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August 31, 2013

Maxwell's 54% Q2 Growth: An Outlier, Not A Trend

Tom Konrad CFA

Maxwell Logo

When I wrote about Maxwell Technologies’(NASD:MXWL) earnings restatement earlier this month, I predicted that third quarter (Q3) earnings would be much worse than recent trends were leading investors to believe.  I expected the stock would decline as analysts revised their expectations to reflect Maxwell’s weak short term prospects, allowing me to exit my short position, which I still hold.

Sure enough, analysts have reduced their earnings expectations.  Analyst consensus earnings expectations for Q3 have reversed from 13 cents to a 10 cent loss, while expectations for 2013 have plunged from 46 cents to 6 cents.  Consensus estimates for next year have dropped from 59 cents to 31 cents.

What has not happened is the stock decline I expected; the stock first drifted as high as $9.70, before falling over the last couple weeks.  Since my first bearish article, the stock is only down 3%, in line with the decline of the S&P 500 over the same period, and a smaller decline than we would expect from a volatile stock such as Maxwell.

Valuation


Maxwel Technologies' Product Portfolio

At the current price of $8.84, Maxwell is trading at a trailing price earnings ratio (P/E) of 35, a P/E of 147 against current year expected earnings, and a P/E of 28 against 2014 earnings, a very rich valuation for a company that’s expected to grow revenues at a 13.5% annual pace from 2012 to 2014.  For Maxwell to be fairly valued, investors would have to expect the 33% to 54% year over year growth in the first two quarters to continue for several years.

Such growth looks impossible to achieve even on an annual basis in 2013.  The main recent source of growth, ultracapacitors for Chinese hybrid buses, has almost completely dried up.  These customers are waiting on new subsidies from the Chinese central government.  The Chinese press currently has been predicting these subsidies will be released in late August or early September.  August is now over, and the continued delay of their release is eroding Maxwell’s earnings potential for 2013.  Without the hybrid bus subsidy, Chinese bus operators  will currently be buying more buses with conventional drive-trains rather than hybrids, so many of these sales will be lost forever, not merely delayed.

Insider Trading

I first started buying Maxwell over a year ago in part based on significant purchases by company insiders including the CEO, David Schramm, and what appeared to be an attractive valuation in the $6 to $8 range.  The valuation at the time turned out to be less attractive than it seemed, because, apparently unknown to those insiders, the company’s revenue and profits had been inflated by too-early revenue recognition.  Those insider purchases have turned out to be good ones anyway.

One insider with good timing was the CFO, Kevin Royal, who sold shares in February at $10.77, shortly before the stock declined and eventually fell to $5.  Royal does not seem to be unloading his holdings, just selling part of his stock awards for cash, but he seems to have an knack to timing those sales for when the stock is near a peak.

Royal and Schramm both sold shares on the open market In August at $9.27.  Like Royal, Schramm is not liquidating his holdings, but rather only selling enough to pay the taxes on a share grant in February, which is what he told me he usually does when he receives a share grant.  Nevertheless, this sale is a far cry from his purchases in 2012.

Conclusion

Although Maxwell stock has been advancing, my thesis that the rest of the year will be disappointing to investors is now backed by additional evidence:

  • Analysts have been cutting earnings expectations for this year and next.
  • Chinese hybrid bus subsidies have yet to be announced, eroding near term revenue and earnings potential.
  • Knowledgeable company insiders have stopped buying, and resumed selling when they need the cash.

Although I like Maxwell’s business and long term prospects, those prospects are currently very overpriced.  Much better buying opportunities are likely to arise later this year and early next.

Disclosure: Short MXWL

An earlier version of this article was first published on the author's Forbes.com blog, Green Stocks on August 21st.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

August 26, 2013

Tesla Hits Chinese Speed Bump; BYD Rounds A Corner

Doug Young

A couple of interesting news bits are coming from the new energy vehicle sector, including a potential roadblock into the China market for up-and-coming US player Tesla (Nasdaq: TSLA) and new results from struggling domestic electric car maker BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF) that look encouraging but not too exciting. The main common theme in this latest news is that new energy vehicle makers continue to hold out hopes for the China market, banking on strong government policies to boost the market, even though progress has been slow so far.

byd logoLet’s start with a look at BYD, which started its life as a cellphone battery maker, then expanded into cars and most recently has placed big bets on the new energy vehicle sector. That big bet helped to attract billionaire investor Warren Buffett, who purchased 10 percent of BYD in 2009. His investment sparked a massive rally in BYD shares, though they later gave back most of the gains as the company’s traditional car business sputtered.

BYD shares have more than doubled from their lows last year, largely on hopes for a turnaround at its traditional gas-powered car business that accounts for half of its revenue. In that regard, investors should be relieved to see that BYD’s revenue grew 13 percent in the first half of 2013 to 24.2 billion yuan ($3.9 billion), reversing 2 years of declines. (results announcement) Car sales grew a healthy 25 percent, or about twice the rate of the broader Chinese car sector. Those solid gains helped to fuel a 26-fold rise in its profit to 427 million yuan.

But despite those upbeat figures, it’s interesting to note that BYD didn’t include any individual mention of its electric vehicle (EV) business in the highlights section of its report, which reflects the tough road that business has faced. Despite earlier strong hopes for the business, BYD has yet to make much major inroads with consumer buyers. Instead, it has had to rely on fleet buyers of taxis and electric buses for most of its sales.

The number of those fleet buyers has been growing steadily, though most programs are currently in the trial phase and it’s unclear if any will ultimately result in the bigger orders the company needs to make some profits from its big EV investment. It’s probably still a bit too early to call the BYD’s current line of EVs a failure. But time will start to become a major enemy soon as BYD’s current technology starts to become obsolete. Accordingly, I suspect that the company will have to make some major write-downs on its EV campaign in the next 2 years.

tesla logo From BYD, let’s look quickly at Tesla, which began taking orders in China last week for its high-end car, the Model S, costing about $70,000. The company had made most of the necessary preparations to start delivering its first vehicles this year, including preparation of a showroom in Beijing. But now media are reporting Tesla has hit an unexpected setback due to the registration of its name by a Chinese trademark squatter. (English article)

This case looks reminiscent of a much higher profile one last year between Apple (Nasdaq: AAPL) and a bankrupt technology company that owned the rights to the iPad name. Apple went to court to get back rights to the iPad name, and reportedly ended up settling the case for $60 million. (previous post)

I suspect the government got involved in that case due to its high profile and helped to broker the settlement. This Tesla case is far lower profile, meaning it will probably have to go through the usual legal channels if Tesla wants to resolve the matter in courts. Rather than face such delays to its China plans, I expect the company will probably negotiate with the squatter to get back the rights to its name, though it will probably pay far less than the $60 million Apple paid for the iPad trademark.

Bottom line: BYD’s latest results show it is running out of time for its EV push, while Tesla is likely to negotiate a deal to regain the rights to its trademark in China.

This article was first published in the online edition of the South China Morning Post.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

August 25, 2013

First Solar Won the Race; The Environment Lost

Joseph McCabe, PE

First solar logoIn 2011, I wrote about the CdTe Horse Race in which the three US companies making cadmium telluride (CdTe) photovoltaic (PV) modules, First Solar (FSLR), Abound Solar and General Electric (GE Solar, stock ticker GE) jostled for position.  Abound and GE were challenging the reigning champion First Solar to build the largest PV manufacturing facility in the world.

The official results of that race are in, and First Solar has beaten the competition by many lengths. Within about a year of each other both Abound and GE Solar announced they had stopped any hopes of solar panel manufacturing. On July 2 2012 Abound Solar announced they were closing (See The End of Abound Solar, What Have We Learned?).  On the August 6th, 2013 First Solar earnings call they announced the purchase of all the GE Solar intellectual property, along with a relationship to purchase GE inverters thus ending the Primestar/GE Solar story in manufacturing their own product. Our trifecta ticket wasn’t in the money because we had the win right with First Solar, but reversed the second place and third show order. GE Solar came in second place because they obtained 1.75 million shares of First Solar stock. On the day of the announcement FSLR was trading around $47 or $82.25 million for GE to exit (today’s FSLR stock quote, you do the math on what it means to GE).

Those who invested in Abound ended up with nothing, in fact the Department of Energy (DOE) is financially liable for Abound PV modules that are not fit for sale and reportably have poured concrete onto them at a cost of $2.2 M http://www.denverpost.com/business/ci_22666212 and http://tinyurl.com/mleh3z9. The story will not end there, concrete encapsulated cadmium isn’t environmental stewardship. Anyone owning Abound Solar modules is now responsible for both warranty and end-of-life disposal/recycling costs.

First Solar’s February 2013 earnings call described their $1.39/watt system installed costs, which is a low cost milestone for the PV industry. GE Solar must have realized they cannot compete with this experience and pricing; in a way GE got off their own horse and got on First Solar’s during the race for dominance. GE is now one of the top ten shareholders of First Solar.

April Analyst Day

At the time of that February earnings call, First Solar wasn’t answering analysts’ questions, deferring to a April analyst day for answers. My perspective at that time was negative, having seen delay tactics resulting in bankruptcy, but my concerns were wrong. The analyst day was well received and the stock shot up from where it was around $26 at the end of February to over $39 after the analyst meeting.  First Solar announced the purchase of high efficiency crystalline silicon PV company Tetrasun at that analyst meeting, now blurring the lines between it and the other high efficiency crystalline silicon module manufacturer SunPower (SPWR).   First Solar also predicted its module cost would fall to $0.40/watt by 2017. Cost of production would be between $0.34/watt and $0.37/watt , plus $0.04/watt cost of sales. $0.04/watt is also what they eliminated with their end-of-life recycling program, now that responsibility is on the system owner.

No Environmental Stewardship

First Solar’s eliminating the prefunding for end-of-life recycling did not get much attention after the February earnings call, but it should have.  Recycling and environmental stewardship was once a cultural touchstone for First Solar during Bruce Sohn’s tenure as President, from 2007 to 2011. Asbestos manufacturing can be used as a guidepost for First Solar in that owning the recycling might be the best long term approach to reduced liability from manufacturing.

From the transcript of the February 2013 earnings call:

Note, regarding our module end-of-life program, beginning in the fourth quarter of 2012, we made prospective changes to our solar module collection and recycling program outside of the EU. For new contracted sales, customers as part of their overall power plant decommissioning obligation will now be responsible for ensuring modules that are either recycled or responsibly disposed at the end of their life.

As noted with the Abound experience,  the decommissioning and recycling costs will likely far exceed what First Solar was previously prefunding.  CdTe can be an expensive material to throw away.  It cost the DOE at the very least $0.20/watt to encapsulate the modules in concrete (as many as 140,000 modules and $2.2M cost). The right and not very difficult approach is for these thin film PV materials to be recycled and reused to produce new higher efficiency modules; a cradle to cradle philosophy (See Clean & Green). Maybe General Electric can do the right thing with their unused modules now that GE Solar is finished.

image00.jpg

Photo 1: Crates full of broken unusable Abound Solar modules during their October 2012 auction. Photo by author.

