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.  

( Click on Table to Enlarge )

Walmart Announces Massachusetts Solar Plan

Retail juggernaut Wal-Mart disclosed plans today to outfit half of its Massachusetts stores with solar power. Twenty-seven stores would have solar panels and inverters installed, capable of generating 10.5 megawatts of electricity a year. Massachusetts aims to have a generating capacity of 250 megawatts of solar energy by 2017.

Wal-Mart's solar systems will be owned and operated by Greenskies Renewable Energy (Conn.); the company will sell generated solar power to Wal-Mart at an undisclosed rate, though it figures to be comparable, if not cheaper, than grid-based utilities. Wal-Mart says each store will generate enough power to cover 10-15% of its energy requirement. Similar deployments in California generate 20-30% of each store's needs. Each store in Massachusetts should produce about 400 kilowatts per year. The installation price is also undisclosed, as engineering planning has yet to be completed and each project still must obtain permits. This shouldn't be too hard, though, as the state strives to meet its 2017 goal. One-hundred five megawatts have already been installed in Massachusetts.

This article from the Boston Globe points out that Wal-Mart will generate enough energy to power 2,600 homes, which is all well and good, except that the energy won't be used to power homes. Wal-Mart's goal is to cut down on the cost of electricity, and by doing so cutting down on carbon emissions. It's hard to believe that the big-box king would have made the move were in not saving a significant amount of money as well.

The move does bode well for solar power in the Northeast. Wal-Mart originally went solar in sun-soaked California and Arizona. Installations in Massachusetts and New Jersey show solar can be viable even in less sunny areas, and, if Wal-Mart's solar plans succeed, will surely lead others to follow. More business would definitely be a welcome development for the hundreds upon hundreds of solar companies hunting for customers.

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.

( Click on Table to Enlarge )

Advanced Energy (Nasdaq - AEIS) -- Transforming Solar Energy

Advanced Energy Industries (Nasdaq: AEIS $13.00) is a leading provider of power conversion technologies. The company manufactures photovoltaic (“PV”) inverters, used to change the direct current (“DC”) power collected by solar arrays into usable alternating current (“AC”) energy. The inverters are deployed for both residential and industrial settings. Advanced Energy also produces thin film deposition power converters primarily used by original equipment manufacturers of semiconductors, flat panel displays and architectural glass. These thin film converters regulate raw energy to provide OEMs with efficient, predictable output for increased precision in their production. The company’s thermal instrumentation line is used to control temperatures during the manufacture of semiconductors and solar panels to optimize yield and performance.

Advanced Energy continues to report strong earnings even with declining government support of solar energy. Year-end 2011 revenue of $516.8 million was up 12.4% from $459.4 million the year before; sales increased 219% from $161.8 million in 2009. The reduction of solar feed-in tariffs (subsidies) in Czech Republic, Germany and Italy could decrease the profitability of investing in those countries. Most of the damage is done to large- and medium-scale installations, though, so Advanced Energy could find a footing in those regions with smaller projects, like rooftop solar farms. The tariff cuts in Germany will hurt the most this year. But supply was beginning to outgrow demand, so smaller companies will begin to fail, or merge with larger companies this year. This could thin the market and provide Advanced Energy with more opportunities in the next year or two. That is, if Advanced Energy can persist in what figures to be a year of flat or slightly declined earnings.

Other countries are now beginning to offer or increase subsidies. Advanced Energy’s inverters were chosen for six projects in Canada by Moose Power. The Ontario Power Authority will purchase electricity at a fixed rate for 20 years. Success in this partnership could lead to further opportunities. Subsidies have also led to more sales in China, India, the United Kingdom and sections of the United States. The company is adding salesmen in the U.S.

Thin film sales protected Advanced Energy in Q1, when solar revenues are typically down. Solar sales dropped 22% sequentially to $45.4 million in first quarter 2012, since winter weather restricts system installation. But quarterly revenues were up 20.9% year-to-year, from $37.6 million in 2010, driven by North American sales. The thin film segment grew 11% sequentially in Q1 to $60.4 million from $54.4 million. However, thin film sales retreated 39.7% from $100.1 million the year prior. Thin film margins slipped owing to a one-time purchase from a supplier which discontinued production on several parts; Advanced Energy made the purchase to bolster inventory. The company has repurchased 4.1 million shares ($44 million) since November, and plans to buy back more through 2012. 

