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No. of Recommendations: 6
Power-One
This is an intriguing company in the midst of metamorphosis. It is the story of the tech bubble and crash all in one company. The chart of their price per share is an almost perfect reflection of the rise and fall of tech. From $80 per share in 2000 at its pinnacle down to a couple of bucks in 2009 and now back to $8. And it achieved its highest price in history all without the benefit of earnings—a perfect metaphor for the tech boom and bust.

http://finance.yahoo.com/q/bc?s=PWER&t=my&l=on&z...


Ugly numbers

2009 2008 2007 2006 2005 2004 2003 2002
===========================================================

Margins
-----------------------------------------------------------
gross 22% 21% 21% 27% 29% 35% 37% -2%
EBT -13% -3% -7% -5% -14% -6% -7% -97%
net income -15% -3% -7% -4% -15% -8% -7% -91%

growth
-----------------------------------------------------------
revenue -20% 5% 51% 29% -7% 9% 11%
gross -13% 5% 13% 21% -22% 3% -2440%
net income 261% -52% 149% -62% 81% 16% -91%
===========================================================
Diluted EPS -0.74 -0.20 -0.42 -0.17 -0.45 -0.25 -0.22 -2.62


Looks like an entirely forgettable company

What do they do?

They do inverters for renewable energy and the legacy business that was so ugly is power conversion mainly for telecommunication and other electronic equipment.

Power conversion products generally convert one voltage into another voltage (AC-to-DC and DC-to-AC) or modify the voltage being delivered (DC-to-DC), while power management products manage multiple voltages.

Renewable energy inverters harvest either solar or wind energy converting it from DC to AC power.

They do the design and R&D, the manufacturing and the sales.
Depending on customer's needs, they can provide standard, modified-standard and custom-designed products. That means they have skill meeting an idiosyncratic demand for a non-standard piece of equipment—a valuable skill and separates them from simple distributors of mass produced products.

Custom products are usually designed from "scratch" to meet the specifications of a unique customer application and may require significant tool and die costs and four-to twelve-month lead-time

Renewable can be used in both residential and industrial settings and gives them access to a bigger customer base than restriction to one or the other

This is a short description of what they do. Keep in mind that power systems and power supplies has been a failure for over a decade. The only thing keeping the company in the black is renewable energy

Renewable Energy

• convert solar (photovoltaic or "PV") or wind energy into useable grid connected power

• power range: 2 kW to 2.5 MW

• are used in residential, commercial, and utility-grade solar panels and wind turbine farms.

AC/DC power supplies

• convert AC from a primary power source, such as a wall outlet, into a precisely controlled DC voltage

• typically embedded within the equipment that they are powering

• used in networking systems, network servers and storage, and industrial equipment

• are used to power communications infrastructure equipment, although their usage is expanding to other markets including server and storage; and

DC power systems

• convert AC voltage into DC voltage and, together with a generator or an array of batteries, provide several hours of additional power capacity in the event of an AC input disturbance or power outage

• can be either stand-alone units that are external to the equipment or sub-systems (commonly called "racks") that are integrated into a system

• are used primarily to power communications networks and cellular communications systems

Smart motor control and other products

• used primarily in sophisticated appliances, such as high-end clothes washers and dryers, and air conditioners, where energy efficiency is very important

• board-level products or modules that are incorporated by the manufacturer in their system.

Why am I babbling on about such an apparent loser? Something strange happened in 2010—they started making money and fast. Growth took off and all of a sudden, expenses did not outpace growth and lo and behold we have earnings!


9/10 6/10 3/10 12/09 9/09 6/09 3/09 12/08
=============================================================
margins
-------------------------------------------------------------
gross margin 41% 37% 30% 29% 23% 20% 14% 22%
EBT margin 31% 22% 9% 8% -1% -7% -64% 1%
net margin 20% 12% 3% 4% -2% -7% -63% 1%

growth
-------------------------------------------------------------
revenue 214% 135% 56% 9%
gross 457% 338% 230% 43%
net 3236% 498% 108% 267%


Diluted EPS 0.40 0.17 0.04 0.07 (0.03) (0.08) (0.70) 0.02


Dost mine eyes deceive me? Is this the same company? It is not

In 2006, they made a pivotal acquisition that set them on the road to profitability.


