by Debra Fiakas CFA
Solar power installer Solar City (SCTY: Nasdaq) has attracted a swarm of shareholder lawsuits in recent weeks. The stock is trading at a price level 44% below its 52-week high of $88.35 set in February 2014. That has to be disheartening for those who were on the wrong side of the trades at those lofty levels.
In February when traders were bidding $88 and change for SCTY, the stock was trading at about 50 times revenue and 47 times cash flow from operations. Of course, since the company had yet to produce a profit, the price/earnings ratio was negative. What was it about those valuation metrics that looked appealing?
From a technical standpoint SCTY shares had begun to look precarious even before the end of December 2013. For example, the Commodity Channel Index (CCI) began signaling that the stock had entered overbought territory as early as the third week in December. I frequently use the Moving Average Convergence/Divergence (MACD) line in combination with the CCI to make certain higher highs are not still in on the way. Even with that nuanced analysis, the show appeared over by the end of January 2014. Granted as the temperatures dropped in February, trading in SCTY was hotter than ever. Unfortunately, it was more flame-out than solid price appreciation as the stock has been on a steady decline ever since.
So now that the stock price re-entered the atmosphere, is it a better value? First quarter 2014 results, did not change the profitability picture for Solar City. The company is still reporting substantial expenses that eat up profits. However, in the twelve months ending March 2014, the company turned sales of $197 million into $150 million in operating cash flow. The current price level near $50 per share implies a multiple of 30.7 times operating cash flow. That is still rich, but an improvement from three months ago.
In one of my last posts on Solar City in March 2013 – I suggested that management needs to spend a bit more time in explaining the company’s business model and a bit less time fanning the flames under the trading of its stock. Apparently, they did not listen. Analysts following Solar City do not expect the company to report a net profit any time soon, but it is clear the company has conjured a business model that generates positive cash flow. Despite reporting net losses, the company has the cash resources to grow. Management needs to fan the flames under that story. The stock may not experience one of those dramatic climbs again, but there might be fewer lawsuits.
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.