Thursday, July 26, 2012

Power-One (Nasdaq: PWER) Posts Strong Q2 Results

Power-One (Nasdaq: PWER $4.90) reported second quarter results that exceeded expectations. The company, a leading provider of inverters for photovoltaic arrays, logged revenues of $322 million, up 24% over the same period last year ($260.3 million). Renewable Energy Solutions (“RE”) accounted for $255 million; Power Solutions made up the remaining $67 million.

The majority of sales came in Germany and Italy, where solar installers are working to get as many arrays finished as possible before current feed-in-tariffs are altered or eliminated. Sales in the two countries should remain strong in July and August, but are expected to decline once the new policies take effect in September. Europe accounted for 91% of sales in the second quarter, with 5% in North America and 4% in Asia Pacific (China, India, Australia). Overall, Power-One shipped 1,263 megawatts of inverters in Q2, up 88% sequentially and 76% over last year. 

North American business was hindered by production and distribution foul-ups. The company believes it could have shipped 20% more units in North America had these interruptions not occurred. While customers were understandably upset about the delays (which CEO Richard Thompson called “embarrassing”), these customers expressed satisfaction once their inverters were received. Thompson claims the issues have been fixed, and North American sales will increase in the third and fourth quarters. 

The company is working on a line of microinverters to compete with companies such as Enphase (ENPH). The microinverters, individually attached to each PV panel, compared to a central inverter, are still in beta testing. They could be out as early as the fourth quarter of this year, though. Power-One claims the microinverters will boast an industry-leading 250-300 kW capacity. 

Power-One is still trying to penetrate Japan, but it’s a year or two away. Certification is underway and shouldn’t present problems. Once that’s done, the company will need to find a suitable partner to help generate interest in Japan, traditionally a relationship market. Power-One is currently in talks with several large corporations in Japan, though details are scarce. Sales in Australia are satisfactory, but Chinese shipments have been lower than expected, and financing issues have hindered business in India. Revenues are expected to pick up in China and India, but the company is focusing on Japan for the future. 

The company projected revenues between $240 and $260 million for the third quarter. The main reason for the sequential decline is the expected slowdown in Europe during September. It should go without saying, but economic concerns in Europe could further reduce sales. Regardless, Power-One’s strong second quarter led us to slightly alter our outlook for 2012. If the problems in North America are fixed, those sales should pick up at least some of the slack. We’ve bumped our earnings estimate for 2012 to $.60 per share. The company is anticipating a drastic reduction in sales to Italy in 2013, and reduced revenue from Europe in general. Still, an EPS of $.65 for 2013 is realistic. Power-One’s products are popular, which gives them an advantage if the industry is further impacted by outside factors. 

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Tuesday, July 24, 2012

Sevcon ( Nasdaq - SEV ) -- On-Road Electric Vehicles Show Spark

( Note - Previous reports about Sevcon can be found in the International Stocks section. )

Sevcon (SEV $6.00) reported Q3 (June) results that were less than our expectation.  Fully taxed earnings declined 75% to $.01 a share.  The company is based in the United Kingdom, where the standard rate is 23%.  Sevcon operates around the world, though, so its official tax rate fluctuates depending on the specific locations where it conducts business.  It also claimed some R&D credits in the latest period.  After adding all the benefits back in Sevcon reported GAAP income of $.05 a share for the June quarter.  Sales rose 8% to $8.88 million. 

Sevcon is a leading provider of computerized controls that manage the engine performance of electric vehicles.  The company had a gangbuster business going prior to the 2008 Financial Crisis, focusing on industrial and off-road vehicles.  As gasoline prices blew past $100 a barrel mining companies, forklift operators, and a wide range of other work machine users switched to electricity to save on fuel costs.  In some cases they received government subsidies or other benefits because they were fighting the good fight against global warming.  That business fell of the cliff in 2008 (see financial table below).  Sevcon has a fantastic and hard working management team, which didn't panic.  The company diversified into the on-road (motorcycles, scooters, and city cars) and ATV markets.  Recently, it signed a deal with a Chinese truck manufacturer, as well. 

Those diversification efforts restored sales growth.  The legacy industrial segment returned to life over the past two years, as well, providing further impetus.  Sevcon's newer consumer oriented markets continued to gain momentum in the June quarter.  But the industrial segment experienced some backsliding as a result of the poor worldwide economy.  Sevcon added several engineers in the quarter, boosting expenses.  The shortfall in sales combined with the higher expense level crimped income.