On October 23, 2006, the Company completed its acquisition of certain assets and liabilities of Magnetek, Inc. and all of the outstanding common stock of Magnetek, SpA, a subsidiary of Magnetek, Inc. The final purchase price for the equity was $69.4 million, consisting of $66.1 million in cash and $3.3 million in direct acquisition costs.

The Company also assumed $27.8 million in debt. The preliminary purchase price was funded with cash on hand and the proceeds of a $50 million promissory note issued by the Company.


Magnetek does mainly renewable energy

http://www.magnetekrenewableenergy.com/

I am not sure if the new direction is sustainable. As far as the demand for inverters goes, I am at least a galaxy away from my circle of supposed competency. I have absolutely no idea if they can continue at the impressive pace set in the first 9 months of 2010.

The change comes with higher growth and higher margins. The business is rapidly morphing into renewable energy with a smaller and smaller percentage remaining in power solutions. As the percentages shift the improvements in margins, growth and earnings all accelerate


9/10 6/10 3/10 12/09 9/09 6/09 3/09 12/08
===================================================================
sales in millions

renewable energy 228.3 142.3 82.29 na 31.1 16.9 12.72 na
power solutions 85.7 72.2 70.09 na 69.0 74.3 85.12 na

percent of revenue

renewable 73% 66% 54% na 31% 19% 13% na
PS 27% 34% 46% na 69% 81% 87% na



Cash flow is improving

Annual

2009 2008 2007 2006 2005
===========================================
CFFO 54.98 (22.31) 2.58 (25.94) (5.43)
Capex (6.75) (8.80) (8.44) (5.64) (6.24)


One reason for positive CFFO in 2009 was a big positive swing in receivables and inventory. This is OK but not something to count on.

In 2009:

(Increase) Decrease in Receivables 28.53
(Increase) Decrease in Inventories 29.65


The quarterly cash flow receivables and inventory are increasing and even with that, CFFO is positive and increasing. This is what you like to see. Not necessarily that these accounts are going up, but that the CFFO is probably sustainable even with the increases that are necessary when a business is finally in growth mode.


Quarterly
In millions


9/10 6/10 3/10 12/09 9/09 6/09 3/09
=====================================================
CFFO 67.13 51.05 28.95 28.07 9.65 10.12 7.14
capex (7.93) (4.13) -4.19 (3.10) (2.13) (0.56) (0.96)


With all this going on, we do not need to worry about overleverage. The company is paying down debt and current debt/capital is 14%.

Debt

(in millions):
October 3,2010 January 3,2010
==================================================================
Senior Convertible Notes, due 2019 $35.9 $35.7
Secured note payable 3.6 4.6
2% Installment notes, due 2011 0.2 0.3
8% Senior Secured Convertible Notes
due 2013 — 38.8
==================================================================
Total long-term debt 39.7 79.4
Less current portion 1.3 1.3
-----------------------------------------------------------------
Total long-term debt,
less current portion $38.4 $78.1

The new converts are pricey

Interest relating to the new converts issued 2009 is paid semi-annually at a rate of 6% per year the first year, 8% the second year and 10% thereafter.

The New Notes are convertible into Power-One common stock at a conversion price of $1.35

The high premium is no doubt due to their somewhat poor earnings history. They had been paying 8% on the repurchased converts. At its worst the premium paid out after three years will be $3.5 million per annum. With their new improved positive operating income, this is unlikely to be a game-changer if they keep growing. In 2009, interest expense was $8.7 million per annum

I went from thinking this was an exercise in futility as I looked back through the last decade—pathetic company. But the last few quarters make them a little less reprehensible and a lot more interesting. Management changed in 2007 and may have something to do with the change in direction and profitability.

I do not have any idea if this is a good business to be in—inverters for renewable energy. Not a clue. If anyone has some idea of the potential of this niche please let us hear your ideas.
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No. of Recommendations: 1
"I do not have any idea if this is a good business to be in —inverters for renewable energy. Not a clue. If anyone has some idea of the potential of this niche please let us hear your ideas."

It all depends on how much one wants to bet that we, as a Nation, will try to develop a "smart grid" for electrical transmission. Right now, we're not doing all that much. Practically zilch.