Solar manufacturing costs should decrease as the company shifts production to a plant in Shenzhen, China. Inverters were assembled in plants in Washington and Oregon. The new facility is also expected to reduce shipping expenses. The trade-off is the quality of goods of the inverters produced in China. Asian suppliers now provide the bulk of materials used in the inverters, and sales could suffer if customers decide the products are not up to snuff. Cheaper parts might also lead to malfunctions, which would lead to warranty claims against Advanced Energy. So, though manufacturing costs may drop, maintenance expenses could nullify the savings. Operations in China could also be affected by unforeseen changes in economic and/or political policy. 

There are many risks. But the reward could be substantial if solar energy begins to seriously compete with traditional energy sources (oil, coal, etc.). For now, Advanced Energy’s inverters are popular, and the company should stay afloat this year because of the thin film unit. The outlook is brighter beyond this year, but it could be a hairy nine months. 

Advanced Energy is based in Fort Collins, CO.

( Click on Table to Enlarge )

MIT Clean Energy Show

We attended MIT's Clean Energy Prize show on Monday, April 30th.  It was a blast.  The guy who won, we figured he had no chance.  Actually he'd already been told beforehand that his company had netted at least a $20,000 prize.  So he was in a great mood, dealing with the hoy peloi the same way we would have, toying with them and having fun.  That company is called Radiator Labs.  It operates in the green energy sweet spot -- conservation.  The guy went to Columbia University in New York City, lived in an old dorm, and  was fed up with the heating system.  Steam.  Tremendous solution.  Wireless connections to every radiator in the building.  Plus a pile of software behind the scene.  Could save tons of money.  He says New York City wastes $445 million a year on steam.  That sounds low.

There were three categories to the competition.  Conservation, obviously.  Renewables, which basically focus on delivering low cost solutions to Third World customers.  Our favorite was Solar Tri-Gen, which figured out a way to power rural villages in Africa using a simple solar technology that the villagers could manufacture and repair themselves.  (They lost that sectional to a bunch of Indians who rented out a solar generator to shopkeepers.)  And Deployment, which included SolidEnergy, probably the best company in the show.  SolidEnergy could not win the grand prize because they won last month in a different competition.  But the start-up took home $20,000 anyway as a category champ.  SolidEnergy says it has a new battery that is safer than existing electric car designs, expands driving range by 300%, and lowers cost.  Radiator Labs won this show's $200,000 grand prize. 

The biggest downer was the old hippie they brought out as the principal speaker.  That was Bill Joy, who invented Java and bunch of other things when he was younger.  Now he's a vulture capitalist at Kleiner Perkins in California focusing on green energy.  Right off the bat he put down one of MIT's current initiatives, which we totally agree with, to make natural gas a bridge to a green energy future.  MIT's theory is that natural gas delivers 50% fewer carbon emissions than coal and oil, it's cheaper than coal and oil, and that by rolling it out now the world could cut CO-2 substantially and continue to operate.  Bill Joy wants more government subsidies of uneconomic technologies like biomass and wind.  Fortunately for us it looks like the MIT approach may prevail.  CO-2 emissions should slow in the short run by converting to natural gas.  Then  the killer apps will come on line when they're ready.

Solar wasn't a big factor at this show.  That's because it's 1-2 years away from grid parity with existing technology, and yesterday's start-ups are knocking at the door with a host of improvements.  That will be the first killer app.  Natural gas prices are so low right now that solar's day in the sun has been pushed out again.  New generating capacity, they're using natural gas instead of solar or coal.  But natural gas costs $4.00 per mcf to produce, and it's selling for $2.25 today due to oversupply conditions.  That price will revert to $4.00 before long as supply and demand return to equilibrium.  When that happens solar should be golden.