I have written about GT Advanced Technologies (GTAT) here and unfortunately the market is offering us an opportunity to buy it at an even lower price (it closed Friday at $3.10) than it was when I thought it was cheap. Ouch! My Bad! Mea Culpa. GTAT's most recent quarterly earnings were disappointing, there has recently been an large convertible bond offering and, after Wednesday's close, an acquisition was announced. The price has declined by more than 30 cents a share since the acquisition and, since that constitutes a reduction in market cap of roughly $35 million and the price paid for the acquisition was $10 million, it appears that, once again, the market may be overreacting.
GTAT (which was once named, GT Solar) now has three lines of business: photovoltaic (PV), polysilicon (PS) and sapphire. All three lines of business involve the manufacture of equipment (mainly, furnaces) which create crystals for the manufacture of downstream products. Two of the businesses - PS and sapphire - seem to be thriving; the third - PV - has dropped like a paralyzed falcon. The table below provides the gross revenue in millions of dollars for each of the three businesses for the six months ending September 29, 2012 and the comparable six month period one year earlier in 2011.
|Business||6 mos. ending 9/11||6 mos. ending 9/12|
The bad news is that PV declined so fast that the growth in Sapphire and PS could not offset the decline in PV. The good news is that PV has fallen so far, so fast that, any decline from here will probably be inconsequential. The remarkable thing is that in the quarter ending September 29, 2012, despite a total collapse in its largest line of business that rivals the performance of the Philadelphia Phillies in the last two weeks of the 1964 pennant race, GTAT was actually able to eke out a profit.
The important question for investors is not what has just happened but is best expressed by the title of a song Madonna sang in Evita: "Where Do We Go From Here?" ("...this isn't where we intended to be...Certainties disappear..."; by the way, I still think it would have been a better movie with Michelle Pfeiffer as Eva Peron).
The recent conference call, as well as an examination of the financial reports, provides some clues. GTAT has net balance sheet cash of some $180 million so the creditors are not about to come to their offices and grab the furniture. GTAT is careful with its cash and just announced significant cost reduction measures including layoffs of roughly one fourth of its work force. And GTAT has a $1.5 billion (more than $12 a share) order backlog which appears to be stable. We are not in any imminent danger of liquidity problems.
The PV business tends to be volatile and there appears to be excessive capacity and a burgeoning international trade war. GTAT is thinking through the viability of its existing technology but is hopeful that the next generation of equipment - the HiCz - will be attractive to customers because it offers significant cost advantages. It should be available in mid-2013 and may lead to a revival in this line of business.
The PS business is more of a major project, long lead time business with customer deposits securing a substantial backlog of orders. Earnings visibility is strengthened by the order backlog ($618 million), customer deposits, and substantial deferred revenue applicable to orders which have already shipped but have not been fully reflected in earnings. Investors should be aware that recognizing earnings with respect to a cash deposit increases earnings but does not generate cash. Of course, significant additional cash will be generated as orders are completed and additional payments are made. A truly secular decline in the entire solar industry could threaten this business as well but the current decline, which appears to by more cyclical, will be cushioned by the huge order backlog. Putting my energy analyst hat on for the moment, if solar costs come down significantly, solar will be competitive against retail electricity for distributed applications even without a subsidy so I do not think that the industry is going to go away.
The big promise for the future appears to be in the sapphire business. Right now, the big application is LED lighting and LED lighting appears to be well established and expanding. Order backlog in this business is $718 million. GTAT is optimistic about the ability of sapphire to penetrate the touch screen, mobile phone, market which would require a huge expansion of sapphire production capacity. There are persuasive arguments that this may occur as early as late next year, but, when I try to assess them, I realize that I am getting out of my technical depth.
CEO Tom Gutierrez is trying to do what General George Patton did masterfully at the height of the Battle of the Bulge - shift direction while in action. I think he has taken critically important initial steps in the right direction, but it is a very difficult thing to do. On the other hand, at a price of $3.10 a share, GTAT offers rewards which are asymmetric to risks. With roughly $1.50 in net balance sheet cash and one extremely attractive growing business and another solid business with a huge backlog, GTAT should, at worst, pull thorough as a smaller, but profitable, company and an attractive acquisition target. If sapphire is used in mobile phones, if the HiCz is a big winner, or even if the PS business just keeps humming along on the backlog long enough to hit the next upturn in the cycle, GTAT could pay off handsomely. The rewards grossly outweigh the risks here.
Disclosure: I am long GTAT.