Reviewing Power-One

Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I find researching new investment ideas to be way more exciting than thinking about the companies I already own.  I am guilty of treating my portfolio like a Ronco Rotisserie: “set it and forget it.”  I’ve been fooling myself into thinking this is OK because I am a buy and hold investor with a very long time horizon, therefore since I have no immediate plans to sell any of my stocks I should have no reason to keep tabs on them.  In an effort to improve on my personal investing discipline I am reviewing each of my holdings, starting with Power-One (NASDAQ: PWER.DL).

The Business

Not surprisingly, Power-One makes power supply products.  Specifically its products are divided between two business units: Renewable Energy, which makes inverters for solar and wind power utilities; and Power Solutions, which makes power converters and software solutions for data storage and industrial applications.  The Renewable Energy unit accounts for roughly 70% of sales and is the side of the company most closely watched by the market. 

Renewable Energy Market

The Euro crisis has hit the solar and wind energy markets hard. On top of that, feed-in-tariffs in Italy (where solar production has increased twelve-fold since 2009) are set to expire by the end of 2012.  Global demand is forecasted to remain flat through 2014 due to Asia and the Americas picking up the slack for Europe.  Increased competition is driving down prices for inverters, knocking down Power One’s gross margin from 38.5% in 2010 to 30.8% in 2011.  Over the first three quarters of 2012, gross margin has dropped to 28.2%.  The shift in demand from Europe to Asia, where price points are lower, will likely lead to further drops in margins. 

Financial Picture   

The short term market condition looks pretty bleak, but Power One stands apart from many of its peers with a solid balance sheet.  With $287 million in cash and no debt, the company can easily weather a weakened market.  Since 2009 the company has posted positive free cash flow, save for one quarter in 2011 due to a hefty income tax payment. 

Management

The CEO has been in the seat since 2008 and owns 938,000 shares with another million shares in exercisable options.  While he was not groomed for the position from within the company, he has served in various management positions at power conversion and technology firms since 1974.

Competition

Competition is increasing from private companies in the U.S. and abroad.  Major conglomerates, such as General Electric (NYSE: GE) and Siemens (NYSE: SI) are also moving into the renewable energy space.  Both are focusing on utility-scale solar inverters, which leaves the residential and commercial space to Power One for the time being.  However, Power One must be able to compete in the utility space in order to experience the kind of growth investors are hoping for.  The company will face an uphill battle against the likes of General Electric and Siemens that offer complete solar or wind farm building capabilities.  GE recently announced it is building the largest solar farm in Australia, and I'm guessing they are not using Power One inverters for the project.  I wouldn't mind either company eyeing Power One as an acquisition opportunity, for a premium of course. 

Value Metrics

Power One is a victim of its industry.  Investors had a lot of hope for the solar market only to have it dashed by lackluster results.  First Solar (NASDAQ: FSLR), a trendy stock pick a few years ago, has plummeted from over $160 in mid-2011 to $25 today.  Over the course of several years this high-flying company saw profit margins shrink, sales flatten, and a $400 million impairment of goodwill from previous acquisitions.  That's not to say that Power One has been killing it over the last year and is unfairly being punished by proxy alone.  2011 sales were down 3% from 2010 and the high end of management guidance for 2012 is only a 4% increase from 2011.  Finished goods now accounts for roughly 37% of inventory, compared to 28% last year.  As mentioned earlier, price competition in emerging markets will likely keep sales flat despite an overall increase in global demand.  For all these reasons and more, the stock is trading at just over 6 times earnings, less than ½ times sales, and 4 times free cash flow.  At the time of this writing, the share price is around $4.  Meanwhile, the company has over $2 per share in cash.  Clearly the market isn’t expecting big things from Power One anytime soon.

Conclusion

I seem to have written a bear case for Power One, yet I have no desire to sell my shares.  If the company didn’t have such a great balance sheet it would be a different story, but for the time being I believe they can make it through the short term struggle and come out the other side a strong company ready to ride the boom of global renewable energy demand (see chart below).

<img src="/media/images/user_13027/untitled_3_large.png" />

Interested in Additional Analysis?

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drfrank1 has positions in Power-One and General Electric. The Motley Fool owns shares of General Electric Company and Power-One. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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