End-of-Life Costs for PV

An example of the cost for decommissioning PV systems was recently revealed by a public bid at the Sacramento Municipal Utility District in Sacramento California (SMUD). Financial experts should take note that the 1.6 MW of retiring PV systems cost $1M to decommission or $0.61/watt. Albeit this included all ground work and removal of materials to make the land like nature intended. This kind of activity and bid is something that hasn’t been seen previously for the PV industry because systems are just now coming into retirement. PV is much less expensive than a nuclear power plant to decommission which SMUD also has experience in decommissioning. Interestingly the decommissioned Rancho Seco nuclear power plant is the exact same place the decommissioned PV systems were located.

There is currently very little knowledge base or experience in the salvage, decommissioning and recycling of PV systems. The SMUD cost experience can become less expensive if the industry can develop mechanism for decommissioning and recycling for both crystalline silicon and thin film PV technologies. We have several data points: First Solar will no longer prefund $0.04/watt; SMUD spent $0.61/watt for full site rehabilitation including recycling, and DOE’s reported disposal of Abound Solar modules with concrete cost at least $0.20/watt.

The lesson from these experiences is to be conscious of cost reductions from module and system installers that have now become the responsibility of governments and the system/landowners.

Conclusion

First Solar continues to be a dominant player in the PV industry, winning the thin film solar factory race against Abound Solar and GE Solar, and it has now teamed with the latter on intellectual property and inverter sales. First Solar dominates the industry with low costs for installed systems, and now joins the race for dominance in the crystalline silicon space with the purchase of Tetrasun.

Environmental stewardship will need to be addressed, if not by the manufacturer then by the communities installing these systems. There is a new race, the race to avoid paying for end-of-life costs. The loser of that race is becoming clear: the public, because we don't even know we're in the race. If only the race were for dominance in environmental responsibility.

Disclosure: No positions.

Joseph McCabe is a solar industry expert with over 20 years in the business. He is an American Solar Energy Society Fellow, a Professional Engineer, and is internationally recognized as an expert in thin film PV, smart grid and new business models for the solar industry. McCabe has a Masters Degree in Nuclear and Energy Engineering and a Masters Degree of Business Administration.

Joe is a Contributing Editor to Alt Energy Stocks and can be reached at energy [no space] ideas at gmail dotcom.

August 23, 2013

Microinverters Make a Move on Multi-MW Solar Power Installations

Tildy Bayar

EnPhase Microinverter
A microinverter from iEnergy
Photovoltaic (PV) microinverters, traditionally used in smaller rooftop solar installations, are being used in a 2.3-MW commercial rooftop installation in Ontario, Canada, supplier Enphase Energy (ENPH) has announced. The installation is the largest commercial rooftop project under the province’s feed-in tariff (FiT).

Analysis firm IHS Research has called the announcement a milestone in the microinverter segment’s progress towards establishing itself outside its biggest market, the U.S., and outside the residential solar segment. 

According to IHS’s analysis, PV microinverter shipments are forecast to exceed 2 GW in 2017 — and penetration into larger installations, along with success in new markets, will be the key driver for this growth. IHS inverter analyst Cormac Gilligan cautioned that if microinverters are unable to move into new markets and lower their dependence on the residential sector, their success will be tested.

The U.S. accounted for nearly 75 percent of the shipments IHS recorded prior to 2013, but in many states the residential market for microinverters is approaching saturation. It will be increasingly important, said Gilligan, that microinverters are used by the third-party/solar lease companies which are very active in the country. While solar lease companies such as Vivint Solar and Sunrun have used microinverters in limited numbers, other large companies like SolarCity (SCTY) have preferred to stick with string inverters as the more proven technology, he said. IHS does forecast that microinverters will be used in greater numbers by solar lease suppliers in the coming years as the technology improves and new models are released.

Microinverter use in commercial installations will grow by more than 20 times 2012’s amount to over 700 MW in 2017, said IHS, with revenues of more than US$200 million and commercial installations accounting for over one third of total inverter shipments in that year.

In 2012 the world’s second-largest microinverter market was France, largely due to market leader Enphase’s penetration, said Gilligan. In addition to the U.S. and France, the company currently focuses on Canada, Italy and the UK. In future, IHS projects Australia, Japan and the UK as very attractive markets for microinverters, as all have large residential markets and smaller commercial ones.   

Although microinverters are currently more expensive than traditional string inverters, IHS forecasts that prices will decrease by 10 percent per year, on average, which will contribute to increased commercial adoption.

What’s Driving Microinverters’ Success?

Features such as embedded module-level monitoring, increased energy yield and improved safety have enabled microinverters to successfully penetrate the MW-scale installation space in 2013, said IHS, and these factors are expected to drive the projected growth in commercial uptake. All are currently important considerations when choosing an inverter for a solar project, Gilligan said, but they will also grow in importance.

For example, he explained, safety features are particularly important on a rooftop commercial solar installation in case of fire, so that fire personnel are protected. Indeed, safety was a key concern mentioned by the owners of the Ontario MW-scale system.

On larger projects, costs such as installation and servicing can add up. With microinverters’ module-level monitoring an installer or electrician can quickly discover which module is underperforming and replace it, saving on labour costs. And, Gilligan pointed out, in commercial locations such as cities and car parks it’s likely that there will be shading from buildings or trees, in which case the microinverter for each module can carry out its own diagnostic, optimising energy harvesting and helping to pay for the extra investment.  

Gilligan said microinverters will be used less in larger (2 MW and above) installations because for these projects it may not be economical, as installing a microinverter for each module may become challenging or time-consuming. “There’s no particular limit,” he said, “but I’d say up to around 250 kW is where microinverters become attractive. Thereafter, for 101 KW — medium-sized commercial installations — and above, there would have to be unique circumstances or customer demand.”

In the case of very large PV projects, he said, the customer or installer usually needs to be familiar with microinverter technology and have used it in the past — for example, in the U.S. and Canada where customers are already knowledgable and comfortable with it.

Key Players

Enphase, which has dominated the market to date, holds a 15 percent share of the total U.S. inverter market, and the company has grown that share year-on-year over the past few years, said Gilligan. Other key microinverter suppliers are Enecsys, SolarBridge and two traditional inverter suppliers, SMA (S92.DE) and Power-One (PWER), who have now entered the microinverter space. These larger companies are likely to have the bankability and resources to promote and offer a microinverter solution, said Gilligan, with the U.S. currently their biggest target market.

The traditional string inverter suppliers, he continued, don’t seem to be running scared just yet — although they have realised that it is important to offer a microinverter solution as part of their portfolio. “So if they have a particular customer or installer or integrator who’s comfortable using microinverters, they will offer one to them,” he said. “But equally, if they have an electrician or installer who’s very comfortable with the string solution, they’ll offer that. Different customers have different requirements and if there’s a unique situation — for example, a lot of shading, or angled roofs, or space issues where a larger inverter is impractical — it makes sense to use microinverters.”

Tildy Bayar is Associate Editor of Renewable Energy World magazine.
This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

August 22, 2013

Lime Energy's Long Dark Year Of The Soul

Tom Konrad

DarkNight[1].jpg The last year has been hard on Lime Energy (NASD:LIME Disclosure: I own this stock.)  The company discovered problems with its internal reporting over a year ago, and the effort to restate the books and establish proper controls took much longer than anyone expected, in large part because the internal investigation uncovered additional problems as it proceeded.

While the company was in danger of delisting, creditors were reluctant to provide funding, and this led the company to sell its two most capital intensive businesses: its asset development business, and its ESCO business.  The ESCO business required backing from surety partners with strong balance sheets willing to guarantee Lime’s work.  The uncertainty around possible delisiting caused these partners to draw back, preventing Lime from executing on contracts it had won, and leading Lime to sell that business to PowerSecure (NASD:POWR).

Lime’s asset development business also required significant capital which was no longer available.  Although Lime was able to identify opportunities, it was not able to execute on these opportunities without outside capital, and so Lime is winding this business down.

What is left is the company’s utility business, which provides turnkey energy efficiency programs to electric utilities, helping them reach small business customers.  Such customers are often difficult for the utilities to reach, but many regulators nevertheless require that utilities offer energy efficiency programs to these customers.

Lime is the leader in this business, as measured by its success in exceeding contracted goals for energy savings.  They recently won a national energy efficiency award from the Alliance to Save Energy (one of seven such awards for excellence in saving energy to companies and individuals.)

While Lime’s business is much smaller after a year of being starved of capital, that time forced management to take hard decisions.  Those decision have created  a much slimmed-down company focused on a capital-efficient niche where it has a true competitive advantage.  We can also have a lot more confidence in Lime’s financial statements, now that much stronger controls are in place to ensure proper reporting.

Lime logoLiquidity

Unfortunately, Lime is not yet quite ready to enter the heaven of profitability without one more trial.

Lime may need to raise more capital in another dilutive offering before it can fund its operations internally. While Lime’s utility business has had significant  success in terms of recognition and acquiring new customers, there is a lag between the initiation of a new utility program and when it begins to generate cash for the company.

Lime used up $1.7 million of its liquidity in the first quarter.  $1.3 million of which was for expenses related to the earnings restatements, but even so, the company was slowly eating through cash.   $281 thousand was used in operations, and $47 thousand was paid out as interest.

This left $2.4 million in cash at the end of the first quarter.   Significant accounting costs will have continued through the second quarter, but these will decline significantly now that the statements have been filed.  Nevertheless, these costs are likely to use more than half of Lime’s remaining cash.

Will the utility business move to profitability quickly enough to avoid an additional fund raise.  Management says “there is a chance we will achieve profitability on a consolidated basis” by the end of the year.  There may be enough cash to get there, but the cushion is worryingly thin.

Conclusion

If Lime’s return to compliance with Nasdaq listing requirements allow it to fund its working capital requirements with bank debt, or cash flow from its business grows quickly, then the company should be able to achieve profitability without further diluting shareholders.  The very real possibility that this won’t happen is why the stock fell from around $0.90 at the end of July to the low 60 cent range today.

If Lime is forced to raise funds by selling stock or convertible notes, expect the price to fall further.  On the other hand, any sign that expenses are falling more quickly than anticipated, or that revenue is increasing should lead to a rally.

I sold a little stock on the way down, but I’m currently holding the bulk of my shares, awaiting more news.  We may get a hint tonight in management’s conference call to discuss first quarter results.

Lime Energy’s business  is as slim as an ascetic after a year of fasting.  The focus gained should serve the company well in the future, but the lack of fat leaves very little room for error in the coming months.