Sevcon is dependent on the industry's performance.  It might be counter-intuitive but history suggests demand for electric vehicles is strongest when the economy thrives.  People have money to experiment with.  The tests are successful.  They expand.  Strong economies also make it easier for governments to support emerging technologies.  The deer in the headlights approach to economics now being pursued in Europe and the United States is likely to provide a significant headwind, until it changes.  On the plus side, electric vehicle price performance is continuing to improve at a fast pace.  So even under recessionary conditions the industry is likely to keep growing.

Sevcon is a high potential speculation.  The company's market capitalization is $20 million.  Sales are approximately double that.  Margins could improve substantially if volume improves.  The age old formula of rising sales and expanding margins could drive the value of these shares substantially higher over the next 2-3 years.  We projects sales could reach $75 million to provide earnings of $1.20 a share, after allowing for the sale of an additional 1.25 million shares to support growth.  If financial results reach that level, moreover, they're probably going to keep going higher, perhaps at an explosive pace.

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Tuesday, July 3, 2012

Real Goods Solar (RSOL) -- Delivering the Goods

Real Goods Solar­ (Nasdaq: RSOL $1.15) is a leader in solar energy engineering, procurement and construction (“EPC”). The company designs and installs residential and commercial solar arrays, using photovoltaic equipment from top manufacturers. This equipment is purchased directly from the manufacturers, unlike many of Real Goods’ competitors, which buy from third-party dealers at a higher cost. In addition, the company offers several other services, including obtaining permits, grid connection, and helping customers to find financing for a project.

The company’s residential and commercial installations normally generate between three kilowatts (“kW”) and one megawatt (“MW”) of electricity. If bought outright, a residential array costs between $10,000 and $30,000. It’s a substantial investment up front, but the system will generate power for 10%-30% less than what fossil fuel utilities charge. Certain customers also qualify for financing or system loans to ease the cost of installation.

Sales are hampered by the struggling economy. There is a lot of interest in solar energy, but potential customers are reluctant to carry through with a solar project because of economic uncertainty. Demand for solar looks like it should increase in the next few years, though. Half of United States power plants are 30 years or older, and many plants run at or near capacity during peak hours. The increased demand and aging infrastructure translate to higher costs for consumers. Utility companies will have to build new plants to reach the rising demand, which could further drive up prices. Coal reserves are estimated to last about another 100 years, but higher demand will burn resources more quickly. Also, coal may be the cheapest fossil fuel, but it’s also the worst for the environment. Real Goods and other solar installers can’t overlook natural gas, though, which is cheaper than solar and much cleaner than coal. 

Real Goods installs only in the United States, primarily in California and New Jersey, with the remainder in other Northeast states and Colorado. Sales are achieved through the company’s reputation and by word-of-mouth referrals from previous customers. Once a potential customer is identified, company sales representatives engage in thorough telephone interviews to decide the optimum setup for a customer. Customers range from 30 to 65 years old, and tend to be just as interested in the environmental benefits of solar power as they are in cost reduction. Once a contract is signed, the process takes 60 to 90 days to complete, with installation taking only two or three days. The rest of the time is spent obtaining buildings permits and have building sites inspected. 

Like most solar companies, Real Goods’ sales fluctuate seasonally. The first quarter is the slowest, because the systems can’t be installed in winter or other unfavorable weather conditions. Real Goods’ highest sales historically have come in quarters three and four. Revenue grew 70% from 2009 ($64.3 million) to 2011 ($109.3 million), but earnings haven’t followed suit. Shares earned $.08 in 2010, but the company has posted losses every other year. We estimate shares will lose $.05 in 2012, despite a projected 19% revenue gain to $130 million for the year. However, an EPS in the range of $.10 and revenues around $180 million seems reasonable for 2013. Tax credits in the United States were extended through 2016, and there is no longer a $2,000 credit cap. A handful of states have legislation that makes solar even more appealing, which could lead to other states adopting similar strategies and giving the company more potential customers. On June 25, Real Goods announced a deal with Canadian Solar (Nasdaq: CSIQ) for the former to use up to 40 MW worth of the latter’s PV panels in installations. Real Goods also buys panels from Kyocera, Sharp, SunTech, and SunPower. Inverters are purchased from Enphase, SMA and others.

The company’s main competition comes from smaller, privately-held installation companies. Solar City is believed to be the largest.  Others include Sungevity, REC Solar, Verengo, and Namaste Solar Electric. Some of the smaller companies can charge customers less, but Real Goods has a strong reputation and 30 years’ experience in solar installations. 

Real Goods is located in Louisville, Colorado.

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