Traders/Investors/Shorts: The technicals are getting very close to the oversold levels. First the stock is trading well below the lower bollinger band at $9.48. Second, the rsi is now down to 35 and starting to curve back, and maybe a bounce off 30 which would be normal. Third, stochastics at 29, and should bounce off 20. Fourth, the volume on the selloff today is not very high. Last, the 200 ema still will remain as a support level around $9.09, and the price should could recover to rest on or near there. If today ends up a push/pull day between the shorts and longs, the chart will form a doji candle. The doji candle will be a clear sign for a turnaround signal, which would normally shoot the price back up on a rally. Shorts will cover, and possibly cause a shortsqueeze. New buyers will run the stock back up towards the next resistance of the 50 ema, around 10.45. One more point to make is the Money flow is now up to .163 positive! There is buying at these levels, and in bulk.
>>The power SBU did $331 million in revenue in 2010 and management is projecting $300 million in 2011.<<
I thought this was wrong, but just to double-check, I just replayed the call. At around 20 minutes into it, the CFO says he expects 2011 power SBU revenue to be "roughly in-line with 2010, with a 5% delta either way." This would imply (according to their historically conservative guidance) $314 million to $347 million. However, I do acknowledge that for 2011, at least, this is not the "exciting growth story" for the company.
Another way to look at the power SBU, though, is as its value as a sale to a larger entity. I'm sure-- due to SG&A savings-- it could be sold for at least 1x revenue, which would make it worth $331 million which is around $2.25/share. So if you net out that value plus an anticipated $3/share in 2011 year-end cash, at an $8.75 stock price you're essentially getting the renewables business for around $3.50/share, which is only around 3x my baseline EPS figure of $1.16.
So, at a "core" forward PE of 3x, I think there's more than enough "margin of error" here to make anyone happy.
<<Do you know what power SBU sales were for Q1 of 2010?...around $70 million. Do you know what the year-over-year difference is between $70 million and your $88 million estimate for the current quarter? A tad over 25%. Where I come from, that's called "growth.">>
logical it is not the kind of growth people pay up for. Its fake growth. In early 2010 the supply channel was all screwed up and power solutions customers could not get what they wanted which was probably about $85 million worth of product in Q1 2010. So there has been no meaningful demand growth in the past year.
The power SBU did $331 million in revenue in 2010 and management is projecting $300 million in 2011. What do they call that where you come from? Its not growth.
Lets get down to the real question:
Are you saying you believe the power SBU to be a significant part of the PWER growth story? because if you are then I disagree.
At this point its a nice side business that has decent revenue but no meaningful earnings. If you value PWER on a P/E ratio basis, and I presume you do because that is what you post, then what is the power SBU if its earnings are zero? Its not much, which is why I say you should back it out of your model and focus almost entirely on the RE SBU.
(By the way my source for the $300 million 2011 number is a direct quote from management during the cc last Thurs.)
>>power SBU revenue will be down about $15 million which puts it at about $88 million in Q1, the same as 2 quarters ago...<<
Do you know what power SBU sales were for Q1 of 2010? 46% of total sales, which means they were around $70 million. Do you know what the year-over-year difference is between $70 million and your $88 million estimate for the current quarter? A tad over 25%. Where I come from, that's called "growth."
>>I am surprised you do not know this logical. More than surprised, shocked really, given how you represent yourself as deeply knowledgeable about PWER and its growth drivers.<<
I represent myself as someone who is quite certain about the long-term growth of solar, and then in that context takes the company's numbers and puts a big haircut on them, and DESPITE that haircut still sees the stock as being extremely cheap. Feel free to agree or disagree.
<<Why do you say this? In Q4 it was +39% year-over-year, and +21% sequentially from Q3.>>
I say this because management essentially says this. Q4 was up because they were clearing their "past-due" orders. They expect to revert back down 15% or so in Q1, which means essentially no growth and no net income from power in Q1. Going forward it will not grow at anything like the RE revenues and earnings.
Here is what the ceo said in his interview last Friday: "Yet also keep in mind that our numbers from the fourth quarter include a bubble of demand in the power solutions business. We shipped $15 million of past-due demand in the power business, and that's not repeatable, so we are losing 5% off the revenue number there."
Translation: power SBU revenue will be down about $15 million which puts it at about $88 million in Q1, the same as 2 quarters ago ($86 million in Q3 which generated essentially ZERO earnings)
The quote is at the bottom of page 2 at the following: http://www.thestreet.com/story/10997490/2/power-one-ceo-9-share-doesnt-make-sense-to-me.html
I am surprised you do not know this logical. More than surprised, shocked really, given how you represent yourself as deeply knowledgeable about PWER and its growth drivers.
>>In my opinion the power SBU should be backed out of any sound analysis of the company because it does not earn any meaningful income and it is not growing.<<
Why do you say this? In Q4 it was +39% year-over-year, and +21% sequentially from Q3.
<<This is why I'm saying that the inverter oversupply is in the channel and not stuck at the company>>
I certainly agree with that. My main point is that the Q1 inventory/revenue issue is only for the RE SBU and that you did not isolate this very clearly in your analyis.
