GT Advanced Technologies (GTAT) is one of the biggest solar equipment providers in the world, selling equipment mainly to upstream solar companies. The company used to be known as GT Solar, but changed its name after it bought Crystal Systems. This acquisition allowed GTAT to get into the sapphire production equipment space leading to the change in nomenclature. The company is going through the roughest phase in its history as the whole solar industry is going through a massive downturn. With most of its solar customers facing survival questions, capex has been put on a backburner. Equipment orders for solar equipment vendors are down by around 70-80%, as the solar industry has around ~60 GW in capacity compared to the annual demand for ~30 GW. Some of its competitors like Centrotherm have become bankrupt, while others are closing divisions and firing workers.
The company on 19th December gave revenue and earnings guidance for 2013 that was much lower than analyst estimates. The company also gave a realistic view of its polysilicon and sapphire division outlook. Like the solar industry, the LED industry has also seen a massive oversupply and price crash. Bankers burnt by their solar customers have been reluctant to lend to LED players. This means that GTAT is losing out on sapphire sales as well. While GTAT is the leading polysilicon equipment seller in the world, a huge oversupply position implies slow sales here as well.
The company has also stopped development and written off the order backlog for one of its main solar products - DSS (revenue was more than $200mm a quarter in 2010). This product is used by solar wafer companies to grow solar ingots which are ultimately cut into wafers. The solar wafer part of the supply chain has been one of the worst affected with wafer ASP much below cost for even the lowest cost suppliers. LDK which has a 4 GW capacity is barely operating at 40% utilization.
Why we like GT Advanced Technologies
1. Excellent Acquisitions and Good Management
The current stock performance might lead people to criticize the management, but we think the company leadership has performed excellently. Their acquisition of Crystal was a masterstroke leading to a business which now accounts for almost 50% of their revenues. GTAT grew the sapphire business from approximately $23 million in the first 9 months of 2011 to $218 million in the first 9 months of 2012
GTAT also bought Twin Creek's technology and assets for a mere $10 million. This gives them access to Hyperion" Ion Implanter Technology which will benefit both their sapphire and solar product lines. Before its demise, Twin Creeks was developing ion implantation technology which allows the production of substrates without the need for wafering.
2. Product Pipeline
The company has constantly been introducing new products for its main customer segments. These products have proven their utility in reducing costs and improving throughput. It is the world leader in supplying polysilicon equipment and counts top polysilicon companies as its customers. The company has lined up several new products and technologies for its customers. We are listing some of them below:
- New Polysilicon Equipment allowing for production cost of $14/kg. The older polysilicon companies are producing polysilicon at $20-30/kg, while the spot price now is $15-17/kg.
- ASF Opportunity for Mobile and Touch screens. Note if this product succeeds, it will open a vast new market for GTAT in addition to the LED market.
- HiCz Technology aimed at next generation of high efficiency solar wafers and cells.
3. Cyclical Bottom but still making Profits
GT Advanced Technologies has touched rock bottom in the solar segment and is very near to the bottom in the LED segment as well. Despite this, the company has managed to keep itself in the black. The time to buy is when things are at their worst and that certainly seems to apply to GTAT. The company has sharply reduced 2013 revenues to $500-600 mm (~ 30% y/y decline) and EPS to 25-45c. But GTAT is in no danger of becoming bankrupt (Centrotherm) or getting out of this business (Applied Materials (AMAT)?). The solar industry is going to keep on growing and it will require technology vendors like GTAT.
4. Company has already reduced fat and streamlined operations
GTAT has been rapidly consolidating operations and reducing the workforce. In October, 2012, the company announced that it would cut 25% of its workforce and combining separate business units into a single Crystal Growth Systems (CGS).
5. Industry is Consolidating
The severe downturn has separated the men from the boys. The industry is consolidating with Meyer Burger buying Roth & Rau and Centrotherm going bankrupt. Some of the top solar equipment companies like Applied Materials have also sharply reduced their focus and spending on solar energy. GT Advanced Technology is positioning itself cleverly for the next capex cycle ( N-Type monocrystalline wafers, HiCz).
- Global Solar Panel Wars - The Global Solar Panel Wars are escalating rapidly and it is hard to predict who gets hurt. China is preparing to retaliate against the US duties on its solar panel exports. Since GTAT exports most of its equipment to China, it may get hurt if the government decides to penalize US solar imports.
- Further Deterioration of Backlog - The order backlog has decreased rapidly for GTAT as customers have no money to pay for equipment. The management has already pruned the backlog quite sharply, however there is no guarantee that it might not go down even more.
- Cash Burn - The Company currently has sufficient cash of ~$400 million and net cash of ~$100 million. However the company is forecasting end 2013 cash position of less than $300 million which implies cash burn in 2013.
Summary and Valuation
The GTAT stock price like the rest of the solar stocks has come down quite dramatically from the peak of $16 to around ~$3 now. However, we think the company is a survivor and will be a leader coming out of this vicious industry downturn. The company is not expensive at roughly ~0.6x forward sales and 10x forward P/E (assuming 30c EPS in 2013). While it is tough to predict exactly when the solar industry will come out of its rut, we think this stock has a high upside potential.