Is This Solar Equipment Provider Undervalued?
Shobha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
GT Advanced Technologies (NASDAQ: GTAT) is one of the largest equipment providers for the solar and LED industry. In the last year its stock price has declined more than 60%, and now is in range of its 52 week low. A 52 week low is never a buy signal for any company--it just means investors are pessimistic about the company’s future. Let us take a look at what is happening with this company.
What does it do?
GT Advanced Technologies provides equipments for the upstream solar and LED market. It operates in 3 segments – Polysilicon, PV, and Sapphire. Its Polysilicon segment makes CVD reactors, which are used to produce pure polysilicon. In the PV segment, it sells DSS furnaces that are used to melt polysilicon and cast multicrystalline ingots from which solar wafers are made. Its Sapphire segment manufactures ASF reactors, which are used to produce Sapphire, a material that is used to produce LED.
In 2007, the company generated 100% revenue from its PV segment. It has been diversifying its product portfolio through acquisitions and organic growth. In the last twelve month, it generated only 10% revenue by selling DSS furnaces. However in the same period its Sapphire segment accounted for 32% of its total revenue, while the Polysilicon segment contributed for 58%.
Its customers are struggling
Even though it is a global company, the majority of its revenue comes from China. It also has some serious customer concentration, and since 2007 at least one customer accounted for more than 20% of its revenue. LDK Solar (NYSE: LDK) was one of its largest customers--in 2007 LDK Solar accounted for 62% of total revenue, and in 2009 the same solar player contributed 34% of the company's revenue. As the solar industry struggles with reduced government subsidies, demand/supply imbalance, and declining prices, many of the company’s Chinese customers are struggling to be profitable. As its customers are financially struggling, Chinese banks want to reduce their exposure to the solar sector. So the company’s customers are struggling to raise capital when they need it the most. Currently LDK Solar is struggling financially, and since 2011 its gross profit has been in the red.
GT Advance Technologies’ LED customers’ story is not that different either. They are also struggling to be profitable, are facing financial difficulties, and are unable to raise capital.
When the company’s customers are struggling to raise capital, they will not be spending on GT's products, which is why in December the company provided a very dire outlook for 2013. It is planning to write down inventory, so its profit margin will fall further. It has idled its manufacturing, stopped investment in DSS, and cut 25% of its work force.
At times when a company is struggling it can be due to competitors stealing market share. However, GT Advance Technologies’ competitor Veeco Instruments (NASDAQ: VECO) has also mentioned overcapacity, weakened market demand, and continued competitive pricing pressure. Veeco Instruments has also stated that the tightened credit market has limited some of its Asian customers’ ability to raise capital and buy more equipment. Veeco Instruments is reviewing its revenue recognition accounting and hasn’t filled its last two quarterly reports. Its first half revenue has declined 47%, while operating margin has fallen from last year’s 22% to 9% this year.
In additions to the solar industry’s struggle, Chinese players are facing extra challenges from trade barrier and their unsustainable cost structure, and so GT Advance Technologies is trying to diversify geographically. It is going after Korea and other South East Asian solar and LED players. In 2012 its revenue from Korea doubled compared to 2011.
GT's strength has always been its superior technology. It is investing in next generation technology which will help its customers to reduce the cost of manufacturing. The solar industry is here to stay, but it will be slow going as it learns to survive without subsidies. There might be more bankruptcies, but at the end there will be survivors. Those panel makers will need equipment to reduce their manufacturing costs, and GT Advance Technologies will provide that. In September, the company raised $202 million in convertible debt, and it still it has a strong balance sheet. By cutting work force, and idling its manufacturing but still investing in next generation technology, it is preparing itself to weather the downturn. That's why this company is worth considering for the long term.
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