That said, there IS a market for power converters to transfer DC current from a small commercial or household-size solar panel array into usable AC power for home use. Ask yourself this: are you, your friends and neighbors planning to install solar panels anytime soon?
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No. of Recommendations: 5
Power-One is an old friend. I made good money on it during the tech bubble and I even managed to get out in time keeping most of my winnings.

Repeat after me: "Inverters are a commodity business." So are all the products Power-One has ever made so one has to be extra careful with it. BTW, wind generates AC directly and does not need inverters. They need other kinds of things to clean up the electricity so that it can safely be fed into the grid.

American Superconductor has a big position in the wind industry and they have recently announced SolarTie

We strengthened our position in the renewable energy and power grid sectors by making a strategic investment in advanced wind turbine blade manufacturer Blade Dynamics Ltd., and we introduced our new SolarTie™ Grid Interconnection Solution.

http://finance.yahoo.com/news/AMSC-Reports-Second-Quarter-bw...

also

The SolarTie Grid Interconnection Solution combines two of AMSC’s proven and proprietary technologies – D-VAR® STATCOM solutions and PowerModule™ power converter systems-that are today connecting over 15 Gigawatts (GW) of renewable energy to the grid. This utility-scale grid interconnection system is designed specifically for megawatt-scale solar power plants. By coupling best-in-class power converter capabilities with AMSC’s world-renowned dynamic reactive compensation technology, the SolarTie product represents the industry’s first fullyoptimized solution for utility-scale solar photovoltaic (PV) power plant developers.

http://www.amsc.com/products/solartie/index.html

The following article in Seeking Alpha renewed my interest in Power-One:

Power-One Is a Steal at Its Current Price
November 07, 2010

Power-One (PWER) has rapidly become the world's second-largest maker of inverters for solar cells. (Inverters convert the DC power from the cells into the A/C power used by electrical appliances.) The company just reported a blow-out third quarter, earning .40/share vs. a .03/share loss a year ago on $314 million of revenue vs. just $100 million a year ago.


http://seekingalpha.com/article/235322-power-one-is-a-steal-...


Denny Schlesinger
Disclosure: Long AMSC. Short puts AMSC, PWER
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No. of Recommendations: 2
Sailboats also use inverters if they want to use household AC appliances since they rely on battery power.

The Captain
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No. of Recommendations: 1
I love you guys--tear in eye--

this is just what I kept asking going through PWER--why are they doing such great business all of a sudden. It was Germany. Germany did OK through the recession and had money to spend. I am guessing no one else does and I would agree with the thought 2011 is going to be disappointing

The US has no will to do anything green. It has been a huge disappointment. The UK is involved in wind from the offshore Gabbard but does wind need inverters? And I am guessing Fluor might want to go with American Superconductor if they are in the market for inverters.

I agree these are a commodity and I do not see much of a moat I do normally like to see a reason for customers to prefer one product over another for some reason other than price. And as I said, I know nothing about this space

i think the company may have to be given time to see if the price will reach new lows. At some price, even with diminished expectations, they are doing some things right
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I'm curious if some of Stimulus I found its way into the company. Green was one of the targets industries to "stimulate". The timing is about right. The acquisition could very well be the reason for the turn. I just wouldn't want to get got in a temporary surge like we saw with autos and homes that were sourced solely in govt incentives.

jack
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No. of Recommendations: 4
I am slightly more than half way in the bag in a beatiful location in Hilton Head. So please excuse if I opine that this is a little like my first wife: many beautiful statistics for which the parts were alluring, but the whole, when fully discovered, didn't live up to the hype, nor was suggicient for a long term relationship. Thank God for spell-check.

Hockeypop
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No. of Recommendations: 4
The US has no will to do anything green. It has been a huge disappointment.

Be careful with broad generalizations like that.

California is targeting 20% green electricity by 2020 and is actively on the road to that. Look at the California Public Utilities Commission web site for more information.

According to the fifth annual study of renewable energy released last July (http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR_2010... Sept2010.pdf) by REN21, the U.S. was #3 in the world for adding total green capacity in 2009, #2 for adding wind, #4 for adding solar PV (grid-connected), and #3 for adding biodiesel. For total capacity in green power, the U.S. is #2, ranking only behind China.