DISCLOSURE: Long LIME

This article was first published on the author's Forbes.com blog, Green Stocks on August 12th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Alternative Energy Mutual Funds Post Stellar Performance, ETFs Variable

By Harris Roen

Mutual Funds

Alternative energy MFs have had stellar returns in the past three and 12 months, all showing gains in the double digits. ETFs have also done well on average, but returns are much more variable, as detailed below.

MF_20130820[1].jpg 

Returns remain excellent for alternative energy MFs overall, with annual returns ranging from 54.5% to 15.8%. The average MF is up 31.3% for the year, and not a single fund posted a loss in the past 12 months.

Three-month and one-month returns also look good—even the funds that did not make a gain are down less than 1%. One word of caution, though, is that all MFs are trading near the top of their 52 week range, which could mean a short-term pullback from here.

Exchange Traded Funds

Performance of alternative energy ETFs are much more erratic than their mutual fund counterparts. Overall ETFs have done well, 14 out of 17 ETFs show gains for the year, and two funds, First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN) and Market Vectors Global Alternative Energy ETF (GEX) posted gains better than 50%. Three funds, however, had losses for the year, with iPath Global Carbon ETN (GRN) down almost 50% in the past 12 months. This exchange traded note, which tracks Barclays Capital Global Carbon Index Total Return, continues to reflect the global paralysis in carbon markets.

ETF_20130820[1].jpg

Having said that, GRN is up 33.5% over the past three months, and is up 56% from its lows of mid-April. This improvement signals confidence that the European Union is having success in addressing long-term carbon market issues. The gain also reflects a positive reaction to new Chinese emissions trading initiatives aimed at aiding troubled carbon markets

Guggenheim Solar (TAN) has done extremely well, up 77% for the year, owing to a recovery in solar stocks  that started at the end of 2012. Recent news from the trusted industry research group IHS Electronics & Media Market Intelligence contends that the improved margins that photovoltaic companies reported in the second quarter of 2013 should continue to increase. I expect the solar sector to hold strong for the rest of 2013.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

August 20, 2013

SunEdison's Impressive Customers Not Yet Impressing Investors

by Debra Fiakas CFA

Sunedison Logo.png A series of acquisitions have put SunEdison, Inc. (SUNE:  Nasdaq) in the business of solar energy systems.  Until recently called MEMC Electronics Materials, the company had been a provider of silicon wafers to semiconductor producers and fabricators.  In 2009 and 2010, MEMC acquired SunEdison and Solaicx, respectively.   Besides the foundation for a new name, the SunEdison deal gave the company a line of photovoltaic energy solutions to sell to solar system developers and major end users.  Solaicx acquisition gave the company access to a proprietary continuous crystal growth manufacturing technology which yields high-efficiency monocrystalline silicon wafers.  Conveniently, Solaicx came with a manufacturing facility in Oregon.

SunEdison reported $2.0 billion in total revenue in the most recently reported twelve-month period ending June 2013.  Historically, about two-thirds of revenue has been from the sale of solar systems and the remaining one-third from semiconductor materials sales.  However, in the June 2013 quarter the value of solar systems sales slipped to just 40% of total sales, elevating semiconductors materials to the leading segment with 60% of total sales even though sales in that segment were only slightly higher than the same quarter last year.  Selling prices have been pressured downward by aggressive pricing on the part of Chinese solar components companies.

What is more the company has not reported a profit since 2010. At the operating level, the semiconductor segment has been profitable most of the time.  However, the solar segment has been floundering in operating losses for the past few years.

The board of directors decided last May that a name change from MEMC Electronics Materials to “SunEdison” would give the company better branding success.  The name change and emphasis on better branding for the solar segment is part of an overall plan to boost sales and profits.  The company refers to it as the 2011 Global Plan.  Other elements include streamlining the semiconductor materials operation and improving cash flows.  We note that in the June 2013 that segment was cash flow positive.  The company is also taken a more protectionist stance on solar project, limiting exposure until customers have committed project financing.

What may be a bigger problem for SunEdison than the branding qualities of its name is the selling qualities of product line.  Frankly, there is little that stands out in a crowded market.  Acquisitions have served as the company’s ticket to the solar market.  It is doing very little in-house to added nuance to its technology.  Research and development spending total only 3% of sales over the last three years.  It is important to consider that in the solar system design and installation business, financing can be an even bigger obstacle to getting a sale completed than being able to differentiate yourself from the next solar system peddler. 

That said, we note SunEdison has been able to land solar system contracts with some of the most visible leaders in the move to solar power:  Staples, Kohls, Walgreens, Albertsons and Whole Foods, among others.  SunEdison claims over 550 different customers in its solar segment.

For now investors have not been impressed by the customer list.  Recent trading sessions in the stock has shown clear bearish sentiment prevails.  That does not prevent us from including SUNE in the Solar Group in The Atomics Index for companies in the alternative energy business.

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.  SUNE is included in the Solar Group of Crystal Equity Research’s The Atomics Index, composed of companies using the atom to create alternative energy sources.

August 19, 2013

Ameresco's CEO Expects Return To Growth In Q3

Tom Konrad CFA

Ameresco logoWith earnings announcements coming fast and thick over the last two weeks, it has been all I can do to keep up, let alone go into detail about the companies I usually follow, as I did with Maxwell Technologies (NASD:MXWL) earlier this week. (Note: I am currently long Ameresco and Short Maxwell.)

Rather than remain completely silent, I’m going to attempt to focus on the main take-aways I’ve gleaned from the filings and earnings calls, starting with Ameresco’s (NASD:AMRC) potentially confusing earnings.

Another “Miss”

Ameresco again missed First Call analysts’ average earnings estimates for the fourth quarter in a row, with a loss of 4 cents a share compared to the one cent gain predicted by the First Call consensus.   A 23% year-on-year decline in revenues also sent traders running for the hills.

The stock promptly plunged $1 to open at $8 when the market opened on August 8th.

I had a bottom-fishing order in to purchase at $7.75, which I revised to $8.10 later that morning in the hope of scooping up some cheap shares in the panic.  Neither executed, because the market quickly caught on to what I’d seen: the headline numbers were hiding a change in management’s outlook for the future.

Guidance

As in previous quarters, Ameresco’s CEO, George Sakellaris, had attributed the weak results to slow conversion of efficiency projects, due to “a rather protracted disruption in the federal market” but with a big difference this time.

In previous conference calls, Sakellaris had not been willing to provide firm guidance about when he saw conditions improving.  This time, he said, “ We believe that several awarded projects appear to be nearing the contracted stage.”  He provided revenue guidance of $620 to $640 million for 2013, with income of $18 to $21 million, compared to $631 million in revenue and $18 million in income in 2012 (40 cents a share.)

Although revenue and earnings are likely to be flat for 2013, to achieve Sakellaris’ guidance, revenue for the second half of 2013 will have to be at least $384 million in revenue and $15 million in earnings, which amounts  to 17% revenue growth and 25% earnings growth over the second half of 2012.

The Future

Rapid second-half growth is also likely to continue into next year, since Ameresco’s pipeline of potential Energy Performance Contracts has been growing even as its sales have slowed.  The backlog was up 10% in Q2 year on year, driven by a 22% increase in awarded contracts.

Due to the compelling economics of energy efficiency, the contracts typically result in savings from day one for the customer, and they are often driven by a customer’s need to replace aging equipment.  Such projects cannot be delayed forever, so Ameresco has all the pieces in place to return to strong growth in the third quarter, and continue producing growth for a long time to come.

Disclosure: Long AMRC, Short MXWL.

This article first appeared on the author's Forbes blog on August 9th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

August 18, 2013

Suntech Shares May Be Worthless; Canadian Solar Sells More

Doug Young

Suntech logo]The latest news from Canadian Solar (Nasdaq: CSIQ) and Suntech (NYSE: STP) is casting a shadow over a nascent recovery for the embattled solar sector, as each company struggles to fix its broken finances pummeled by a two-year downturn. Canadian  Solar has announced a plan to raise up to $50 million through a stock sale, while domestic media are reporting that bidding for bankrupt Suntech is moving ahead quickly, indicating the end may be near as an independent company for this former solar high-flyer. All this shows that investors shouldn’t get too bullish on solar companies just yet, even as Canadian Solar says it is still on target to post a profit for all of 2013.

Let’s start off with Suntech, which is in the process of a painful reorganization in bankruptcy court. The steady stream of signals coming from the courtroom in the city of Wuxi seem to indicate that Suntech won’t emerge as an independent company after the reorganization, though its brand and operations are likely to survive. That means Suntech shareholders could ultimately find themselves holding worthless stock, which is often the case for companies that undergo this kind of bankruptcy reorganization.

The latest report indicates that rival solar panel maker Yingli (NYSE: YGE) has looked at Suntech’s books and decided to bid for the company’s main manufacturing assets. (Chinese article) According to the report, Yingli is seen as the most likely winner in the current round of bidding, where it is competing with 3 other firms including Trina Solar (NYSE: TSL). Previous reports had indicated that the companies would each bid to become a strategic investor in Suntech’s main assets, which would probably see them take a controlling stake in those assets.

Investors seem to sense that their shares could soon become worth very little or nothing, and are quickly dumping the stock to recoup some money while they can. Suntech’s shares are down 33 percent this month alone, including a 14.3 percent plunge in the latest trading session. They now trade at $1.08 a share, and could soon fall below the $1 level that would put them in violation of continued listing requirements. Still, I doubt the company is too worried about being de-listed, since it’s shares are likely to become worthless before that happens. Look for a winning bidder to be named by October, and for the shares to lose most of their value by that time.

From Suntech, let’s move quickly to Canadian Solar, which has announced a plan to sell shares to raise up to $50 million. With a current market value of about $500 million, that would translate to issuing about 10 percent of company stock in this fund raising exercise. Investors weren’t too excited about the plan, with Canadian Solar shares tumbling 11 percent after the news came out. But even after a recent pull-back, the shares are still 5 times higher than their lows from late last year.

Frankly speaking, I was a bit surprised to read about this new capital raising effort, as previous signals from Canadian Solar had indicated the company was boosting its finances by selling some of the solar plants it constructed with its own money. This $50 million also doesn’t seem like a very big number, which hints that the company may simply need the cash to keep funding its daily operations in the present. Regardless of the reason, this latest news doesn’t seem too encouraging, and we could well see Canadian Solar shares continue their recent pull-back over the next month or two.

Bottom line: Suntech’s main assets could be auctioned off in the next month, leaving its shares worthless, while Canadian Solar’s stock may also come under pressure.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

August 16, 2013

Maxwell's Earnings Restatement: Some Good, Some Bad, No Ugly

Tom Konrad CFA

Maxwell Logo

When Maxwell Technologies (NASD:MXWL) announced problems with its revenue accounting on March 7h, I took a look at the company’s reported Accounts Receivable  (where early revenue recognition usually shows up) and concluded that management had underestimated the scope of the accounting problems. Convinced that there was more to come, I not only sold the stock, but took a short position.