The reason this is important is because RE is the growth driver for PWER. In my opinion the power SBU should be backed out of any sound analysis of the company because it does not earn any meaningful income and it is not growing. When you do this for Q1 you end up with RE revenue of $170-200 million. This is a nice 107%-143% gain from the prior year, but sequentially it is a DROP from the $263 million in Q4 of 35%-24% (and even a significant drop from Q3's $228M). This is not what you want to see in your growth engine. A year ago Q1 RE revenue was $82M UP 20% sequentially from $68M in Q4 '09.
In my estimation your analysis does not adequately show the significance of the hit in Q1 to the PWER growth engine because you did not back out the power SBU revenues. No wonder the stock crashed. Growth companies get punished severely when the engine even so much as appears to putter.
Having said all this, I believe we are in the midst of a MAJOR buying opportunity in PWER stock. The selloff has been overdone.
Management has executed well and I still believe them when they say they will work through these Q1 issues in the first 4-6 months of the year and do $630M to $830M of RE sales in the final three quarters, with sales accelerating sequentially in that period. This would translate into eps of over $1.10 a share for the year which should command a 15-25x P/E ratio as markets get more comfortable with a company that is still in its infancy as far as growth is concerned (only 5 quarters of profitability under its belt).
>>I just re-listened to the cc:... sounds like they have the opposite of an inventory issue in the power SBU.<<
Well, look at it this way. At the end of Q3 (i.e., going into Q4), they were probably where they want to be on total inventory (for the combined businesses) at $125.7 million. (And some of that inventory HAD to be for the non-renewable power business, as there are inevitably some slower-selling items, even if there were shortages on faster-selling items.) Q3 sales were $314 million = $3.45 million per day. So at the end of Q3 (a time when we could fairly assume that inventory was properly in sync with demand), they were carrying $125.7mm/$3.45mm = 36.4 days of inventory.
At the beginning of Q1 2011 (i.e., the last day of Q4 2010) they were carrying $152.3 million in inventory. If we take the midpoint of Q1 2011 guidance and use $275 million for a revenue figure, we get sales per day of 275/90 = $3.05 million. $152.3mm/$3.05mm = 49.9 days of projected Q1 sales in inventory.
So, they've really only got 13 days of total excess inventory (assuming that 36 days is the optimal figure). Even if most of the inventory is inverters (clearly a chunk of it HAS to be from the power business, as I'm sure they have slower-selling items there for which there aren't shortages) it's still probably three weeks worth of surplus inverters.
This is why I'm saying that the inverter oversupply is in the channel and not stuck at the company, and that's why the reduced revenue figure for Q1 already accounts for this and also why PWER won't need to conduct any price-slashing inventory clearance sales.
The only "technicals" that matter is the oversupply of inverters and how low PWER will need to price the stuff in order to balance supply/demand... this thing is certainly not going anywhere until the market gets a sense of what's happening with the oversupply... you can have all the rsi, bollinger bands and doji candles you want but it won't mean a hoot until the excess is absorbed... plus, there is nothing to say that mgmt won't have to write down the value of inventory to deal with the problem much the same as the chip companies did when they were fighting their situation... pay attention to the real world... the market is... brutally...
>>The only "technicals" that matter is the oversupply of inverters and how low PWER will need to price the stuff in order to balance supply/demand...<<
I think that in this case, the inventory build is in the (non-returnable) channel, rather than at the company. If you look at the earnings release, inventories were at $152 million, which was only up $27 million or so from the $125 million of the last quarterly number. If Q1 sales are $275 million (the midpoint of guidance), that's only around seven weeks worth, and means that Power-One won't have to grossly slash its margins to get rid of it. Please note that the company is projecting Q1 sales of $260-$290 million. If you assume a 37% gross margin (i.e., $152 million of inventory generates around $240 million in sales), they'll still need to produce plenty of additional product this quarter in order to maintain a traditional level of DSI (days sales of inventory) of around four to six weeks, and that would imply that they're not going to have to take much (if any) of a write-down on what they currently hold.
I may be naive, but I operated my own small businesses for over 25 years, two different businesses, and had/have a different perspective of an oversupply of inventory.
What I first decided was if the excess inventory was dead stock that was out of favor, outdated, or unwanted, or if the excess inventory was still wanted and in demand but simply was over produced. If dead inventory, then most certainly it had to be dumped, even at a loss. Free the dead money and put it to good use elsewhere. If still salable and wanted, just too much inventory, just halt or reduce production until supply drops to current demand levels. This would maintain margins while working off excess inventory to improve cash flow.
My point is that unlike your suggestion to "price the stuff in order to balance supply/demand" or "write down the value of the inventory", both that would reduce margins and profits, perhaps the company needs to do neither. If good inventory that is just over stocked, is it necessary to dump it in a fire sale, or is it more prudent to simply work it down at regular prices/margins? Bottom line is that an excess inventory problem has to be evaluated on the merits of the market, then taking the path that is best for the company.
What makes business interesting and challenging is that unlike math or engineering, there are no textbook pre-determined correct results or answers, all decisions must be evaluated rationally rather than with an automatic knee-jerk reaction. The same is true of investing in stocks.
Just my take based on my own business experiences, which were successful, including bad economic times.