Wednesday, September 3, 2008

Marcial: A New Spark in Energy Conversion Devices

Marcial: A New Spark in Energy Conversion Devices

The brightening story at Energy Conversion Devices (ENER), an alternative energy enterprise that makes solar products, rechargeable batteries, and digital storage technology, is attracting investors thanks to the restructuring efforts of CEO and President Mark Morelli, who took over a year ago when the company was in the red. Until the two recent fiscal quarters, Energy Conversion had for many years reported losses. The company's stock, which soared to 71.30 on Sept. 2 from a 52-week low of 20.47 on Jan. 22, hit a 52-week high of 83.33 on June 23.

Some pros see even more spark in Energy Conversion's shares. Brion Tanous, managing director at investment boutique Merriman Curhan Ford, rates the stock a buy and figures it's worth 110 based on projected earnings and the worth of its three major assets, which are all involved in clean energy technology. "The collective value of Energy Conversion's United Solar Ovonics, Cobasys, and Ovonyx businesses is significantly higher than the current stock price," says Tanous.

Although the alternative energy field is getting crowded, Tanous says Energy Conversion is one of the major "pure plays" in high-growth thin-film solar products. Using a film of silicon on a sheet of stainless steel, these products can be more easily installed on rooftops than conventional solar cells, which are produced on a base of polysilicon crystalline covered in glass.

Fat Margins on Solar Sales

The United Solar Ovonics unit, which contributes about 90% of revenues, uses proprietary technology to make thin-film solar photovoltaic modules that convert sunlight into energy. The modules are mainly used for rooftops. Its Cobasys unit, a joint venture with Chevron (CVX), licenses its proprietary nickel-metal hydride (NiMH) battery technology to hybrid vehicle makers and other manufacturers. Energy's third unit is 30%-owned Ovonyx, which has developed a high-speed memory technology for a variety of applications, including cell phones, digital cameras, and PCs. Several tech companies, including Intel (INTC), have entered into licensing pacts with Energy for the technology.

Tanous figures Energy Conversion's solar business alone is worth 90 a share and Ovonyx about 20. He expects the company to sell its Cobasys operations to a major automaker by yearend, primarily because the unit has been losing money and requires more funding. He values the operations at about $150 million.

For the fiscal fourth quarter ended June 30, Energy Conversion posted record revenues and higher net income driven by greater-than-expected gross margins of 33.5% on solar polyvoltaic sales, Tanous notes. Based on the company's higher guidance for 2008 and 2009, he raised his earnings-per-share forecast for fiscal 2009 ending June 30 to $1.61 on revenues of $459.7 million, and to $3.28 for fiscal 2010 on $757.3 million in sales. In fiscal 2008, the company earned a meager 9 a share on sales of $255.9 million. The analyst attributes the jump in sales and earnings to a turnaround spurred by Morelli, who cut costs, sold some assets, and focused on commercializing products.

Still a Bargain?

Deutsche Bank (DB) analyst Steve O'Rourke, who is also bullish on the company, says that with the company's continued improvement in operations and rising demand for solar photovoltaic products, he is maintaining his buy rating on the stock. "We view strong solar PV backlog growth as indicative of a substantial turnaround in Energy Conversion's sales distribution channels," and a sign of its competitiveness, says O'Rourke. (Deutsche Bank has done banking for Energy Conversion and owns shares.)

Analysts agree there is strong demand for solar products. Energy Conversion's thin-film solar technology is "superior to and differentiated from the more established and commodity-like polysilicon-based solar technology," says Angelo Zino, an analyst at Standard & Poor's Equity Research (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP). He notes the company has filled its entire fiscal 2009 available capacity and is getting significant purchase orders for its fiscal 2010 planned capacity. However, Zino has a hold opinion on the stock because of its already sharp climb. He's also cautious about the lower barriers to entry into the thin-film solar market.

Nonetheless, some investors and analysts believe Energy Conversion is well-positioned for strong growth for the long haul. That's because demand for alternatives to fossil-fuel generated power "should only increase, given environmental, cost, and geopolitical concerns," says Nils C. Van Liew of independent research firm Value Line. Energy Conversion, says Van Liew, has a good shot at grabbing a bigger share of the solar PV market because its product is lightweight, flexible, and easily integrated into building materials, making it well suited for rooftop installations.

Indeed, as it reshapes its corporate structure and sees healthy global demand for its solar products, Energy Conversion has found a profitable green niche.

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