Tuesday, February 8, 2011

Interview With Power-One's CEO: "$9 Shares Don't Make Sense" (PWER; FSLR; SPT; TSL; LDK)

In pre-market trade the stock is up 8 cents at $8.83. On Friday we said:
The stock is down $2.46 at $9.29 slightly above the day's low of $8.97.
Look for another test of that low as the slow-to-move crowd become resigned to the decline.
Then we swoop.
The stock could trade as low as the Sept. 17 low of $8.15 but anywhere in here is a fair price.
I've included the other solar symbols because this interview by Eric Rosenbaum of TheStreet.com should be read by anyone who has money in the sector.
Shares of solar inverter company Power-One(PWER_) dropped to less than $10 on Friday, after a 21% share decline. On Monday, the post-earnings selloff in Power-One shares continued, with another 5.5% decline amid heavy trading volume.

It's been an "up and to the right" period for Power-One, moving from as low as $3 in early 2010 to as high as $13 in the past 52 weeks. 

Yet that upwards trajectory in Power-One shares has not exactly been a straight line, to say the least, and earnings day has been the trigger for Power-One to either skyrocket or sink, with nary a quarter in recent history that has seen a sideways earnings reaction.

By the end of the second-straight selloff day on Monday, Power-One shares were below the $9 mark, in a share price territory that Power-One had not seen since November.

When Power-One shares first passed the $10 mark after its second quarter earnings in July, analysts covering the solar inverter company suggested it was a good barometer for the health of the stock. Power-One shares slipped to $8.75 on Monday, after a weaker-than-anticipated 2011 outlook that included a host of "spooky" solar industry tells such as excess inventory and feed-in tariff declines. Nevertheless, Power-One CEO Richard Thompson remains confident that the bears -- some of whom make the claim that Power-One shares are going to $5 -- will be proven wrong. 

TheStreet spoke with the Power-One CEO on Friday to get his take on the earnings, the earnings reaction, and the outlook for the solar inverter market in 2011.

TheStreet: In high-growth sectors such as the solar inverter market, it often comes down to gross margins for investors. Power-One delivered on margins in the fourth quarter at 40.7% -- a decline but one that was anticipated. Yet the company wouldn't provide guidance on margins for the first quarter, sticking with the long-term 40% margin target. We hear that a range of 36% to 38% for the first quarter would be a fair assumption given the excess inventory in the market. Is that fair?

Thompson: As a rule, we don't provide margin guidance. Modestly lower margins makes sense to me, given our manufacturing ramp costs that we've disclosed previously and the short-term inventory issue. If you think about the growth rate of the inverter market and hyper demand last year, inverter companies were running factories at 110%. We had great absorption even if it was offset somewhat by higher component prices due to supply constraints. This year, it's expected to be the opposite, with the loss of overabsorption somewhat offset by component cost reduction, but saying the overabsorption by materials savings offset is 100% is not practical.

TheStreet: It's the first quarter and 2011 revenue outlook that has taken its toll on shares. One analyst I spoke with gave Power-One credit for providing a full-year revenue guidance range, even if it disappointed. Yet analysts still ask why the 'radio silence' from Power-One, in terms of margin guidance, especially now?
Thompson: We've thought through this carefully. I, for one, would rather give no guidance, but with 15 analysts covering the company now, it's important that we give demand guidance. I didn't want to be silent on the year and first quarter, yet I haven't wanted to provide profitability guidance yet, and it will likely stay that way. The analysts are capable of making their own profit calculations....MUCH MORE, including some deep insight into the industry as a whole.