Under Construction: The State of Solar

By Eric Ramsley  

The Los Angeles freeway system is in disarray. There is a lot of work that needs to be done. But there is so much traffic that there isn’t a whole lot of time to get anything fixed. Even when roads are temporarily shut down, like the 405 was earlier this year, no discernible progress is made. And by the time any construction is finished it will be time to start all over again. The roadways resemble the handful of Frankenstein cars driving along them: Pieced together with spare parts and clinging to dear life, unrecognizable from what they once were.

Swap out a few words and you’ve got the United States’ power grid. A jerry-built electrical network owned and operated by competing companies that is being stretched to its limit. Improvements have been proposed, but much like the highways in Los Angeles, by the time they are complete it will be time for the next round of emergency surgeries. Some have suggested that the grid’s poor state leaves it vulnerable to a terrorist attack; others argue that it is so shoddy and unpredictable that such an attack might ultimately fail.

Los Angeles is so developed that replacing the highways is highly improbable, if not impossible. But it’s at least conceivable that a new power grid could be built around the existing one, with the old system providing power up until the new system is complete. The benefits should outweigh the costs. The U.S. could have a state-of-the-art grid in place, securely and efficiently meeting increasing demand. This would also keep power companies in control of distribution. As much as some of them seem to want to believe it, the current setup will not be around forever. 

Power One ( Nasdaq - PWER ) -- Malaise de Europe

Power One (PWER $4.00) appears on track to report lower than expected Q4 results.  The company is the second largest producer of string converters that turn DC power generated by solar panels into AC electricity.  Demand declined dramatically in Q4 following the elimination of key subsidies in Italy and Germany.  Other European nations have imposed reductions, as well.  U.S. business remains good.  Accelerated depreciation rules, federal tax credits, and a range of state and local programs have kept the residential and light commercial segments expanding at a fast pace.  But large installations, which account for half the American market, have slowed due to the recession and more efficient energy use.  Financial performance is likely to fall short of previous targets in the December quarter.  Sluggish results could persist well into 2013 as European declines erase whatever upturn Power One benefits from in the U.S.  Asian solar installations are on the rise.  But those projects are tough to crack due to protectionist schemes.

The long term outlook is uncertain.  U.S. subsidies are scheduled to end in 2016.  Tariff wars are cropping up, making it difficult to serve the entire world solar market.  Europe remains depressed, making it unlikely new government subsidies will emerge any time soon.  On the plus side inverter production costs keep coming down.  New products are in the pipeline.  And the cost of solar systems in general remains on a favorable slope, laying the groundwork for broad based adoption over the long haul.

2013 is likely to be a transition year for Power One.  The company is well financed, though.  And its new product pipeline promises to reinforce Power One's competitive position.  Earnings could rebound in 2014, perhaps bolstered by new U.S. government support.  Natural gas remains a huge challenge to the industry.  That lower cost and less polluting fossil fuel has displaced home heating oil and coal over the past five years, lowering co-2 emissions in the United States by 10% over that time.  The lack of electricity demand growth presents another obstacle.  More efficient appliances and lighting have helped keep electricity demand flat in the U.S. despite fast growth in the number of electrical devices.  If total electricity output doesn't improve solar probably will expand less rapidly than predicted.

Long term appreciation is possible in spite of the headwinds.  If the world economy returns to normal and trade obstacles are not created, Power One could rebuild earnings to the $.50-$1.00 a share range within 2-3 years.

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Power-One Price Falls After Sale Rumor

Power-One's (PWER $6.00) stock experienced volatile trading Thursday amid rumors that the solar technology developer is seeking a buyer for the company. The stock price climbed to $7.12 at 11:05 this morning, roughly the same time this was posted by Paul Murphy on the Financial Times' Alphaville blog. Thirty-three minutes later, the price had sunk to $5.84. It eventually recovered to $6.03 by the market's close, down $.48 from an open at $6.51. The price had been rising steadily on buyout speculation. But Murphy's report cast doubt on investors that a sale was realistic.

The company still appears on track to post good third-quarter results. Guidance suggests $270 million in revenues, though gross margins could slightly dip. We've given our earnings estimates a slight bump: we now see $1 billion in revenue for 2012, up from our previous estimate of $980 million. Our earnings per share estimate is now $.63, from $.60. Other analysts are predicting revenues slightly above our outlook, but it really depends how fourth quarter sales are impacted by European regulations. The United States' tariff on Chinese solar cells could also lessen solar demand stateside, although those tariffs have yet to be finalized. It is also concerning that the U.S. may decide to apply the tariffs retroactively.

Power-One is releasing its Aurora Ultra inverter next week, which at 1.4 MW boasts the highest capacity in the solar market. The Ultra is designed for utility-size installations. In addition to the industry-leading generating power, the inverter requires fewer wire hookups and shouldn't take as long to test as other inverters. The company is also continuing its efforts to penetrate Asia. It expects sales to India to double in 2013. Stiff competition is hindering expansion in China.

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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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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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