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No. of Recommendations: 4
Hi everyone,

Here are some notes I put together a while back. I've updated what I can to include the most recent quarterly results.


     • Market cap: $974 million (11/8/10)
     • Share price: $9.54 (106.3 M shares outstanding; 6.7 M avg volume)
     • No dividend
     • PE, diluted: 12.7
     • FCF ttm: $104.1 M (7/4/10)
     • Cash: $194.6 M
     • Total debt: $39.7 M (about half what it was 3 months ago)
Power-One is a pick-and-shovel company in two important and rapidly growing markets.
First, it provides power inverters (which convert DC electricity generated by wind or solar to AC so that it can be fed into power grids) for the renewable energy market.
     • Inverter market currently is $5.1 billion and is expected to grow by 25% to 35% per year as more nations move toward green sources of energy.
     • Over the past two years, Power-One has moved from #9 market share (3%) to #2 market share (11%).
     • Has grown sales from $13 M in 1Q2009 to $228 M in 3Q2010.
          • These represented 13% and 73% of total sales, respectively.
     • Currently, solar and wind produce ~32% of 34.8 TWh of renewable energy (rest is small hydro, geothermal, biomass, biogas).
     • In five years, total output is expected to be twice that at 72.3 TWh, with solar and wind combining for ~62% of the total, a four-fold increase total in wind and solar.
     • A growing reputation of highly reliable products that operate at a higher yield than competitors' products (efficiency, harvesting, uptime) over a wider range of operating voltages.
     • Wide geographic range: U.S., Canada, western Europe, Turkey, China, Australia
Second, it provides converters and power management for technology and telecom devices (communications, Internet, server farms and storage, etc.), which are requiring more power, denser power, reliable delivery, and fine control of power delivered.
     • High conversion efficiency (AD/DC and DC/DC) and control (e.g., delivering different amounts to multiple users on same circuit board).
     • High density -- devices are decreasing in size while doing more things. OEMs are outsourcing power control needs due to growing complexity of problem.
     • High reliability -- the grid delivers 99.9% spike free power, or all but 9 hours per year. But one instance of bad (or zero) power can knock out tech devices (e.g. server farms) for much longer periods with high costs.
     • Growth of distributed power and power management -- more devices, homes, and businesses becoming "smart" about both power use and generation (local, small power generation plus grid, rather than just grid).
After several years of losses focusing just on the second part of the above, it has entered renewable energy in a big way, rapidly moving to the #2 spot. Higher margins have followed.
     • Gross margin has grown from 20% in 2007 to 36% TTM.
     • Operating margin has grown from (2.2%) last year to 23.8% TTM.
     • Has swung from net loss (negative 14.7% net margin) a year ago to 12.1% net margin TTM.
Management and inside ownership:
     • Long-time chairman and CEO (since 1990), Steve Goldman retired in June 2007.
          • He still holds 2.9% of the company.
     • Replaced by Richard Thompson (started Feb 2008), transferring and moving up from CFO of American Power Conversion. Improvement in company performance followed (though end of recession also helped).
          • He owns 1.5% of the company.
     • Long-time board member Jay Walters (since 2000) took over the chairman position when Goldman retired.
          • Walters owns 0.04% of the company.
     • All told, insiders own 7.98% of the company.
     • World economy dips again.
          • As the company swings further toward renewable energy (was 13% of revenue in early 2009, 66% of revenue in mid 2010), becomes more dependent on continued growth of renewable energy installations around the world. Governments currently subsidize a significant portion of drive to green energy. Companies don't want to upgrade to expensive infrastructure.
               • Cost of renewable energy continues to drop (has reached grid parity in a few locations), so government subsidies will become less important. As it reaches and drops below grid parity in costs, private industry will more rapidly adopt.
               • There are many indications that the world economy will not drop into recession again, though the recovery will probably continue to be slow.
     • Reputation suffers.
          • It is building a reputation of high quality products. This is a significant competitive advantage, as nobody wants downtime or lengthy repairs. The company's products have less downtime and shorter repair times than competitors', which management believes is a major factor in its rapid growth in the renewable energy field.
     • Customer concentration.
          • Five customers accounted for 22% of sales in 2009, down from 28% in 2007.
     • Manufacturing and supply chain problems.
          • The company has experienced problems in manufacturing, ability to deliver on time. Supplies of certain components has also tightened up.
               • Has addressed these, but fixes may not be optimal.
     • Many players in industry and product cost erosion / obsolescence.
          • Rapid technological change leads to obsolescence, with cheaper, newer products replacing older generations.
     • History of operating losses.
          • Recorded operating losses for the last nine fiscal years. Changes to business model may not be sufficient to bring about sustained profitability.
               • So far, though, management seems to be pulling the right levers, controlling working capital better and becoming a significant player in renewable energy power conversion.
     • Average analyst expectation for long-term earnings growth is 26% (10 analysts, up from 4).
     • Current price expects 5.9% growth (FCF) for five years, and then 2.5% from then on, at a 15% discount rate.
     • Alternately, current price expects 7.0% growth for five years, 3.5% for five years, and then 0% forever.
     • While it's hard to judge what the company has done, thanks to its long string of losses, the 18-month growth in the renewable energy market far, far outpaces that low level of expected growth. I feel this is an unreasonably low level of expectation currently implied by the price.
The two markets it operates in are significant and growing. A company with a reputation for high-quality products will be able to expand even faster than the market as it captures market share. Power-One has demonstrated this ability in the renewable energy market, rapidly rising from #9 to #2. Green energy is here to stay and will become a bigger part of the world's energy supply. By providing needed components, it can sell to anyone, regardless of the success or failure of the individual players, just like the sellers of picks and shovels were independent of the gold miners' success. Further, demonstrated expertise in the growing complexity of technology and telecom power needs provides another avenue of growth. New blood at the top has moved the company away from losses, expanded margins, and grown its opportunities significantly.
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No. of Recommendations: 0
hi jim

