No. of Recommendations: 5
Hi everyone,


A disappointing quarter. The company's guidance at the end of Q3 was $210 MM to $230 MM for Q4. Analyst EPS estimate was a loss of $0.03. The company delivered only $192 MM in revenue and a loss of $0.14 per share. Shares fell 3.5% in response last Friday (the day after earnings came out), which tells me most of the bad news was already priced into the shares.

For most of the past year, the share price has sat between $4 and $5, with an occasional foray into the high $3 range. I think the company's going to have to beat expectations for 2 or 3 quarters in a row before the market starts pricing things higher.

However, I continue to remain a holder of this company, both here in the MUE port and personally. One reason is the strong (and stronger) balance sheet. The company added just shy of $61 MM in cash and short-term investments to the balance sheet in 2012. Debt remains at zero. A/R went down over the course of the year, which is also a good thing. As a result, shareholder equity climbed by $76.4 MM over the year to just shy of $516 MM.

For RE, the revenue shift away from Europe is underway, from 91% in Q2, 82% in Q3, and 76% in Q4. Admittedly, a big part of this is declines in German and Italian revenue, but it is forcing the company to keep growing in North America and Asia-Pacific, which it is working toward. Unlike Europe, growth of solar power is expected to grow healthily in the U.S. (40% next year, if memory serves) and as much or more in Asia. If it can rampu up to meet that kind of demand and become less dependent on Europe, especially Germany and Italy, that will do nothing but good for the company (and the share price). The next few quarters should tell us whether that is happening or not.

Today's announcement ( of teaming up with the Japanese company Panasonic is good for a couple of reasons. First, it gives them an "in" for selling inverters in Japan, something they need, as business there is about relationships as much as good products/prices. (It's pursuing the same JV strategy in China for the same reason.) This should lead to nice sales in Japan as that country moves away from heavy reliance upon nuclear power following the 2011 tsunami.

Second, it gets the company into another area that's important for PV work, the storage of energy for use to smooth out what's being generated and what's being used (e.g. storing up when the sun is bright, delivering from the storage when the sun is not). Lack of that has always been a weak point in solar adoption and developing the storage market will help reduce that concern. I don't know how soon fruits of this collaboration will start to come out, but remember Power-One has expertise in energy handling from its Power Solutions side of the business which should help the effort.

The investment in shares in PWER by the MUE port remains one of my 3 biggest losers so far. The average cost basis is $6.19, and I've invested a full 7% of total investable funds into the company. I'm not going to expand the holding by putting more money in as a way of reducing cost basis, however. Even though I strongly believe the company will do quite well over the long term, I do not want to expose the portfolio to the risk that I could be wrong, more than I have at any rate. If I'm right about the ultimate success of this company, that means I'll be giving up even better returns, but that's okay because I'll also be protecting the portfolio from the risk of being overweight in case something goes horribly wrong with the company. When the next round of funding comes available next November, I'll re-evaluate and see if I want to remain at 7% exposure or reduce that to 5% for this company. It depends on how well the company performs between now and then.

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