On August 1st, Maxwell filed its restated annual reports for 2012 (including restatements of 2011), as well as  statements for the first two quarters of 2013.

The Bad News: Revenue mis-statements were much larger than previously announced

The bad news for Maxwell investors was that I was right about the revenue mis-statement.  The initial press release put the overstated revenues for 2011 and the first three quarters of 2012 at $6.5 million and $5.5 million ($11 million total,) while the actual restatement was $10 million and $9.2 million, respectively ($19.2 million total.)

To be fair, $2.5 million of the 2011 restatement involved replacing a reported general and administrative  (G&A) expense with a contra-revenue account, which has no net effect on earnings.  What apparently happened was that some returns or warranty costs were charged to overhead, rather than decreasing revenue as accounting rules say they should.  This type of misreporting makes revenue growth look faster than in reality it should, but does not increase earnings.  While it is a problem, it has less of an effect on company valuation than early reporting of revenue.

Because the effect of the $2.5 million re-categorization of G&A expense as contra-revenue has no effect on Maxwell’s earnings, the rest of this article does not include the re-categorized $2.5 million from 2011 as restated revenue.

Even excluding this $2.5 million, the total revenue restatement of $16.7 million was significantly greater ($5.7 million, or 52%) than the $11 million restatement the company’s initial press release told us to expect.  If the $2.5 million re-categorization is included, the initial announcement understated the problem by $8.2 million, or 75%.

Still More To Come?

MXWL Sales and AR restatement.png

I initially predicted these larger revenue restatements by observing that Maxwell’s Accounts Receivable (AR) had been growing much more quickly than they should have in order to keep up with the company’s sluggish sales growth at the time.  This can be seen in the chart above, where orange bars and dark blue line show what AR and revenue looked like before the restatement, the red lines (“adjusted AR”) and light blue line show what the restatement would have looked like if the initial press release had been accurate, and the brown bars and green line show AR and revenue as the company reported them on August 1st.

As you can see, recent growth in AR has been much lower than revenue growth (green line.)  If anything, Maxwell management is now being extremely cautious about revenue recognition.  This is unsurprising, as the company is currently being investigated by both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in because of the previously misreported revenue: The company has every incentive to err on the side of caution.

I think it’s very unlikely the DOJ or SEC will find any more skeletons to be hiding in Maxwell’s accounting closet.  With luck, the investigations (which have not yet involved company management) will not lead to significant expenses or management time going forward.  While it’s appropriate for the DOJ and SEC to look into the particulars, it seems as if Maxwell has done a good job cleaning up the books and putting better controls in place, and it would be unfortunate if past problems were to interfere with a promising business.

Market Reaction

Despite the worse-than-forecast revenue restatement, the market reacted euphorically to Maxwell’s filings.  MXWL stock soared $1.47 to $9.43 (18%) in the first day of trading after the announcement.  I ascribe this euphoria to three factors, in decreasing order of importance.

  1. Maxwell’s revenues and earnings grew strongly over the past three quarters, flattered in part by the restatement itself.
  2. Many traders had sold the company’s stock short, and the strong results created a short squeeze.
  3. Investors were paying more attention to recent growth (which management highlighted) than previous disappointments.

The Good News: Recent Growth

As Maxwell’s CEO David Schramm stated in the conference call, year-on-year revenue growth has been 54% and 33% over the last two quarters (Q2 2013 and Q1 2013, respectively).  Fourth quarter (Q4 2012) growth was 19% over the previous year.

The restatement contributed to this recent growth both by reducing reported revenue in the first two quarters of 2012, and increasing revenue in those quarters of 2013.  Without the restatement, Q2 2013, Q1 2013, and Q4 2013 sales growth would have been 28% and 14% growth, and a 2% decline respectively compared to the previous years’ results.

Nonetheless, no matter how you slice it, revenue and earnings have been growing strongly over the last two quarters.  The following chart show’s Maxwell’s earnings per share (EPS), before and after the effect of the restatement:

MXWL EPS restatement.png

While the restatement has the effect of making recent results look stronger as compared to results from the previous year, it’s important to keep in mind that the restated results were restated to correct real accounting errors, not just to make Maxwell’s recent growth look good.

Short Squeeze

I was not the only analyst, trader or hedge fund manager to be surprised by the strength of Maxwell’s recent results.  As of June 15th, 2.91 million shares were held short.  That is 11% of the company’s float, or over seven days’ trading volume.  Unlike myself, many shorts use significant margin, and a share price spike like the one yesterday can lead to margin calls which force them to cover, buying even as the stock is rising, and accelerating the ascent.  I keep my short positions relatively small to avoid being caught in such a short squeeze, and was not forced to cover.

I plan to cover my short position in the next few days, assuming the stock declines to something closer to what I consider Maxwell’s actual value.  If it declines far enough, I may even go long again: I like the company’s business.  Since I have yet to make these trades, I won’t reveal my current valuation of the company here, although I will give you much of the information which led to that valuation.

The Future

To determine what Maxwell is worth, we have to determine our expectations for Maxwell’s future earnings.  Growth of ultracapacitor sales for automotive stop-start applications has been flat, but this has been driven by poor car sales in Europe, which are at a 20 year low.  Stop-start idle elimination systems using Maxwell’s ultracapacitors are now available in more models, and their wider availability has offset the decline in overall auto sales.

The main source of Maxwell’s recent growth has been the hybrid bus business in China. accounting for 80% of sales in Q1 2013, and 65% in Q2 2013.  We can expect softness in this segment as Maxwell’s Chinese customers await the release of new subsidies fro hybrid buses.  These subsidies are widely expected, but have yet to be finalized, and it is anyone’s guess when that will happen.  With the third quarter almost half over without an announcement, we can expect far fewer sales of ultracapacitors for Chinese buses in the third quarter than in the second.

The other major end market for ultracapacitors has been the wind market, which in the past has exceeded sales for hybrid buses.  Global wind installation in 2013 are not expected to grow over 2012, but growth is expected to resume in 2014.  Hence, while wind should be a source of long term growth in for Maxwell, it is unlikely to be a source of growth in the near term.

With hybrid bus demand falling in Q3 and stable wind sales, we can expect Maxwell’s third quarter revenues to be down from the second quarter, with earnings following suit.  The fourth quarter could see growth resume once Chinese bus subsidies are in place.

Maxwell’s inventory levels at the end of the second quarter seem to echo my expectation of lower sales in Q3: they were down from the second quarter, and Maxwell’s CEO David Schramm forecast inventory levels to remain flat in Q3 during the recent conference call.  Further, Q2 inventory was down from Q1 levels.  Since every future sale has to pass through inventory, Maxwell’s management would be increasing inventory to meet this anticipated demand if they expected growth in Q3.

MXWL Sales AR Inventory.png
As you can see in the chart above, quarterly revenues have been growing much more quickly than quickly than accounts receivable or inventory.  While increasing revenues relative to working capital items such as these can be a sign of increased efficiency, such efficiency gains are seldom this rapid.  Most likely, Q2 (and possibly Q1) represented a short term revenue spike which will be reversed in Q3.  The fact that Q2 revenues rose above their trend line just as Q2 inventory dipped below it increases my confidence that Q2 revenue growth represents a short term blip.

Longer term, Maxwell’s growth prospects are bright, as wind and bus markets return to growth, while Maxwell also begins to see significant sales in new markets such as their Engine Starting Module (ESM) for trucks, where the company has been making progress by  getting the ESM adopted by two truck fleets.

Over the next two quarters, straight-line projections of revenue and earnings are likely to significantly overestimate Maxwell’s actual results.

Conclusion

As I said above, I’m not ready to reveal my own valuation of the company.  I will say that the recent results are better than I expected, and I plan to cover my short position at a loss reflecting my higher current valuation of the company.

Analysts at Roth Capital were pleasantly surprised by Maxwell’s reported results.  They raised their price target to $8.50, from $7, keeping their rating at neutral.  I have not yet seen how other analysts have reacted, although average estimates for Maxwell’s 2014 EPS have dropped from $0.59 to $0.45 per share over the last week.

Disclosure: Short MXWL

This article was first published on the author's Forbes.com blog, Green Stocks on August 6th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

August 13, 2013

KiOR's Columbus II: A New World of Profits?

Jim Lane
logo[2].png

One of biofuels’ hottest companies aims to accelerate path to break-even; is a shortfall in gallons produced in Q2 meaningful?

In Texas, KiOR (KIOR) reported a Q2 loss of $38.5M, compared to a Q1 loss of $31.3M. on revenues of $239K, up from $71K in Q1. Net loss for the second quarter of 2012 totaled $23.0 million, or $0.22 per share.

The biggest news coming out of the quarterly results is that the company is looking at an additional 500 dry ton/day facility, dubbed “Columbus II”, as an intermediate step between now and building its 40 million gallon plant at Natchez. That would build potential capacity at Columbus to 24 million gallons, overall — at KiOR’s stated 72 gallon per ton yields.

According to the company, the capex for the facility is in the $177M to $225M range and the unsubsidized cost of production would be in the $2.60 to $2.80 range. The switch is prompted, according to CEO Fred Cannon, by advances from the R&D team in utilizing other feedstocks in addition to yellow pine.

According to KiOR, the construction phase would last around 13 months and reduce the time needed to bring the company to cash-positive.
“I am happy to report that Columbus has made significant operational progress and is continuing to build its on-stream performance and reliability,” said Fred Cannon, KiOR’s President and Chief Executive Officer. “In addition to making our first shipment of cellulosic gasoline in the second quarter, we more than doubled the run time of our core technology, the Biomass Fluid Catalytic Cracking Unit (BFCC), to 43% in the quarter, up from 20% in the first quarter.”

“In total,” Cannon continued, “we shipped over 75,000 gallons of cellulosic fuel from Columbus. The BFCC unit is running now and producing high quality oil that we are preparing to upgrade into fuel and ship to our customers. Over the next few months, we will focus on further building that progress and we look to push the facility closer to its nameplate capacity.”

Overall, on a per gallon basis, the company was netting some $3.18 per gallon for its gasoline and diesel shipments.

Let’s recap on the KiOR’s past and future milestones.

Q4 2012. The plant was mechanically completed and commissioning began. At the time, the company tipped that it would begin shipping fuel in Q1 and complete the commissioning process by the end of the first half.

Q1 2013. The plant shipped its first cellulosic diesel — though it was a minimal 5,000 gallons of cellulosic diesel – right before the end of the quarter. At the time, the company affirmed guidance that it would produce in the range of 3-5 million gallons of cellulosic fuel for the year. Groundbreaking for the second commercial facility, in Natchez, Mississippi, was tipped for 2H13 and expectations were raised that capacity there might be increased from 40 million gallons to 50 million gallons per year. The core technology, the Biomass Fluid Catalytic Cracking Unit, reaches 20% run-time in the quarter.

