When Contrary Pays

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Debra Fiakas

Power One (PWER) looks like a promising contrarian play.

It is a scenario that has plays out quarter after quarter.  A leading company in popular sector reports decent results, but surprises investors with guidance below the prevailing consensus.  Then the stock price crashes as sell-side analysts cut estimates, price targets and ratings.  It is a situation that many investors fear as they see once profitable stock positions lose value.

Not the contrarian investor!  There are potential profits to be made for the obstinate, but fearless investors willing to do their homework.   

This very situation is playing out in shares of Power One, Inc.  (PWER:  Nasdaq), a leading supplier of power conversion and management solutions for renewable energy systems, particularly the solar industry.  The company posted revenue and earnings results for the fiscal fourth quarter ending January 2, 2011, above the prevailing consensus estimate of $352.5 million in sales but a nickel below the EPS estimate.  Power One had consistently beat the consensus EPS estimate in each of the last four quarters.

If those mixed results were not disquieting enough, investors appeared unnerved by management’s guidance for the March 2011 quarter.  Unfortunately, Power One management guided for sales in a range of $260 million to $290 million, well below the prevailing view on Power One’s prospects.  According to Thomson-Reuters analysts had published estimates for sales in a range of $281.6 million to $360.4 million in sales and earnings per shares in a range of $0.28 to $35 for the March 2011 quarter.  This produces a consensus estimate of $0.31 EPS on $313 million in sales.  

Shares of Power One sold off 21.2% in the first day of trading following management’s bombshell.  This may be a bit of an overreaction given that guidance for the March 2011 quarter was in part based on poor weather conditions impacting near-term customer order patterns.  Management did cite a reduction in feed-in-tariffs in European markets and excess inventory in its distribution channels as factors impacting demand in the long-term.  Nonetheless, guidance for sales in 2011 appears to support the prevailing consensus estimate of $1.3 million in total sales for 2011.

Clearly things are not as rosy as analysts had projected.  However, that is not to suggest Power One is going out of business.  The company still appears to have a strong competitive position in both its renewable energy solutions and power solutions segments.  Recent results are not yet available for most of its competitors such as Lineage Power, Delta Electronics, or SMA Solar TechnologyEmerson Electric Co. (EMR:  NYSE) reported sales and earnings in-line with expectations for the December 2010 quarter.  Emerson experienced growth and margin compression in its power segment similar to Power One’s report.

The stock price pullback provides a compelling entry point for investors with the patience to wait out the time it take for the dust to settle on this single quarter report.  The stock is now trading at 9.6 times trailing earnings.  Assuming analysts trim estimates for 2011 by the same margin as they missed in the fourth quarter, we expect the consensus estimate for 2011 to drop to $1.10 (from $1.26).  The implied forward price earnings multiple would then be 8.4 times  –  a compelling deal for the contrary investor.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. PWER is included in Crystal Equity Research’s The Mother’s of Invention Index in the Efficiency Group.


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