I have not had time to do anything other than start downloading documents but do have a couple of questions

Is there a big job or account that made the last quarter so great as far as revenue? ie is there reliance on big jobs that could be lumpy. ECOL is like that--great wide moat business reliant on big awards that are infrequent

Is any one client more than 10% of revenue

Is the original older part of the business now profitable or is it a drag on earnings

thanks--on first impressions I like these guys
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No. of Recommendations: 2
Hi Prof,

Is there a big job or account that made the last quarter so great as far as revenue?

I don't think so. At least, there was nothing like that in the earnings release or conference call. As far as I can tell, it's just growth and gaining market share.

Is any one client more than 10% of revenue?

Customer concentration is down, as mentioned in the notes, from five covering 28% of revenue in 2007 to five covering 22%. I didn't see anybody called out as a 10% customer in the last 10-K.

Is the original older part of the business now profitable or is it a drag on earnings

For this quarter, it operated just shy of break even ($100,000 loss), which is a big improvement over the past.

One article (pub'd 9/20/10) I read had this to say: "Power-One still makes power conversion and management gear for telecommunications and industrial equipment, a business [CEO] Thompson said the firm 'will continue to mend.' It closed its Dominican Republic plant, consolidated facilities in China for efficiency and moved Italian production to Slovakia. The company is looking for higher-margin niches where it can compete successfully against much bigger companies like Emerson. 'You have to build a better mousetrap, but you have also have a very cost-competitive product,' Thompson said."

One last note. From the same article: "While its other lines will still factor into the revenue mix, Nasdeo [director of research at Ardour Capital Investments] and Thompson both peg renewables as the division where big gains will come. Power-One’s inverters are a necessary component of any renewable electricity system, but they aren’t tied to particular panel or turbine technology and can be adapted as new ways to capture sunlight or wind come about. 'We see renewable energy as a growth market for years to come,' Thompson said."

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thanks jim

You have the 2010 numbers for client percentages of business?

Will not have time to do much with this until Friday but they have moved to the front of my queue. Intriguing that they went from a very expensive company in 2000 and then dropped off the map from $80 per share to $2 or so in 2009.

What I would like to understand is what was going on with them in 2000 making them such a hot property. Was it the original Power Solutions. I confess I do not know what it means when it says

products for AC/DC, DC/DC and digital power conversion, including power conversion products for data centers, such as servers, storage and networking, as well as telecom and industrial power conversion products.

Was it because the internet and PCs and what-nots were fast growing and PWER had product directly connected with the expansion of the net and PC connectivity and server demand?

it looks like that part of business is a dog now. Why is that? No demand? Did they fail to keep up technologically? These are the numbers for Q2

Three Months Six Months
6/10 6/09 7/10 6/09
Renewable Energy Solutions $142.3 $16.9 $224.4 $29.3
Power Solutions 72.2 74.3 142.5 159.7
Total $214.5 $91.2 $366.9 $189.0

Power Solutions just keeps fading badly. I have no table for Q3 yet --8K does not have one.

So I ask myself and you :) is this new segment as good as it looks on paper or are they going to fade like the did with PS? The growth is absolutely phenomenal

To answer that we need to be sure of its utility in the brave new world of solar and wind. Are they in danger of becoming obsolete as they have done in the past? Is R&D not competitive?

Is solar and wind going to finally gain traction? It has been waiting in the wings for mass adoption for decades--is its time finally here?

I see wind farms growing with companies like Fluor working on a somewhat massive project off shore for the UK and then there are the turbines going up all over the US on farmland. Is this part of their market and how big a market is it?

This is an extremely interesting company but way outside my circle as far as understanding what is going to create demand for PWER products and whether they have the game to make it work

I hope you will be able to post some more detail about the history and what is going to make this new direction a turnaround.
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