Wednesday, May 9, 2012

Satcon ( Nasdaq - SATC ) -- Hanging Tough

Satcon (SATC - 40 cents) reported dismal Q1 financial results.  But the company did book a considerable volume of new orders.  That trend has continued so far in Q2, moreover.  It also transitioned its manufacturing operations to two highly productive third party producers, ensuring that gross margins will be sustained at realistic levels no matter what sales level the company is operating at.  Engineering improvements are being achieved on a regular basis, which could enhance those margins.  Satcon lost $.08 a share in the March quarter on sales of $24.3 million.  But it signed new orders worth $45.6 million.  Most of that was for large systems aimed at utility grade projects.  But Satcon also landed a sizable amount of incoming business from rooftop projects, which probably will drive the market over the next few years.  Those designs are more economical than the ground based utility installations, at least for now.  Utilities are building systems to comply with regulations and to take advantage of expiring subsidies.  That business will continue, because the regulations aren't going anywhere.  The rooftop market is beginning to stand on its own without subsidies.  And that trend is likely to continue as price performance improvements continue to be made.  Rooftop systems have a natural advantage because they don't have to buy any land.

Satcon's financial condition is precarious.  These shares are unlikely to advance until investors become confident that cash flow will turn positive and stay that way.  Right now it's a value stock.  But the upturn in orders reduces the potential for bankruptcy.  Downside risk is modest at the stock's current level. 

The political variables are upside down.  Most people think Barack Obama is great for green energy stocks.  But look at them.  On average they are down 75%-90% over the last two years, with many on the edge of failure.  Chances are Mitt Romney, if he is elected president, will have a far more positive impact.  He's a vulture capitalist by nature.  And green energy has tremendous potential.  If he can make it happen it would be tremendous for him politically.  Plus he'd get a kick out of it.  That's what he does.

Right now Satcon remains a high risk proposition.  It has a negative net worth, it's losing money, and the political landscape is negative.  So it might be time to buy.  If you can afford to lose your entire investment these shares are a realistic speculation.  In 2-3 years the stock could appreciate by 2,000% if things pan out.

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