the space and in the US is not being reflected in the financials. Will this company be around in one year? Sure. Will this company be around in two years? probably. In that time frame, if things get better or the Solar industry continues to grow, will the shares continue to trade at these levels...? Definitely not.

 

Again, do not forget that in a normalized economic environment the major growth areas will be solar. In such environments ENER traded heavy volume at $70-80 a share. The stock is bottomed in my opinion and represents a good opportunity here.

 

There aren't many good publicly traded solar stocks thats why they generally command a huge premium.

 

Actually, the last time ENER traded at these levels was in 1998 when it had $28M in sales and $26M in Equity. From 2005 until late 2008 the market cap had been consistently over $1b and even 2 and 3 billion. This is not due to 100% hype, in a normalized environment ENER commands a large premium.

[alertmeipp]

rick,

 

thanks for your idea. do you see any catalysts?

[Packer16]

ENER has debt that is greater than cash level, so in essance it is trading at it market cap plus net debt premium to cash.  Yes cash can be used to fund about $16 million/Q cash burn for another 12 Qs assuming the solar market comes back and the revenues don't fall if subsidies decline (as has happened in  Germany).  Do you know how much of the revenue is subsidy related and what would happen if subsidies went away? That I think is a key risk here.

 

Packer

[rick_v]

Packer, come on man. They have debt which is backed by assets  totaling $301,060,000. Your EV calculation is irrelevant, besides if the debt would be converted to equity at these levels, my god the company would be generating almost 64m$ in EBITDA.

 

The company has 353 in current assets vs. 77.3 in short-term liabilities, so roughly 280M in working capital. The actual debt is ONLY 240M and it is convertible into shares already, they just have to toggle the conversion price a bit. The remaining liabilities include (warranty liabilities of 29.0M), The company CARRIES NO GOODWILL AT ALL these are all Tangible Assets which I would even argue to be undervalued because of accounting laws.

 

Go build a US BASED Solar Panel business like ENER With $234M which is today's market cap... oh and end up with about that much in cash... I don't think you could.

 

Shareholder Equity is $298M and I believe it is fair.

 

In terms of catalyst, with these types of investments, I look at it differently, whether I think the probability of ENER losing its way into oblivion is a possible scenario. In this case I believe the answer is NO.

 

FSLR  trades at 20x (TODAY!) and almost 7x Equity (which includes a bunch of goodwill).

 

This is a Growth Industry, if you believe Solar will be bigger in 10 years than it is today in the USA, than ENER is a good bet.

 

Finally, this isn't a typical value play (geez I find myself saying this all the time on this board) but I just thought I would share it after watching Charlie's extremely bullish position on Solar which I think is quite right.

 

I should add that ENER Debt is trading at a YTM of 18% and has been creeping up over the last 4 months.

 

 

 

 

 

[StubbleJumper]

I actually do not like the industry.  Most of the green energy projects that I've seen over the past 5 or 10 years needed large piles of government money to make them work.  In Ontario we even have solar energy, despite being in a part of the world that might be considered suboptimal.....and the reason why we have it is that the provincial government is promising homeowners $0.80 per kilowatt hour for the energy they put back into the grid.  That's only like 15-20X the cost of our coal plants.

 

So I guess my issue with this type of business is that its success is predicated on continued silliness from governments.  However, given the tight budgets that the US federal and state governments will face over the next few years, is it reasonable to expect that they'll continue to waste so much money on alternative energy when some of them can barely afford to keep teachers in classrooms?

 

SJ

[beerbaron]

If I were to invest in green energy I would opt for CVA. They are converting waste to energy. The technology makes sense and is already economically viable. I'm actually waiting for my entry point, it's quite cheap for a utility but not quite cheap enough for me.