Q2 2013. The plant ships its first cellulosic gasoline, and reaches 43% run time with its core Biomass Fluid Catalytic Cracking Unit, including a 30-day run announced in early July that occurred in June.

Steady-state operations. Last month we wrote: “The gallonage for Q2 is not nearly as important as the reaching of steady-state operations,” and we continue to emphasize that reaching continuous operations on a regular basis will provide confirmation of a successful design at Columbus – and point towards expanded success when the 40 million gallon Natchez facility is completes. The achievement of 43% run-times is encouraging — but there’s far more progress to be made and Q3 will be highly important.

Q3 2013. This is the big, big quarter. As we wrote in July, “that’s where we’ll need to see the production yields move into the 1M+ range for the quarter, if the Natchez project is going to look attractive to providers of lower-cost financing.”

Volume confusion.

Confusing in the Q2 release was the announce that the company had shipped 75,000 gallons of cellulosic fuels for the quarter, well below the 300,000-500,000 guidance the company gave in May. Why confusing? While the company tipped back in July that it has only commenced shipping fuels on June 28th – obviously, the reason for the low gallonage by quarter-end — we’re not sure here at the Digest how to square the run-time increases with the low shipments.

The plant’s nameplate capacity is 2.75 million gallons per quarter (or, 11 million gallons per year), and CEO Fred Cannon indicated that the core technology, the BFCC (biomass fluid catalytic cracking) unit had 43 percent uptime in the quarter. Accordingly, we would have, ordinarily, expected 1.18 million gallons is the plant had been running at full capacity. So, we’re left to surmise that about 1,000 tons of wood were processed during the quarter — a fraction of the plant’s capacity.

Why? Possibly, to conserve on cash while run-time was increased.

Another possibility is that the BFCC unit produced far more than 75,000 gallons of intermediates — but they were not upgraded into fuels for cost, quality, customer or logistic reasons.

Another possibility is that the yields out of the BFCC unit were lower than the 72 gallons per ton that the company has aimed for — making it possible to have high run-time but low output. The company has tipped that, having achieved continuous operation by the end of June, it will focus on increasing output in Q3, and yield optimization in Q4.

Suggesting that a combination of low yields, reduced inputs and Q2 downtime were the trio of culprits for the unexpected low gallonage for the quarter. For definitive answers, we’ll have to wait and see how the crucial Q3 shapes up.

Analyst Reaction

Ben Kallo at Baird:

We reiterate our Neutral rating and $6 price target following KIOR’s Q2 earnings call. KIOR successfully shipped its first commercial batch of cellulosic gasoline, increased run times at Columbus, and is considering a Columbus II plant in an effort to shorten the amount of time needed to become cash flow positive. Despite shipping cellulosic fuel, capital constraints remain a major overhang. Q2 misses estimates. Capital need overshadows the positives. KIOR ended the quarter ~$11.5M of cash and will need to raise capital for the construction of Columbus II or Natchez. Management has indicated a 1:2 equity/debt ratio for a potential capital raise. We need to see a successful capital raise and additional progress at Columbus to become buyers of the stock.

Pavel Molchanov at Raymond James:

KiOR reported a 2Q net loss of $0.36 per share, vs. our $(0.29) estimate and consensus’ $(0.34), reflecting higher plant startup costs. This was the second quarter with sales from the Columbus plant. Revenue jumped 3Q sequentially, to $239,000, though production volumes were still fairly slim. (Recall, KiOR announced on July 1 that continuous operations have been achieved, meaning that 2Q results cover only a partial quarter of steady-state production.) On the balance sheet, cash remained stable at $11 million; there is additional borrowing capacity under a bridge loan, though a sizable financing round has long been telegraphed by management, and we anticipate it taking place over the next several months. Columbus II Option Offers Lower Cost, Lower Risk. Building a copy of the existing plant would be able to use existing engineering while incorporating the latest catalyst improvements and potentially cheaper feedstock. The lead time to completion may be several months shorter, and startup would be aided by having an experienced team already at the plant.

The bottom line.

Reaching continuous production was an important milestone — moving from commissioning in late 2012 to continuous production in Q2 is monumentally faster than some of its peers in cellulosic and/or advanced biofuels. Confusion over production of intermediates and shipment of fuels not withstanding. But it all sets up for a hugely important Q3 — that’s when KiOR will need to show that it can raise production — in order that it can raise money for Natchez.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 12, 2013

Yingli or Trina May Bid For Suntech

Doug Young

August 9th was “Solar Friday”, as we were bombarded with a flurry of news that showing the sector is rebounding and could also see its first major merger. In the former category, earnings updates from Yingli (NYSE: YGE) and Trina (NYSE: TSL) are showing steady improvement for the embattled panel-making sector, while a quarterly report from Canadian Solar (Nasdaq: CSIQ) is showing the sudden improvements may already be starting to plateau. In the latter category, Chinese media are reporting that both Yingli and Trina are also showing interest in investing in Suntech (NYSE: STP), the former solar panel pioneer that is now in bankruptcy reorganization.

All the reports point to an industry that is still very much in a state of flux, as it rebounds from its worst-ever downturn and seeks to return to profitability following a painful downsizing. Let’s start with the latest M&A news, which comes just a day after I wrote about another media report that said 5 potential investors are interested in buying strategic stakes in the main operating unit of Suntech as part of its bankruptcy reorganization. (previous post)

That earlier report said at least one of the 5 potential suitors was a major solar panel maker, and now a new report says that both Yingli and Trina are among the interested parties. (Chinese article) Other potential bidders include Beijing Putian New Energy, and an unspecified company from Xi’an. The report points out that the suitors are being very cautious due to Suntech’s huge debt, which stands at about $1.75 billion.

It says that Trina executives in particular are divided about the a bid for Suntech due to the company’s shaky finances and heavy debt. I would expect that Yingli, Trina or any other suitor will also move very cautiously in the matter, but that we could see one of these big names ultimately purchase most of Suntech’s assets and a limited amount of its debt.

From Suntech, let’s take a look at the bigger solar picture coming from the new earnings reports and updates from Trina, Yingli and Canadian Solar. The Trina and Yingli updates look remarkably similar, with both companies providing upward revisions to their previous shipment and margin forecasts. Trina said its second-quarter shipments will now come in about 20 percent higher than its previous forecast, while Yingli doubled its expected growth rate for the quarter. (Trina announcement; Yingli announcement)

Both companies also said they expect their second-quarter gross margins to come in around 11-12 percent, again higher than previous forecasts. Trina shares rose 9.4 percent after its announcement, while Yingli shares rose 6.3 percent. Both stocks are now trading at about double the levels from their April lows.

By comparison, Canadian Solar shares tumbled 8 percent after it announced its latest quarterly results, though its shares are still more than triple the levels of their lows from March. Canadian Solar also reported relatively solid numbers, including shipments and margins that beat its previous guidance. Its bottom line wasn’t as attractive, widening to a net loss of $12.6 million from a $4.4 million loss in the first quarter. (company announcement)

The company also wasn’t very upbeat about the rest of the year, indicating its sudden jump in performance could already be starting to plateau. It predicted its shipments and gross margins would both actually fall slightly in the current quarter, and left its shipment forecast for the full year unchanged from previous guidance. In a more upbeat sign, it reiterated its view that it could meet its previously stated target of returning to profitability for all 2013.

After the huge run-up in solar stocks so far this year, these latest results could indicate the shares may be due for a rest or even a pull-back as investors take some profits. Still, on an operational basis the results do seem to indicate the sector is returning to health, albeit slowly.

Bottom line: Either Yingli or Trina is likely to make a serious bid for Suntech, as the sector’s recent rebound slows and consolidation continues.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

August 11, 2013

Watch This Nuclear Player Boil

by Debra Fiakas CFA

The last post on Chicago Bridge and Iron (CBI: NYSE) noted the entrance of CBI into the nuclear field with the acquisition of The Shaw Group, which has an exclusive relationship with Toshiba Corporation related to the Toshiba Advanced Boiling Water Reactor (ABWR).

 More evolutionary than revolutionary the ABWR is supposed to be superior other designs in its light water reactor class.  ABWR produces power by superheating water to the boiling point. The resulting steam is then used to drive a turbine attached to a generator.  Other light water reactors also heat water, but not to the boiling point.  Instead the heated water is held in a pressurized vessel and the energy generating heat is exchanged with a lower pressure vessel.  It is the heat exchange process that creates steam and drives the turbine.

The first basic boiling water reactors were produced in the early 1960s. There has been considerable tweaking of the design over the years, resulting in the advanced version in the late 1990s.  There are about a dozen or so deployments of the ABWR design by various power companies in the U.S., China and Japan, the only three jurisdictions where the ABWR design is licensed.  Construction continues on several and some of the older unit built in the 1990s and early 2000s are still in operation.  Indeed, several of the completed units have had to be taken off line for repairs of one kind or another.

Principally the ABWR is supposed to be advantageous over other designs through reduced capital and operating costs.  In the U.S. market cost advantages could not be more critical than at this particular time when swollen natural gas supplies have put other energy sources at a disadvantage.  Some have even called the end of the nuclear energy industry as utilities have shuttered aging nuclear plants rather than incur the expenses of repair and refurbishing.

Kashiwazaki-Kariwa Nuclear Power Plant
By virtue of its investment in The Shaw Group with its Toshiba relationship, CBI now has both feet in the nuclear power plant business.  CBI also has some new competition from General Electric (GE:  NSYE).  GE’s first ABWR installation began commercial operation at Kashiwazaki-Kariwa in Japan, in 1996.  GE partnered with Hitachi in 2007 to produce ABWRs.  The GE-Hitachi tie-up has and total of four ABWR plants completed in Japan and two in Taiwan.  We count another ten units planned in Japan and the U.S. that have ordered from GE-Hitachi.

Toshiba is not be outdone by its competitor.  Most recently Toshiba was been tapped as a contractor for the third and fourth operating units of the South Texas Project in Matagorda County, Texas.  The South Texas Project is a nuclear power joint venture among Austin Energy, CPS Energy and NRG Energy.  The consortium brags that the first two units of the South Texas generating station “produce 2,700 megawatts of carbon-free electricity - providing clean energy to two million Texas homes.”

Here is where The Shaw Group (now CBI) comes into the picture.  Shaw is responsible for the engineering, procurement and construction portion of the South Texas contract.  Shaw came up with $250 million for the strategic partnership with Toshiba when it was set up, of which $100 million was earmarked for a credit facility to finance the South Texas expansion.

The South Texas project is going forward natural gas prices be damned.  It will be Toshiba and its Shaw Group/CBI partner which reap the initial benefits.  The saying says ‘watched pots never boil’ but Toshiba and Shaw/CBI have figured out how to turn a coin with boiling water nonetheless.

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.  CBI is included in the Nuclear Group of The Atomics Index.

