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|Subject: PWER - Q3 2012 - my thoughts||Date: 10/26/2012 6:18 PM|
|Author: TMFGebinr||Number: 820 of 1003|
EPS: Expectation of $0.15, reported $0.13 GAAP and $0.16 after adjustment for forex, which analysts usually don't include in estimates.
Revenue: Expectation of $269.76 MM, reported $283.65 MM.
Cash & equiv & ST investments: $287.4 MM, up from $204.9 MM at the beginning of the year.
SE: $870.1 MM, up from $743.5 MM at beginning of the year.
Gross margin: 28.9%, up from 28.1% YoY, down from 30.3% QoQ.
Operating margin: 15.3%, up from 13.9% YoY, down from 18.6% QoQ.
Despite what I viewed as a relatively solid performance in Q3, shares took a hit today of about 5%. (But given the volatility of the share price, 5% might not be considered out of the realm of "normal.") This is probably because of two things: 1) The company guided Q4 revenue ($210 MM to $230 MM) below analyst expectations ($256.5 MM consensus) and, 2) that inverter demand in Germany and Italy, which combined still account for 67% of the company's revenue, is expected to decline significantly.
There are several points I wish to point out from the call:
• There was higher demand than probably expected in Europe, despite fears that Germany, Italy, and others are in decline. Part of this is from improvements in products, part is in shifting of products away from utilities and toward commercial and residential rooftop.
• Southern Italy has reached grid parity for solar, thanks to both more expensive electricity and high amounts of sunshine. The company is already bidding on unsubsidized projects and it expects that market to expand.
• The company is gaining market share, currently estimated at 13% worldwide, up from 11% a year ago. In specific markets, it has even higher share (California = 22% and Australia = 20%, for example). It is targeting 20% share in all of North America by end of 2013.
• The Phoenix manufacturing plant is well on the road to recovery. Shipments are up, deliveries are timely, and customer satisfaction is higher. This will help it continue to grow in North America.
• Even though Germany and Italy markets are expected to decline, other areas of Europe are strong and/or expected to grow, including U.K., France, and eastern Europe. The overall effect, therefore, upon the company should be considerably muted.
• North American solar market growth is expected to be 40% next year, greatest in the commercial and utility areas. Power-One is well positioned to take advantage of that with a strong product lineup.
• China is a tough market. Here's what management had to say: For China, it's primarily a large scale commercial and utility market with a large number of smaller domestic inverter suppliers competing on price. We will approach this market selectively by focusing on EPCs and utility companies that appreciate our value proposition and are looking to minimize their total LCOE or levelized cost of energy over the life of the project. While this market is very price sensitive and highly competitive, we believe our product cost structure will allow us to achieve reasonable margins. Additionally, our strong balance sheet and product warranties will help us win business. Smart customers will be pound wise, not penny wise. The company's products have strong selling points including reliability, uptime, operating range, and smart controls. Plus, with a debt-free balance sheet, customers know the company will be around to service the products (unlike some of its competitors elsewhere and quite possibly competitors in China). It does a utility no good to buy a product only to have the seller go bankrupt two years later.
• The company continues to diversify revenue streams away from Europe. Thompson (CEO) said, "So we feel confident that over time over next year, we'll be able to achieve a very large position outside of Europe next year." We'll see how that works out, but I expect the company to make significant progress along those lines over the next year or two.
The company's price remains irrationally low, in my opinion. It has shown that it can grow and gain market share outside of Europe. It has restored the profitability of the Power Solutions segment (the original segment for the company). It is debt-free and becoming cash rich (with an increase of $82.5 MM to its cash reserves in nine months and 57% of its market cap in cash). It threw off $23 MM in FCF this past quarter and $120 MM over the past four quarters, so its trading at an EV/FCF ratio of just 2.4 times. It has been profitable for the past 11 TTM periods, going back through the four quarters ending 4/4/2010. And, it's grown net income from $2.5 MM to $105 MM over that period (with a peak of $181 MM for the TTM ending 7/3/11).
Now maybe the fact that net income has declined from that peak through today is what's killing this stock, but I fully expect net income to turn around and start growing again through 2013 and beyond.
Given that we're coming up on the 2-year anniversary of the MUE, I'll be able to increase my investable funds levels from which I calculate position sizes (measured by dollars invested). So, I'm likely to make an additional purchase of shares in the not too distant future.
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