As for stimulus money (to address a comment by jack), $188 billion world-wide had been allocated by the end of 2009. Unfortunately, only 9% had been spent, but that's mostly because of administrative delays.

Yes, Power-One has been heavily reliant on the EU, but it's not solely dependent on it. It is actively expanding further in the U.S., Canadian, and Chinese markets, for instance. (They just opened two plants in the U.S. this past quarter.)


and I do not see much of a moat

Addressing the question of moat: The company claims to have the most efficient inverters with the widest range of voltage operating ranges with the least amount of down time. That's part of what has driven the huge market share gains made by the company over the past three years. It's also adding specialized software control thanks to a recent acquistion, giving customers more control over the use of the devices. And, it is one of only two companies in the world to meet the stringent German PDEW standards for grid stabilization, which further differentiates its products.

Inverters may be a commodity product, but Power-One is doing something right, otherwise it couldn't have grown its market share so quickly. And, it's doing what it can to differentiate its products from its competitors. And given the size of the market and the rate it is growing (8 GW of solar PV were added in the first half of 2010, more than all of 2009), selling a commodity can also lead to strong results.


From another post in this thread:
BTW, wind generates AC directly and does not need inverters.

I beg to differ. Power-One sells inverters into the wind power market, as well as solar PV. http://power_solutions.power-one.com/renewable-energy/wind-i... Further, comments from this article (http://pacbiztimes.com/index.php?option=com_content&task...) argue against that point, as well. (Thompson is Power-One CEO Rich Thompson and Nasdeo is Walter Nasdeo, director of research for New York-based Ardour Capital Investments.)

"Almost half of the wind market is captive — the guys who build the turbines build the inverters," Thompson said. "That leaves half of the market, but it’s still a huge market."

There are technical challenges as well, Nasdeo said.

"Wind inverters are more difficult than solar energy because of the volatility of the sine wave of the energy from a wind turbine," Nasdeo said. "A lot of companies just don’t spend much time on them. … But by the same token, if somebody comes up with a real technologically advanced type of inverter — high-efficiency and things like that — I think you’ll see folks going to it."


Cheers,
Jim
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No. of Recommendations: 2
Wind inverters are more difficult than solar energy because of the volatility of the sine wave of the energy from a wind turbine,"

That to me sounds like AC, not DC. It was my understanding that inverters convert DC to AC.

An inverter is an electrical device that converts direct current (DC) to alternating current (AC); the converted AC can be at any required voltage and frequency with the use of appropriate transformers, switching, and control circuits.

http://en.wikipedia.org/wiki/Inverter_(electrical)


The quote from Nasdeo makes it sound as if the sine wave from the generators in windmills is erratic and that it needs to be corrected to make it match the grid. I wonder why they call that "inverting?"

I'm not saying they are not selling equipment to windmills but I would not call them inverters. But then, it might be 1984. ;)

Denny Schlesinger
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Jim,

Just playing devils advocate.

That's part of what has driven the huge market share gains made by the company over the past three years.

I saw the data on earnings. What/where is the data on market share? A rising tide lifts all boats, even the ones that still float when sunk to the oar locks.

jack
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No. of Recommendations: 2
Power one's market share went from 3% in 2008 (9th place) to 6% in 2009 (4th place) to 11% in 2010. (2nd place). Slide #7.

http://goo.gl/UbVGl
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Ty Rule

So with an 11% market share and they are #2 we are back to mote issues, are we not? I mean 89% of the market is shared by someone else.

just kickin tires

jack
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excellent discussion and many thanks.

Jim---
I am generalizing about the US renewable spending. I just see no mention of major products in the companies I follow

the U.S. was #3 in the world for adding total green capacity in 2009

Do you have a dollar amount to go with this to put it into context? For instance, the UK is spending $1.8 billion on the Gabbard wind farm offshore

Along those same lines other information I could not find:

Do you know what Germany spent with PWER in 2010?

And do they ever break out the business by geography as most global businesses do? If so could you add the numbers either here or at RS? Thanks much

I was looking for the equivalent of one big customer or a big one off project as an explanation for the excellent Q3 and I think the German business fits that. it has yet to be proved they can capture enough other big projects to fill this gap and grow both. It was an amazing 9 months. If it continues this company is cheap. The rapid sell-off back to $8 makes it seem that there are worries about the renewable energy market in 2011.