August 10, 2013

Solazyme Shares Soar On Sasol Deal

Jim Lane
solazyme-logo.jpeg

Bioenergy’s #1 company surges on the exchanges after big Sasol, AkzoNobel partnership announcements.

In California, Solazyme (SZYM) announced a Q2 loss of $25.8M, compared to a Q2 2012 loss of $19.2M, on revenues of $11.2M, down from $13.2M for Q2 2012, as government funded revenues declined as expected. Excluding the government sector, sales jumped 28% year on year despite the lack of the big capacity that Moema and Clinton will represent when completed. Product gross margins were a very healthy 70%, in line with guidance.

Solazyme shares were up 12.95 percent today at market close.

“We are making great progress as we approach commencement of manufacturing at our commercial production facilities later this year,” said Jonathan Wolfson, CEO of Solazyme. “Capacity build-out at our Brazilian JV facility remains on target, and we are actually accelerating plans at the Clinton, Iowa facility, which should allow us to begin producing product for market and application development during the second half of this year.

sasol-logo.jpeg “Peoria is also being retrofitted to produce algal flour and protein products with availability of commercial development quantities also expected in the second half of this year. Tailored oil technology breakthroughs are continuing to open additional attractive end market opportunities, as evidenced by the announcement of the new high erucic tailored oil under development with Mitsui and the related commercial supply terms with Sasol (SSL).”

The White Hot News

Solazyme and Sasol Olefins & Surfactants have finalized commercial terms for the supply of an algal oil rich in erucic acid under development at Solazyme for production of downstream derivatives such as behenyl alcohol. Sasol O&S produces and sells C22 derivatives such as behenyl alcohol to serve a number of applications in markets that include the paper, water treatment, personal care, lubricants, oil and gas, and paints, inks, coatings and adhesives industries.

High erucic oil is the second oil in the suite of tailored oils being developed under the JDA with Mitsui, with myristic oil being the first. Erucic acid is commonly found in some rapeseed and mustard seed oils and is currently used mainly as an emulsifier in multiple industries including cosmetics and as a plastics additive.

In addition to the agreement on commercial supply terms, the companies also executed a letter of intent to investigate expanding to a broad collaboration, including joint manufacturing and marketing of multiple tailored oils.

Why Big? Solazyme, which has been highly focused on building capacity, has faced criticism for not developing enough binding offtake agreements. Here’s one, with a brand-name partner, though with volumes not disclosed it is not possible to relate this back to the supply vs demand questions.

Red Hot News

Speaking of capacity building, Moema remains on track (now 80% complete), and the facility in Clinton is accelerating and is expected to begin commissioning in late 2013 instead of early 2014.

Orange-hot news

Solazyme and AkzoNobel Enter into Joint Development Agreement. The partnership targets the development of advanced tailored oils and commercial sales for the specialty surfactants and paints and coatings markets. The agreement is centered on a shared commitment to the production of high-performance triglyceride-based products that improve upon the performance of plant oils and animal fats.

More orange-hot news: The Algenist sales jump. Algenist sales rose 21% over Q2 2012 — a big jump, and a nice confirmation that that remains a growth channel for now.

Warm but not hot news.

Solazyme is establishing new large-scale manufacturing capability for high protein and high lipid products that were previously part of the Solazyme Roquette Nutritionals joint venture. Production of both products is targeted to begin at Solazyme’s Peoria facility this year.
It could be hot.

Earlier this week, Solazyme and Twinlab announced the launch of Twinlab’s CleanSeries Veggie Protein Powder featuring Solazyme’s algal protein. In their annoucne, the partners noted that “whole algal protein is a vegan whole-food source, microalgae-derived, non-allergenic”, and contains “at least 50 percent protein by weight and 15-20 percent dietary fiber.” What we don’t know at this stage is the demand for the powder.

Analyst commentary

Rob Stone, Cowen & Company: ”Q2 was essentially in line and 2013 guidance maintained. Capacity build is on or ahead of schedule, including initial quantities for nutritionals. A new high-Erucic oil expands the Mitsui relationship and adds a supply deal with Sasol. The volume ramp should drive CF breakeven by Y.E. 2014.”

Pavel Molchanov, Raymond James: “The versatility of Solazyme’s algae-produced oils opens the door to wide-ranging opportunities across the fuel, chemical, personal care, and nutrition markets. While fully recognizing the inherent execution risks in early-stage industrial biotech, we are bullish on the roadmap to commercialization, with two major proof points within months. The balance sheet is also in great shape, with by far the largest cash balance in the peer group, virtually eliminating equity dilution risk over the next 12 months. We reiterate our Outperform rating.”

More on the story.

Q2 results here.

Q2 earnings call transcript here.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 09, 2013

First Solar Buys GE's Tech: A Defensive Move?

James Montgomery

First solar logoFlexing its muscles yet again, thin-film solar PV leader First Solar (FSLR) has quietly acquired GE's (GE) similar solar intellectual property portfolio, but questions linger about whether and when the company will see the benefits.

The deal includes both a specific module purchase commitment plus a longer-term commitment with agreed-upon pricing "over an extended period of years," according to First Solar CEO Jim Hughes during the company's 2Q13 earnings results. GE, meanwhile, will supply inverters for First Solar's global deployments, technology acquired through French firm Converteam, and it will seek to sell solar PV into power plants alongside wind and thermal assets. (Such an example already exists, with GE helping Invenergy outfit adjacent solar and wind farms at its Grand Ridge projects in Illinois, a GE spokesperson pointed out.) Financially, GE also receives 1.75 million shares of First Solar common stock, making them one of FSLR's top-10 shareholders -- a roughly $82 million value at yesterday's market close, but currently down to about $70 million as First Solar's stock slumped in reaction to its other financial and project announcements (more about that on the next page).

GE and First Solar had been trading CdTe efficiency records lately. Both agree that thin-film solar PV and especially cadmium telluride (CdTe) have lots of room to improve conversion efficiency and better compete with silicon PV.

GE's CdTe technology is "distinctly different" from First Solar's CdTe process but nonetheless it is "consistent with our manufacturing platform," Hughes said in the call. Both sides, though, have yet to "fully determine how we best integrate their technology into our roadmap, determine the proper sequencing in terms of upgrading of equipment and what it means in terms of our profits," he said. An update on that evaluation likely won't come until First Solar's Analyst Day next spring, but he confidently stated that within two years some of GE's CdTe technology would be incorporated into First Solar's modules. GE currently has 19.6 percent cell efficiency in a research cell, beating FSLR's best lab cell mark by nearly a full percentage point, he noted, and GE's >450 issued patents and pending applications in CdTe effectively doubles FSLR's portfolio.

We asked First Solar for further clarification about the companies' CdTe methodologies and how they might be combined, but the company declined to comment.

First Solar has long been one of the bellwethers in the solar PV sector, and certainly the far-and-away leader in CdTe, with technology specifically geared toward large-scale solar deployments. (Solar Frontier holds a similar position on the CIGS side of thin-film PV). First Solar also was one of the first solar upstream manufacturers to extend further downstream into project development, creating a captive pipeline for its products.

But not everyone agrees this was a good deal for First Solar. "[It] appears defensive," writes Credit Suisse analyst Patrick Jobin in a research note. It's the second recent acquisition by First Solar (following Tetrasun and its C-Si technology) for solar PV technology that's "relatively early-stage," he points out, which perhaps suggests that the company's "core technology is not cost-competitive in today's low-poly environment." Deutsche Bank analyst Vishal Shah agrees, writing that GE's CdTe IP likely won't materially help First Solar's efficiency marks until 2017, and that the rest of the partnership likely will amount to merely "a few 100MWs of negotiated volume contracts."

With this deal, GE effectively bows out of the CdTe segment that it joined in 2011, with dreams to scale it up into a multibillion-dollar business alongside its wind business. Its planned $300 million, 400-MW factory in Aurora, Colorado was put on ice last summer, though, and now GE will "discontinue the build-out" of the plant entirely and seek to lease the space, according to a company rep. The original operation in Arvada is going away as well, with 50 employees affected, and future research going through GE's operations in New York.

Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.

This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.

August 08, 2013

Chinese Solar Sector Overhaul Goes Local

Doug Young

The latest signs coming from bankrupt solar panel maker Suntech (NYSE: STP) indicate a Beijing-led overhaul for the struggling sector may not be coming after all, and that local governments and other stakeholders may instead become the main rescue agents for these companies. Reports last year had hinted that Beijing was working on a broad plan to retrench the sector, which was suffering from massive overcapacity. But since then most of the problems at the weakest major player LDK (NYSE: LDK), have been handled by the local government and other stakeholders in its home province of Jiangxi. Now the same appears to be happening at Suntech, which was forced into bankruptcy in March.

While this approach is a bit unexpected, it does seem more practical than a single massive restructuring from Beijing, which would have been difficult to execute since each company has its own individual issues and stakeholders. This kind of approach also looks better because it’s more market oriented, with major stakeholders taking the lead in the restructuring rather than planners in Beijing. Those stakeholders are more likely to make the difficult decisions that ultimately return these companies to health, since all would like to get back some of their investment.

All that said, let’s take a look at the latest news from Suntech, the former solar pioneer that later collapsed under a pile of debt that ultimately forced it into bankruptcy. Suntech has been working closely with its bondholders and other creditors to restructure the company since the bankruptcy filing. We saw one sign of progress in late June, when the a group of bondholders named 2 directors to Suntech’s board, both with strong experience in reviving distressed companies. (company announcement)

The latest report this week indicate the process is moving steadily forward, with media saying that Suntech is talking with 5 potential investors about taking a strategic stake in its main operating unit. (English article) The report doesn’t say much about the actual potential investors, except that 3 are private sector and 2 are state-run entities. It notes that one is another major solar panel maker, which could lead to an interesting mega-merger if that buyer ultimately gets control of Suntech The report also notes that Suntech’s liabilities now total $1.75 billion.

This relatively methodical reorganization contrasts sharply with the turbulence that gripped Suntech before the bankruptcy, when founder Shi Zhengrong and the other stakeholders were fighting for control of the company. We haven’t heard Shi’s name mentioned much since the bankruptcy, while leads me to believe he no longer has much of a voice in the reorganization process. In another minor positive development for the company, Suntech also announced it had regained compliance with listing rules of the New York Stock Exchange, meaning its shares would continue to trade. (company announcement)

This orderly reorganization looks similar to what’s happening at LDK, which has been slowly selling off assets and also taking in new money from state-owned and private investors in its own bid to avoid bankruptcy. Other panel makers are also looking increasingly upbeat, after a retrenchment over the last year that saw many cut back their capacity by shuttering older facilities and laying off staff.

This kind of piecemeal restructuring looks quite market oriented, with Beijing playing a hands-off role and letting each company work out its own issues separately. The one drawback to this approach is that we may see few or no mergers, which Beijing could have engineered and would really help to bring the industry back to health more quickly. Still, this kind of approach will stand a better long-term chance of success, as it will force the companies and their stakeholders to craft solutions that are acceptable to everyone.

