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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Enphase (Nasdaq - ENPH) -- Q2 Earnings Produce Skepticism

Enphase (ENPH $4.90) posted second quarter results that indicate the company is moving along toward profitability. Revenues of $55.7 million were up 88% over $20.6 million in the second quarter of 2011, and were up 31% sequentially, from $42.6 million. Revenues for the first half of 2012 totaled $98.3 million, up 106% over $47.7 million in the same period in 2011. Loss per share was $.23. Gross margins improved to 24.4% for the quarter, up from 21.8% in Q1. Most of the increase is attributable to Enphase’s ongoing cost reductions.

Despite the improvements, investors look wary. The stock price fell from $6.70 to $4.90 the day after earnings were reported. Enphase suggested guidance for the third quarter that looks soft. Couple this with the company’s announcement that CFO Sanjeev Kumar is stepping down at the end of the year, and there is reason for some skepticism. 

The company’s market-leading microinverters continue to win favor among solar installers. The majority of the sales were made within the U.S., but Enphase is seeing increased interest in Europe. France and the Benelux region were the primary buyers, with a few sales to Italy. However, the looming regulatory adjustments in Europe will likely keep sales there scarce until the picture becomes clearer. Enphase recently opened an office in London though, and the company sees a similarity between European interest for the microinverters and the way American companies reacted when the product was first introduced, which is a good sign. An even better sign: Enphase’s microinverters were a hit at the Intersolar Europe trade show in Germany this past June. 

Sales to Canada dwindled as a result of regulations. In 2011, Canada represented 11% of sales; this past quarter the country accounted for only “low single digits.” The Ontario Power Authority is currently accepting applications for its “microFIT 2.0” program, which will award 50 MW of tariff savings to small installations (under 500 kW or less). The feed-in-tariff program for larger, commercial level installations has yet to be announced. Enphase believes it should see increased sales once the OPA resumes the tariffs. The U.S., where tariff programs and government assistance are still strong, remains Enphase’s primary focus in the short term.

Enphase announced several new offerings that will improve system integration. The Array Gun syncs up with the company’s Enlighten software to help installers and owners easily manage solar arrays. The Bluetooth-enabled device scans the barcodes on microinverters, sending the serial number and position in the array to the software. Users will know which microinverter is where, and how each is performing. The Enlighten software has also been upgraded. Energy collection output readings are now more precise both for individual panels and for the system as a whole. Also, the program records historical data for comparative use. 

Third quarter revenue might not reach its potential due to the downturns in Europe and Canada. Enphase suggests Q3 revenue between $59 million and $63 million. For the year, we think a loss per share of $1.10 is still reasonable (Note: $5.01 loss in Q1 used pre-IPO share count). 

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Advanced Energy (Nasdaq - AEIS) -- Straying From Semiconductors

Advanced Energy, Inc. (Nasdaq: AEIS $12.00) announced second quarter 2012 results that were in line with our expectations. Revenues of $115.7 million were up 9.4% sequentially, from $105.7, but dipped 16.2% year-to-year ($138.2 million). Gross margins should improve from this point, though, as the company completed a series of cost cutting measures to eliminate roughly $30 million of operating expenses annually. Advanced Energy hopes to slash another $15 million to $20 million in manufacturing costs over the next year.

The company is de-emphasizing its semiconductor segment. Thin films accounted for 70% of sales in the second quarter of 2011; in 2012, thin films comprised 56% of sales in the quarter. Thin film sales were down 33% from the previous year, from $97,331 in 2011 to $64,843 in 2012. Non-semiconductor thin film sales (architectural glass, displays) advanced. Thin film revenues were up 7% sequentially from $60.4 million in the first quarter of 2012. They were up 19% from $54.4 million in Q4 2011. Semiconductor sales suffered due to an oversaturated market. The segment will still be important, but AE thinks more opportunities exist in its solar inverters and non-semi thin films.

Solar sales improved 24% year-to-year. Revenues totaled $50.8 million for the second quarter, compared to $40.8 the year before. It was also a sequential improvement of 12% over last quarter ($45.4 million). The solar segment should continue to perform well the rest of the year, as the third and fourth quarters tend to be the strongest. Advanced Energy is trying to level out the cyclicality in its sales, but that might prove tough considering solar tends to slow in the first quarter, when winter weather limits installations in the United States and Canada, where the company primarily operates.

