by Debra Fiakas CFA

Solar power producers have many challenges.  One is the direct current to alternating current dilemma.  Solar panels create power that flows one way in a direct current (DC).  We use electricity in our homes and businesses in alternating current (AC) that flows both directions, forward and backward.  So solar cell producers must use solar inverters that convert the electricity from the direct current in the solar panel into alternating current.

This is where Advanced Energy Industries, Inc. (AEIS:  Nasdaq) comes in. AEIS makes power inverters for the solar power industry.  The inverters transform the power in the solar arrays into a reliable electrical power.  Sales to solar distributors and engineering firms involved in building solar power plants represented 43.5% of total revenue in the first half of 2012, a significant increase from a 36.4% share in 2011 and 23% in 2010.

The rest of Advanced Energy’s sales are to the semiconductor industry.  The AEIC power conversion products can be used in a thin-film deposition fabricator to control the raw electrical power that comes in from a utility. Put simply, the power flow can be customized and made more predictable for the highly sensitive deposition process.

Sales to the chip makers slipped in 2011 and again in the first half of 2012.  Fortunately, there appears to be momentum in the solar power industry that has power producers knocking on Advanced Energy’s door.  Analysts following Advanced Energy have projected 15% annual growth in sales and earnings over the next five years.

If those analysts are right in their collective wisdom, investors could be justified in paying as much as 15 times earnings for AEIS  -  Price Earnings to Growth Rate is 1.00.  Giving the professionals a full vote of confidence, we can use their average projected earnings estimate for fiscal year 2013  -  $1.12 per share.  That yields a target price of $16.80 per share and implies a current value of $14.60.  That is not much higher than the current share price of $13.78 (9-18-12).    Surprisingly, the mean target price among that group of analysts is a bit lower at $13.70.

After all this math, it is hard to get enthusiastic about Advanced Energy from a valuation standpoint.  The stock chart is even more dissuasive.  AEIS is trading very near its 52-week high.  The 50-day average price is dropping day by day and appears poised to fall below the average price over 200 days.  It seems prudent to wait for better days to take a long position in AEIS.  

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.