Bottom line: Beijing may be using a localized, more market-oriented approach to overhauling its solar sector, giving the retrenchment a better chance of success.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

August 06, 2013

Three Overpriced Alternative Energy Stocks & Two Bargains

By Harris Roen

Knowing when to get in and out of a stock is critical to being a successful investor. This is especially true in the volatile alternative energy sector. The Roen Financial Report calculates a fair value range for each of the +/-250 alternative energy stocks that it tracks, so that investors can better understand a stocks relative value. Comparing the current stock price to the fair value range helps determine whether a stock is considered overvalued, undervalued, or at fair value.

Which stocks are good prospects for the future, and where should investors proceed with caution? This article looks at three stocks that the Roen Financial Report considers overvalued, and two ranked as undervalued.

Overvalued Alternative Energy Stocks

ABB (Ltd) (ABB)

ABB Valuation chart

ABB is a large Swiss-based company in the business of automating power, which makes it a key player in development of the smart grid. Though its stock has gained 20% since July 2010, there have been wide price fluctuations between then and now. For example, after July 2011 (when the ABB was considered above fair value to overvalued for four months), the stock dropped 39% over the next 3 months. Conversely, when ABB reached undervalued levels in both the second half of 2011, and thru spring of 2012, investors would have done well to buy it when it was trading in the $16 – $17/share range. Since the beginning of 2013 the stock has jumped back into the overvalued range, so holders of the stock may want to reconsider their position.

Tetra Tech, Inc. (TTEK)

TTEK Valuation

Tetra Tech has gained over 20% since July 2010, but as with ABB, has not had straight-line increases. This environmental services company has solid sales and profitable earnings, but has been considered overvalued since the beginning of 2013. Its price has oscillated down ever since. Because its earnings per share (EPS) dropped in the most recent quarter, it remains at the top of its fair price range. I would still be cautious with this stock until it drops into the $15-$17 price level.

Google, Inc. (GOOG)

GOOG Valuation chart

Many do not consider Google an alternative energy company, and surely, it is not at the core of Google’s business. Having said that, Google understands that its whole company is based on the use of electricity, and as a result, Google has taken a proactive approach to integrating clean energy in its electric consumption portfolio (for example, Google’s wind investments are up to $1 billion).

There is no doubt that Google’s stock price chart has been impressive. Despite continued stock price increases, as recently as a year ago we calculated that Google was still trading at reasonable value levels. Since then, however, Google has been inching toward the top of its fair value range. I would not be surprised if the stock price gives back some of its gains over medium term.

Undervalued Alternative Energy Stocks

IXYS Corp (IXYS)

IXYS Valuation Chart

IXYS is a Silicon Valley-based company that manufactures products that efficiently convert power into useable electricity. Its stock was considered overvalued until recently, but due to shifts in EPS estimates, EPS averages, price earnings (PE) averages and PE ranges, its fair value assignment improved. This put IXYS at the bottom of its fair value channel, which prompted us to add IXYS as a Paradigm Portfolio stock. We think it is likely that its price will appreciate from here.

Power One Inc (PWER)

PWR Valuation chart

Quanta Services is a major Texas-based specialty energy contractor in the smart grid sector. It’s stock graph has saw-toothed up nicely since September 2011 on growing sales and earnings reports (as an aside, the stock has doubled in price since 2009 and is worth ten-times what it was trading at in 2002). This stock has strong price momentum, but still remains near the bottom of its fair price channel. We believe the stock price could easily move up 25% from current levels.

Summary

We believe the adoption of energy alternatives is a growing trend that is here to stay. Though the stock market rarely acts rationally over the short term, long-term investors who pick stocks wisely have a greater chance of making profits. Skill in knowing when to get in and out of a stock will greatly benefit the savvy investor.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.


August 05, 2013

CB&I: The Energy Beyond Bridges & Iron

by Debra Fiakas CFA

CBI Nuke.png

The business interests of Chicago Bridge and Iron (CBI:  NYSE) have varied far and wide from its bridge building start in the late 1800s.  These days the company is no longer headquartered in Chicago, builds a lot more than bridges and works with so many more materials than iron.  It may seem even more questionable to include Chicago Bridge and Iron among alternative energy companies.  However, since February 2013 when CB&I bought out The Shaw Group with its nuclear power plant construction services, CB&I has jumped directly into the alternative energy sector.

While alternative energy might not be the highest priority, CBI certainly wants a better position in the energy sector.  CBI needs to go beyond its usual engineering, procurement and construction (EPC) functions to extend help to an evolving power generation industry that increasing is involved in innovating new technologies.  The Shaw Group brings a broader range of power generation skills and experience to the combination. The Shaw Group lays claim to induction pipe bending technology and environmental decontamination technologies.  More importantly, Shaw Group has an exclusive relationship with Toshiba Corporation related to the Toshiba Advanced Boiling Water Reactor. 

The June 2013 quarter will be the first full quarter for the CBI-Shaw combination.  It will be the first look at a transformed operation.  The Shaw Group earned $198.9 million in net income on $6.0 billion in total sales in the year 2012.  While the company has reported net losses in the recent past, cash flow from operations has been consistently positive.  CBI is a bit smaller company, only coming close to the $6.0 billion sales hurdle back in 2008.  In 2012, CBI reported $5.5 billion in total sales on which it earned $301.7 million in net income.  CBI is consistently profitable and consistently turns out ample cash flows from operations.

The seventeen or eighteen analysts following CBI think the combination will result in $2.8 billion in total sales and $110.3 million in net income.   In 2014, which will be the first full year the two will be tied together, the consensus estimate is for $551.0 million in net income on $13.0 billion in total sales. 

Shares of CBI have been on a nice upward trajectory with periodic pullbacks that give long-term investors a chance to jump into a promising story.  The momentum that has built up in the stock suggests a $76 target price, which represents potential price appreciation of 25% from the current price level.  The mean target among those analysts with the estimates is $70.00.  At the price the implied multiple is 14 times the 2014 earnings estimate of $5.13 per share.   That appears reasonable for a company targeting markets with growth rates in the middle teens.

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.  CBI is included in the Nuclear Group of The Atomics Index.

August 04, 2013

Axion Power: Is There Light At The End Of The PIPE?

Tom Konrad, CFA

Light PIPE.jpg
A light at the end of the PIPE? Photo by Tom Check

In my last article, Axion Power’s Potential For Explosive Growth, I outlined a number of near-term business opportunities for Axion Power International, (OTC:AXPW) any one of which could catapult the company into profitability in 2014, and more than one of which could produce significant revenue growth this year.  While I’m quite bullish about Axion’s prospects, I concluded with a skeptical comment about Axion’s stock:

 [I]f I owned the stock today, I would be a seller at the current price of $0.17.

Down the PIPE 

How can I be so bullish about the company’s business but still want to sell the stock?  It’s all because of the recent private investment in public equity (PIPE) convertible note financing.  This is an unconventional convertible financing, because the conversion price of the notes falls with the market price.  Convertible financing of this type is variously known as “ratchet,” “toxic”, or “death spiral” because as the stock price falls, the convertible notes convert into more shares.  Because the convertible note holders end up owning more shares, existing shares represent a smaller percentage ownership of the company, and are worth less.  This sets up a vicous cycle, which frequently ends with the original shareholders owning only a small slice of the company.

There is also an element of the self-fulfilling prophecy: Because existing shareholders expect to be diluted, they sell the stock, which depresses the share price and leads to further dilution of those shareholders who held on.  It’s a sort of prisoner’s dilemma: if all shareholders would just hold on, or even buy into price declines, they can prevent the financing from creating a self-fulfilling death spiral.

Could Be Worse

That said, this is far from the worst such convertible financing I have seen.  For one thing, the conversion option is held by Axion: they can choose to pay in cash or shares.  For another, the note is payable in nine equal installments over nine months .   The conversion price is 85% of the lower of the price on the previous trading day, or the average price over the 20 trading days (approximately one month) for which the price was lowest  out of the last 40 trading days (two months) before each payment.  Many toxic convertibles are payable all at once .  This makes it very easy for the holders of the convertible to sell a large amount of stock during the period the conversion price is being set, artificially reducing the conversion price and awarding themselves more shares at conversion.

There was also a $1 million subordinated convertible note sold to company insiders.  Unlike the $9 million of convertible notes described above, this entire note (principal and interest) is payable at the end of the term, in cash or shares, at the company’s option.  Both sets of investors also received approximately 50% coverage of the notes with warrants that can be exercised after six months and before five years at $0.302.  If there is a future financing at better terms over that period, the exercise price on the warrants is reset to the price of the future financing.

The Next Round

According to Axion’s CEO, Thomas Granville, Axion has enough cash that it won’t need to return to the markets for additional financing until 2014.  If things go well (I recently argued that they could,) Axion may not need to return to the markets for additional financing any time soon.

On the other hand, if new business is slow to materialize, the prospects for an additional round of financing could put more pressure on the stock.

Incentives

The first convertible payment was made on July 3rd, at a conversion price of approximately $0.136 (by my estimate.)  That means the investors were paid with approximately 7.1 million shares of stock.  The second payment will be on August 3rd, and, given the 40 day look-back, we know that the conversion price will be at most  $0.131, with a minimum of 7.4 million shares issued.

AXPW trades an average of less than 10 million shares a month, so the market is simply not liquid enough to absorb all of this stock if they choose to sell.  That means that the investors have enough shares to force down the price of Axion’s stock quickly.  Since they can force down the price of Axion stock, it’s helpful to ask: Do they want to?

The reason to reduce the stock price is so that they will get more shares in future payments.  On the other hand, if the stock price remains low at the end of the nine months, most of the new stock issued will go to the company insiders who bought the $1 million subordinated notes.  A low share price at the end of the nine months would also likely mean a low share price in early 2014, when Axion will most likely need to raise additional funds.  If the share price is low then, Axion will likely be forced into another, even less favorable deal, and they will find themselves diluted just like Axion’s long term shareholders are now.

Finally, if the convertible note holders force the stock price “too low,” Axion might choose to pay them in cash rather than shares, betting that it will be able to raise cash from other sources on more favorable terms.  Management might also be forced to pay in cash because Axion is only authorized to issue 200 million shares without a shareholder vote.  114 million shares were outstanding in the first quarter, and an additional 5 million are reserved for options.  This leaves at most 81 million shares for payments to the note holders.

The 81 million authorized shares may not prove to be a hard limit.  If Axion were to run up against this share issuance limit, the company has the option to make the remaining payments in cash, or ask shareholders to approve the issuance of additional stock.  If cash were unavailable, as is likely, and shareholders were to fail to approve the issuance of additional stock, Axion would be forced to default on the notes.  Any default would likely lead to bankruptcy or a negotiated settlement with the note-holders.  Either would probably be worse for shareholders than the expected dilution from additional share  issuance.