The company seems more concerned with reducing costs than it does with increasing sales. This is kind of concerning given the stiff competition AE faces in both thin films and solar. Their products are praised by their customers, but the company cannot rest on its meager laurels in this environment. The non-semi thin films are performing adequately, and the solar backlog is the largest in company history. One wonders if the cost reductions in manufacturing will affect the quality of the products. Obviously, that remains to be seen. The company’s backlog could be larger, but AE only goes “for the business we want to go for,” according to CEO Garry Rogerson. Other companies have begun introducing microinverters, which are generating lots of buzz and claim to be more efficient than central inverters. Advanced Energy is content (for now) to continue with central inverters. While they may be of the highest quality, it won’t matter if there’s better technology out there.

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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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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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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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Enphase Energy (ENPH) -- Hoping Good Things Come From Small Package

Enphase Energy, Inc. (Nasdaq: ENPH $7.00) is the leading provider of microinverters for solar arrays. Unlike traditional central inverters, which collect energy from all of the panels in an array, the microinverters are attached individually to each panel. The microinverters monitor panel performance more closely and quickly than central inverters. It can take up to a month to detect issues on some central inverters. Traditional inverters also require more complex installations, and, damaged inverters not only are expensive to fix, but also can start fires due to the high voltage passing through them. 

Enphase has shipped 1.7 million units since the microinverters launched in 2008. The majority of sales have been made to the U.S., where the product is installed in some capacity in all 50 states. Canada makes up roughly 12% of sales, and Enphase’s products reached Europe in the fourth quarter 2011. The company primarily sells to distributors, who resell the microinverters to solar installation companies. However, some sales are made directly to installers; sales to OEMs and strategic partners make up the remainder.  

Revenues have soared 640% from 2009 ($20.2 million) to 2011 ($149.5 million). The increased revenues have failed to translate into earnings however, though the company has inched closer to profitability. But Enphase likely won’t turn a profit until 2013 at the earliest. The company was about $14 million in debt, with $5,437,000 short term and $8,619,000 long term. April’s IPO raised $60 million to improve the company’s financial condition.

  

Enphase has no direct competition, which should help it survive in the solar market. North American companies are beginning to embrace the technology, and the company’s penetration into Europe should yield more opportunities, even as subsidies are diminishing and disappearing. The microinverters can capture and utilize solar power more efficiently than central inverters; installing the microinverters could soften the blow of decreased government assistance. Solar energy would become viable without government assistance if prices dropped below $2 per watt peak (Wp). As of March, average prices were $2.29/Wp in the U.S., and $2.71 (€2.17)/Wp in Europe.

The company does have stiff competition from central inverter manufacturers though, so treading water in 2012 will not be easy. Central inverters have been in use for 20 years, and that technology also continues to improve. The microinverters can cost more than central inverters, but are cheaper to install, which could funnel more business their way as installers attempt to limit expenses. Each microinverter retails between $145-$200. A residential installation typically uses 5-50 inverters ($725-$10,000); a commercial operation installs 50-500 ($7,250-$100,000). The high ends of these costs would be substantially higher than central inverters, but the microinverters promise better yield and longer functionality which would make up the costs over the long term. Also, residential installation could be significantly cheaper than a central inverter. A customer could get 10 high quality microinverters for about half the price of a top of the line central inverter, and about the same price as the lowest cost central inverters. Enphase’s inverters also come with a 25 year warranty, compared to 5-10 years for central inverters. Solar arrays tend to last about 30 years before replacement is necessary.

It doesn’t appear that the stock price will change much in 2012. Despite growing revenues, margins are negative, and share losses, while expected to be less severe than in the two past years, are still losses. The high revenues come with a high cost, leaving no room for profit. Either costs must decline in total or in relation to revenue for Enphase to post earnings. Operating expenses in first quarter 2012 were 44% of revenues ($18,587). The gross margin of 22% was the second highest quarter in Enphase history.  For the full year, we project revenues of $210 million. Predicting cost of revenues of 78% and operating expenses of 44%, net loss will total -$46.2 million. In this scenario, loss per share would be $0.97 for the year, a marked improvement over losses of $15.66 per share in 2011. Revenues look ready to make another big leap in 2013, and we estimate Enphase will post earnings in 2013 of around $0.05 per share.

Enphase is located in Petaluma, CA.

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