Wednesday, May 16, 2012

Power-One (Nasdaq - PWER) -- Trouble in Europe Looms

Power-One, Inc. (Nasdaq: PWER $4.00) is a leading designer and manufacturer of power supply solutions, including photovoltaic inverters used to gather and distribute renewable energy from solar and wind farms. The company also offers power solutions that manage traditional energy sources, allowing for higher energy conversion through what Power-One calls “Digital Power Management.” This technology provides greater power output from electronics like computers, while minimizing consumption during downtime. Digital Power Management also protects telecommunications technology from grid interruptions; these interruptions are typically short in duration, but can lead to hours in downtime as servers and routers reboot. 

Power-One is second in the world in inverter manufacture and distribution. Quickly rising above stiff competition in a crowded market (the company began offering inverters in 2007) gives the company a leg up during what’s begun as a slow year for renewable energy industries. Lesser companies could be weeded out through acquisitions or failures during 2012, giving Power-One more room to expand sales. 

First quarter 2012 earnings were down from the previous year, but that was the case with many power conversion companies. Higher than expected inverter sales in Europe during the first quarter meant results didn’t suffer as much as predicted. Still, earnings per share dropped to $0.06 from $0.32 the year before, an 81% fall. Revenues fell 7% from the year prior, to $225.7 million from $244.5 million. It was Power-One’s worst sales quarter since June 2010 ($214.5 million). 

Inverters accounted for 66% of total sales ($148.7 million) during the first quarter, with an operating margin of 12.5%. The rest was made up by power solutions, taking in $77.0 million for the quarter at a 9% margin.

Power-One isn’t subject to any risks beyond those hampering its competitors. Economic turmoil in Europe could lead to an industry-wide downturn. Governments are beginning to reconsider subsidies and feed-in tariffs for renewable energy. Some, like Germany and the U.K. have reduced them. Spain has already cut all subsidies, at least temporarily, to help control debt. If more of these are scaled back or eliminated, investors would be saddled with a higher price tag for installing and operating a solar or wind farm, and likely would be less inclined to do so. Inverter technology continues to improve, so reduced government assistance wouldn’t spell doom, but it would further inhibit renewable energy. 

The company’s second-quarter guidance suggests revenues should increase to between $240 million and $260 million. Power-One believes demand will increase in the short term as companies attempt to take advantage of government subsidies and feed-in tariffs before they are scaled back, primarily in Europe. Unless something drastic happens to improve these economies, the company could see reduced European sales beyond Q2 2012. Shipments to the United States and Asia, where government subsidies are increasing or holding steady, will have to pick up the slack.

The stock price has rebounded since falling to $3.68 on May 8. But it was trading at $9.00 a year ago, with more shares in circulation. The company authorized a stock repurchase plan of up to 10 million shares in September 2010; so far it has bought back 4.6 million. The plan expires September 21.

Like its competition, Power-One is in a tough spot. The renewable energy industry relies on government support to make it competitive with fossil fuels. Cutbacks on subsidies and tariffs in Europe seem inevitable as the economic mess is sorted out. It’s unclear how long it will take to fix, and if government support for renewable energy will be the same once that happens. The company will also have to keep up with the rapidly improving technology if it wants to remain the world’s second leading provider of inverters. 

Power-One is located in Camarillo, CA.  

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