Axion shareholders  should not be comforted by a seemingly parallel situation at  ZBB Energy Corporation (NYSE:ZBB).  While ZBB cancelled plans to hold a shareholder meeting needed to sell shares to Aspire Capital Fund because of lack of shareholder support, failure to obtain shareholder approval does not lead to default under ZBB’s agreement with Aspire.  It is the threat of default which would most likely lead shareholders to agree to additional share issuance, if necessary.

Axion dilution.png

In the chart above, I’ve run three possible scenarios of what might happen to Axion’s stock price over the next 8 months, and the resulting likely dilution of existing shareholders.

In my first scenario, the share price stays roughly where it has been for the last month (purple lines.)  In this case, the convertible note holders will end up owning approximately  79 million shares, or  41% of the company for their $10 million investment, or about  13 cents a share.  I don’t think this scenario is at all likely, but I included it as a baseline.

In my second scenario, which I consider most likely. the note holders will attempt to drive the share price down in the short term, when there are a lot of convertible payments ahead of them, but ease up in the later months to avoid destroying the value of a company they will own a substantial portion of.  In the scenario I modeled, they succeed in driving the price down below  6 cents in the September-October time frame, after which it begins to recover.  This would result in the issuance of  131 million new shares, more than are currently authorized.  However, as discussed above, it seems likely that shareholders would approve additional share issuance if the only alternative is bankruptcy.  This scenario would result in the note holders  being issued nearly  54% of the company for their $10 million investment, or about 7.6  cents a share.

In my third and final scenario (green lines,) a positive business development triggers a quick share price recovery in the near future.  Fears of dilution wane, creating a virtuous cycle, and the share price quickly rises above  $0.31, at which price note holders can choose to take payment in shares priced at $0.264 at their option, not the company’s.  This scenario results in the issuance of approximately 58 million shares (34% of the company) at  17 cents a share.

Strategy

I think the most likely result is some combination of scenarios 2 and 3.  The note holders will succeed in driving down Axion’s share price in the short term, but this process may be interrupted by positive news resulting from one of the business opportunities I outlined in the last article.

Hence, I think a small investors’ best approach is to sell or stay out of the stock now, and buy back in at the first sign of significant positive news.  If there is not any significant news in the next few months, I expect the stock will be considerably lower in the September-November time frame, at which point I will consider buying the stock.

Since the liquidity of the stock is limited, larger shareholders will have to sit tight.  There is also a concern that if all small shareholders rush for the exit at the same time.  John Petersen, a large shareholder and frequent Axion commentator, put it this way:

[A]ny significant incremental selling can only serve to drive the price down in the short term and exacerbate the problematic aspects of the financing. … [I]t’s like yelling fire in a crowded theatre.   Sometimes the only thing long investors can do is suffer through what may prove to be a difficult period.

For myself, I’m fortunate not to own the stock, which I sold last year (at a loss) when it became clear to me that Axion would be in no position to negotiate favorable terms on this financing.

I realize that this article could be construed as yelling “Fire” in a crowded theater, but I feel my first priority with my writing should be to give you, my readers, my honest opinion.  You’ll have to decide for yourselves if you want to find out if the light at the end of the PIPE is an all-electric NS 999 switcher locomotive, or get out now before being sucked down a death spiral.

Disclosure: No position in any of the securities mentioned.

This article was first published on the author's Forbes.com blog, Green Stocks on July 25th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

August 02, 2013

Axion Power's Potential For Explosive Growth

Tom Konrad, CFA

Axion Power International, Inc. (OTC:AXPW) has been developing its patented PbC lead-carbon battery technology, and in 2013 those efforts seem on the verge of paying off.   Unfortunately, Axion’s financing situation makes me unwilling to recommend its stock as an investment in the near term, but I do consider it one to watch.  This article will take a look at Axion’s technology and near term potential markets.  A follow-up article (published here) will discuss the company’s financing situation, and the things which will need to change before I consider the stock an attractive investment.

The Technology

PbC Battery.png

Axion’s PbC batteries are conventional Lead-Acid (PbA) batteries with the lead sponge negative electrodes replaced by a sandwich of a copper current collector protected by corrosion barriers which are in turn surrounded by carbon electrodes.  Not only does this reduce the lead used in the batteries, but, compared to PbA batteries, results in a much more durable battery capable of a much faster recharge rate.

While they cannot compete with Lithium-Ion batteries on energy density, PbC batteries require less complicated battery management, have better low temperature performance, are more cost effective to recycle, and have a much better safety record.  They deliver all these advantages at significantly lower cost.

ePower

According to Jay Bowman, the Chief Technology Officer at Axion customer ePower Engine Systems, it was as if Axion’s batteries had been specifically designed for ePower’s application.  ePower has developed a series hybrid drive system similar to that used in railway locomotives intended for retrofit into heavy-duty class 8 trucks.  Retrofit is a practical application for heavy-duty trucks because a heavy-duty truck’s engine is rebuilt several times during the life of the chassis.  Hence, ePower has the opportunity to achieve  significant penetration into the heavy-duty truck fleet without having to manufacture complete trucks.   The cost effectiveness of ePower’s hybrid retrofit is also enhanced because  much of its cost is offset against the cost of conventional engine replacement.

After two years of testing various types of batteries (both PbA and Lithium-Ion,) Bowman concluded that only Axion’s PbC batteries had the durability and recharging capacity required for a series hybrid drive in heavy duty diesel trucks.

Earlier this month, ePower ordered $234,000 worth of PbC batteries for retrofit into ten trucks.  It will be placing these truck with different trucking fleets to allow the operators to gain experience with the system and allay any concerns about durability.  Multiple operators have informed Bowman that, if the trucks perform as he expects, they will quickly begin placing orders in quantity.  The economics and fuel savings of ePower’s system are so significant that fleet operators will be compelled to use the system to compete, assuming durability concerns can be adequately addressed.

Norfolk Southern

NS_999-green_locomotive.jpgThe second generation NS 999 electric switcher locomotive uses Axion Batteries. Photo by Missy Schmidt.


Norfolk Southern Corporation (NYSE:NSC) released its 2013 corporate sustainability report on July 16th.   The report devoted most of a page (30 of 130) to the NS 999 all-electric switching locomotive, which uses Axion PbC batteries.  The NS 999 was the first of four “Alternative Power” projects mentioned, and was given considerably more space than the other three.  In contrast, Norfolk Southern’s 2012 report only mentioned the NS 999 prototype once, in its environmental timeline, where the prototype was mistakenly said to have been unveiled in 2010, rather than 2009.  The timeline was corrected in the 2013 sustainability report.

NSC’s second generation NS 999 is equipped with Axion PbC batteries, which the sustainability report describes as “more technologically advanced” than the lead-acid batteries the previous NS 999 had used, and with which NSC had  encountered “technical challenges” during trial field operations.

Axion completed delivery of the 1,080 batteries for the second generation NS 999 in January, generating $475,000 in revenue in the fourth quarter of 2012.

It seems reasonable to believe that the greatly increased prominence of the NS 999 in Norfolk Southern’s sustainability report reflects increased confidence on the part of NSC’s management that its previous “technical difficulties” may have been overcome.

Stationary Power

While Norfolk Southern and especially ePower could potentially produce orders which lead to explosive sales growth in coming years, Axion’s initiatives in stationary markets are most likely to lead to significant revenue and cash flow this year.

Axion’s PowerCube is an array of PbC batteries with associated control electronics mounted in a standard cargo container.  These can be quickly deployed to remote locations, and are being marketed to commercial, military, and utility operations especially on offshore islands.  Axion has responded to a large number of RFPs in these markets which could lead to orders and this year.  Since payment is typically up-front, any such orders would greatly help Axion’s financing situation.

Offshore islands and other remote locations, and military operations have very expensive electricity, since the marginal source of power is almost uniformly diesel generators.  That increases the value of grid stability and power-shifting services from stationary storage.  The fact that these applications are stationary makes PbC’s disadvantage compared to Lithium-Ion (higher weight and volume) much less significant.  Axion has preferred vendor status for a number of offshore island projects, and expects commercial sales to commence this year or in early 2014.

The scale of grid tied applications is also an advantage for PbC, since price becomes more significant at scale, and PbC batteries work well in long strings (high voltage installations.)  Operation in long strings is much more problematic with Lithium-ion (and other battery chemistries) because variability between batteries requires either complex battery management or significantly reduced performance and leads to early battery failures.  This sort of variability is why we are told to keep sets of rechargeable batteries together, and not mix batteries of different types, ages, or even manufacturers [PDF].

Stop-Start

I, and most of my readers, were introduced to Axion Power by John Petersen, Esq., an attorney and former board chair and general counsel for Axion.    From 2007 to 2012, John wrote prolifically about energy storage and the electrification of transportation for Seeking Alpha and my own website, AltEnergyStocks.com.  While he did write about the NS 999, ePower’s hybrid truck application, a more typical example of his articles was spent critiquing the economics of plug-in vehicles (with special attention to Tesla Motors (NASD:TSLA),) and talking up the economics of PbC batteries for Stop-Start hybrid vehicles.  Given all this background, I will not go into detail on the economics of Stop-Start technology, but simply refer you to Petersen’s article archive on Seeking Alpha.

In terms of Axion’s progress on stop-start, I spoke with Axion’s CEO Thomas Granville on Thursday.  BMW has completed third party testing on its prototypes, but does not want to adopt the technology if Axion is its sole supplier.  With an introduction from BMW, Axion is working with at least one major battery manufacturer to allow it to be a second manufacturer for BMW.

Like BMW, many potential customers will be unwilling to design PbC batteries into their own products until they can be certain there will be a supplier even if Axion Power, a microcap company with financing difficulties, goes bankrupt.   If Axion successfully negotiates a deal with a major battery manufacturer, it will open a lot of doors, and not just to inclusion in BMW’s Stop-Start vehicles.

Conclusion

I’m extremely optimistic about Axion Power’s business prospects over the next twelve months.  I anticipate a breakthrough in at least one of the four business areas I outlined.   Unfortunately, Axion was forced to raise money to fund its continuing operations in a $10 million offering of non-conventional convertible notes.  The conversion price of these notes is tied to Axion’s market price is based on the recent market price, and so a falling share price for the stock leads to greater dilution of shareholders and further stock price declines.

Even with Axion’s bright business prospects, the continuing issuance of new shares to repay these notes, and Axion’s likely need to raise additional capital next year make careful timing of any stock purchases essential.  I discuss my ideas on the most advantageous timing in a follow-up article.  But, if I owned the stock today, I would be a seller at the current price of $0.17.

Disclosure: no position in any of the stocks mentioned.

This article was first published on the author's Forbes.com blog, Green Stocks on July 23rd

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.


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