 

BeerBaron

[rick_v]

Here we go guys its happening! From today's 8K:

 

  On September 13, 2010, Energy Conversion Devices, Inc. (the “Company”) entered into an exchange agreement with a certain holder of the Company’s 3.00% Convertible Senior Notes due 2013 (the “Notes”) whereby the Company agreed to exchange an aggregate of principal amount of up to $10.0 million held by the holder of the Notes for up to 1.458 million shares of the Company’s common stock, with the amount of stock and the amount of the Notes to be exchanged to be determined based on a formula agreed with the Company. Under the formula, if the Note holder fails to sell the Company’s common stock or if such sales are below a specified threshold, it is possible that the Company may not exchange any stock for the Notes.

    The Company may, from time to time, conduct exchanges for additional Notes. Each of the exchanges is exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 3(a)(9) thereof.

 

IF ENER Converts the majority of the 240M in note outstanding the company would strengthen its capital structure significantly and increase profitability by reducing interest expenses. Again, even a flat or so so year for ENER would translate into the stock appreciating from here because of the industry its in.

 

I forgot to add, the notes are currently trading at a 30% discount to PAR and it seems that ENER is respecting that discount. This means the company really could extinguish 240M in debt with 170M in newly issued equity. At these levels the company would have a market cap of 400M with 220M in cash and 600+ in Equity

[Baoxiaodao]

Please do your research before responding. This isn't a competition as to who answers first.

 

Read the latest 10Q before saying something like "losses have been accelerating".

 

As you may or may not have noticed, I have been refraining from sharing my research lately on the board. Its more amusing to let you all figure it out.

 

I will own up to all my positions though... thus far the ones I have mentioned have been outperforming the market.

 

Cheers!

 

Some people on this board tend to do just that. Take it easy Rick. Not everyone in this world will read 5-year annual reports twice before shot questions. It is part of life. Keep it going. Your effort will not go unnoticed. I like your ideas!

 

Fan

[stahleyp]

Watching Charlie today made me decide to share another one of my ideas.

 

We have a position in ENER which is trading at cash.

 

I too believe that Solar will regain its place as the prevailing method of extracting energy and when it does the solar stocks will go back to commanding huge multiples. ENER used to be a 70$ stock.

 

rick, thanks for posting. i enjoy reading your posts. do you have a website for your firm?

[Packer16]

My point was the firm does not have excess cash without equity dilution.  I wish you well but this type of investment has too much uncertainty unless I could see that the firm will be profitable without the subsidies.  I was talking to my dad the other day and he was saying that in some cases businesses could get these solar cells for free or very little cost but these subsidies are being reduced.  If they are reduced or eliminated (I see spending $ on education as being more important to subsidizing solar installations) how would ENER be effected?  This the key issue at least in my mind.

 

Packer   

[Baoxiaodao]

My point was the firm does not have excess cash without equity dilution.  I wish you well but this type of investment has too much uncertainty unless I could see that the firm will be profitable without the subsidies.  I was talking to my dad the other day and he was saying that in some cases businesses could get these solar cells for free or very little cost but these subsidies are being reduced.  If they are reduced or eliminated (I see spending $ on education as being more important to subsidizing solar installations) how would ENER be effected?  This the key issue at least in my mind.

 

Packer     

 

Packer, you are more than right on the subsidy issue. If you read things happening in EU in the solar sector, you will get even more frightened. In Spain, many people investing in solar assuming the subsidy is a type of government guarantee and they invested heavily into it. However, when the government finance was restrained, the subsidy was pulled out and many will go bankrupt. Also, Germany is planning to do the same thing(or already did). If it can happen in EU, it can happen anywhere in the world.

 

I am not opposing investing in the solar sector, but in doing so we have to take great caution. The cyclical nature of this industry is very obvious and the cycle is very short. Adding to this agony is the government policies towards the industry. Generally I call the 'green effort' window-dressing. In some countries, it has more to do with politics than economics. It is like a fashion trend: if you do not follow, you will be the freak out there.

 

 

[DCG]

Again, do not forget that in a normalized economic environment the major growth areas will be solar. In such environments ENER traded heavy volume at $70-80 a share.

 

Sounds like you might be looking too far into past prices. It was not in a 'normalized economic environment' when it was selling for $70-$80 a share, it was at the peak of one arguably the largest energy bubble in decades.