Denny posted the info on American Superconductor. It was that company that predicted slowing IIRC They look like major competition and held up distinctly better after PWER fell.
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Prof,

Do you have a dollar amount to go with this to put it into context?

According to REN21's 2010 report, covering data through the end of 2009: "Germany and China were the investment leaders in 2009, each spending roughly $25–30 billion on new renewables capacity, including small hydro. The United States was third, with more than $15 billion in investment. Italy and Spain followed with roughly $4–5 billion each."


Do you know what Germany spent with PWER in 2010?

No.


And do they ever break out the business by geography as most global businesses do?

Of course. But, as with other global businesses, it is only done in the 10-K. For 2009:

North America: $101.4 million
Italy: 84.7
Other Europe: 151.7
Asia: 83.2
Other: 10.6
------
Total: $431.6 million

However, they did comment on geography in the third quarter (for just that quarter). "Core areas of strength for RE solutions [this is the inverter business] included Italy and Germany with Australia, and the Middle East highlighting new regions of growth. Europe accounted for 94% of RE revenue with Asia representing 5% and North America 1%. With the launch of our new products, we anticipate our geographical mix will shift in 2011 to include a great percentage from Asia and North America."

Note, also, that they opened 2 new plants in North America, and they are building plants in China, as well, so geographical sales will shift.


I was looking for the equivalent of one big customer or a big one off project as an explanation for the excellent Q3 and I think the German business fits that.

There's no evidence for that other than the popular press belief that Germany is EU renewable energy. And with concerns about Germany pulling back in 2011, that pretty much explains the drop in price last week. However, as I noted in my buy article (http://www.fool.com/investing/small-cap/2010/11/15/rising-st...), one country does not make the market. Spain was the big one in 2008 and it dropped to almost nothing in 2009. Result? Continued increase in RE capacity in the EU. A drop in Germany's spending in 2011 is not a major concern for me.

Management's comments in the conference call do not call out any single one-off project or country as the reason for strong revenue growth. Instead, Gary Larson (CFO) said, "Renewable energy products were the main driver of the sales increase, growing 61% sequentially. The outperformance ahead of our prior guidance was driven by our ability to rapidly increase capacity, successfully manage our supply chain and the availability of components for the power SBU, and the rising value of the euro."

The company is continuing to go after market share and has stolen from market leader SMA Solar Technologies. At the end of 2009, SMA Solar had 42% and Power-One was fourth (with 6%), according to IMS Research (http://www.pv-tech.org/news/_a/sma_remains_solar_inverter_ma...). At the end of Q2 2010, Power-One had risen to #2 with 11% share while SMA Solar had fallen to 37% share. (http://www.solarserver.com/solar-magazine/solar-news/current...)

-- jack, I hope that answers your question re market share.


Regarding DC vs AC from wind, from my additional research here is what I've learned:

Both types of output are possible, depending on whether or not the device attached to the turbine is a generator (DC) or an alternator (AC). It can be difficult to tell which is which, because "generator" is often used to mean both.

I do not know which is prevalent. Siemens uses an asynchronous generator (actually alternator) to put out AC from its turbines. But Power-One makes a DC-to-AC inverter for wind power (http://www.power-one.com/sites/power-one.com/files/lswi25mww... -- see the second page; input = DC, output = AC). This site, http://energybible.com/wind_energy/wind_turbines.html, indicates that both DC and AC outputs are used (DC, for instance, is used to run DC appliances and machinery in businesses).

Do note that wind farms, where the purpose is to feed into the grid, like a large hydro dam or coal-fired plant do, are not the only end use of wind turbines. Smaller installations are also used for either off-grid or grid-tied for small groups of people or an industrial site.

Cheers,
Jim
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Regarding DC vs AC from wind, from my additional research here is what I've learned:

Both types of output are possible, depending on whether or not the device attached to the turbine is a generator (DC) or an alternator (AC). It can be difficult to tell which is which, because "generator" is often used to mean both.

Jim


It's a good day when one learns something new. Thanks!

Denny Schlesinger
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