Monday, November 17, 2008

Marcial: Energy Conversion Devices' Bright Future

Marcial: Energy Conversion Devices Bright Future

The brutal bear market has savaged almost every stock. There's been no refuge even for the once highly favored shares of alternative-energy companies. "Sunshine has fled the group," says one asset manager whose portfolio of renewable-energy stocks has skidded in value by about 70%.

One example is the beating that Energy Conversion Devices (ENER) took over just five months. The Rochester Hills (Mich.)-based company makes solar products, rechargeable batteries, and digital storage technology. Its stock was a Wall Street favorite and highflier earlier this year, zooming from 22 a share on Jan. 23 to 83.33 by June 23. But since then the stock has tumbled, to around 28.50 on Nov. 14—not far from where it was in January.

So are the sunny days entirely past for the green, environment-friendly Energy Conversion? Don't bet on it. Shares of Energy Conversion will likely be among those that will spring back quickly even before any general recovery.

Why? Current demand for solar products remains robust, and some analysts predict that future demand will continue to accelerate. What's more, Energy Conversion is expected to report vigorous sales and earnings in fiscal years 2009 and 2010, according to some analysts' forecasts.

easier solar installation

Energy Conversion is one of the "pure plays" in high-growth, thin-film solar products. One of its major units, United Solar Ovonics, which accounts for 94% of revenues, makes proprietary thin-film solar photovoltaic (PV) modules for converting sunlight into electricity. They're bought by commercial roofing material manufactuers, builders, and solar-power installers. Using thin-film 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.

EC's other division, Ovonic Materials, makes the nickel hydroxide elements that go into the company's NiMH batteries that power hybrid vehicles. Another unit, Cobasys, is a joint venture with Chevron, which licenses its proprietary NiMH battery technology to hybrid vehicle makers and other manufacturers.

"Energy Conversion is demonstrating superior fundamentals in a tough macro-environment for solar PV," says Brion Tanous, analyst at investment bank Merriman Curhan Ford, who rates the stock a buy. (Merriman hasn't done any investment banking for Energy Conversion in the past 12 months.) Tanous says the company's portfolio includes proprietary technologies and products for the next generation of clean energy.

The company has established a pipeline of business, he figures, amounting to $2 billion of revenue through fiscal year 2012. And Energy Conversion has been cutting costs, too. Tanous notes that in the fiscal year ended on June 30, the company reduced production costs from $2.57 per watt to $2.03, and targets less than $1 per watt by 2012.

"superior" technology

On Nov. 11, Tanous raised his fiscal 2009 revenue estimate to $466 million, from $459.7 million, and his earnings per share forecast to $1.66 from $1.61. He has left unchanged his revenue estimate of $774.9 million for 2010, as well as his earnings forecast of $3.58 a share. These estimates represent a big jump from what Energy Conversion generated in fiscal 2008, when it earned a mere 9 a share on revenues of $255.9 million.

Part of Energy Conversion's appeal is the fine quality of its products. "We view its thin-film solar technology as 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 McGraw-Hill Cos.). He notes that Energy Conversion has "filled its entire 2009 available capacity and is receiving significant purchase orders for its fiscal 2010 planned capacity."

Zino, however, rates the stock a hold, mainly because of his concern over the low barrier to entry to the thin-film solar market. Nonetheless, his 12-month price target for the stock is 42, based on his earnings forecast of $1.62 for fiscal 2009.

Vijay Singh, analyst at investment firm Janco Partners, who rates the stock "accumulate," has a higher price target of 45, based on his larger earnings forecast of $2.50 a share for fiscal 2009. "Energy Conversion continues to execute well in the face of a worsening economic environment," says Singh, who figures the company will boost earnings in fiscal 2010 to $3.19 a share.

Some analysts see the stock going much higher. ValuEngine, an independent research outfit, provides the highest 12-month target yet: 65.90, based on data it has gathered as of Oct. 27. "We feel that Energy Conversion has the probability to outperform the market for the next year," the company says in a report.

Several large institutional investors have been drawn to the stock at its depressed level. Fidelity Management increased its holdings by 2.74 million shares as of Oct. 31, boosting its total stake to 5.2 million shares, or 11.54% of the stock. (Fidelity does not comment on its stock holdings.)

Fidelity's move provides ample evidence that Energy Conversion, as an evergreen mainstay, remains an attractive investment for the long haul.

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