Saturday, February 26, 2011

Testing The Water With Power-One, Inc

Power-One goy killed about two weks ago and dropped over 20 percent. It has flat lined at about $9 since the big downdraft. The cause, like so many other slaughters, wasn't a poor earnings report, they beat street earnings and revenues handily, but provided lowered guidance and mentioned the word "glut". That's how 205 can fly out the window.

PWER has two businesses: power solutions for data centers and inverters for alternative energy. They've been in the solutions business for a long time and it keeps chugging along. The sexiness is in the inverter business where they convert the energy from solar and wind generation into power that can be sold to, and used by, power companies. The reduced sales are in the latter, as is the glut. The company expects it will take a quarter or two to work excess inventory, at the distributor level, through the system. PWER doesn't sell their inverters in the US or China, Europe is their main market, but they entered those two markets at the tail end of Q4. They are the second largest inverter company so they have a reasonable shot at gaining some traction in the US and China. The more successful they are the faster the excess inventory goes away and revenues resume their trajectory. Even with the glut, the reduced guidance calls for revenues of $1.1B-1.3B, exceeding 2010 revenue of $1B. PWER made $.96 eps, including a $.14 charge, in 2010. Analysts have been taking dow estimates, but concensus is still $1.16 eps. At $9, PWER is selling very inexpensively. Its cashflow multiple is also a gift. They have several hundred million dollars of cash and almost no debt.

I've started a position and hope that I continue to gain confidence so I can build a larger holding, but what do I know about solar and wind? Believers have all sorts of sum-of-the-parts valuations that get to $20+ and a commanding market share in a growing industry. But, a glut is a glut, and why did the glut develop? I'm comfortable enough to tip my toes in, but not ready to wade out deeper. Hopefully I will be a quasi solar/wind power inverter expert within a short while and be able to know whether I should dive in or rush back to the shore.

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