GT Solar: Stock Price Reflects Concerns

GT Solar International (SOLR), a provider of manufacturing equipment and services for the photovoltaic industry, was one of the few companies to go public in 2008. Asia is the company’s largest geographic market, responsible for 91% of revenues through the first nine months of fiscal 2009. Remaining revenues came from Europe (4.7%) and North America (4.3%). Customers consist of major solar power and chemical companies.

SOLR’s photovoltaic segment generated 76.2% of first nine-month revenues. It makes directional solidification systems (DSS). These specialized furnaces melt polysilicon and cast multicrystalline ingots. The segment also sells wafer cleaning and etch systems, slurry recovery systems, cell testing and sorting equipment, and tabber/stringer machines. SOLR also provides related parts, consumables, technical support, and consulting services. The polysilicon segment, which produced 23.8% of revenues, makes chemical vapor disposition (CVD) process reactors and related equipment. These are used to produce polysilicon, the key material found in solar cells.

SOLR provides equipment across the photovoltaic manufacturing chain, allowing it to offer turnkey solutions few rivals can match. It is seeing strong demand for alternative, clean sources of energy, especially in Asia.

The company has grown revenues from just $9 million in fiscal 2004 to $244 million in fiscal 2008. Growth continued into the first nine months of 2009. Net revenues nearly quadrupled year-over-year to $402.5 million.

The operating profit margin soared from just 5.80% to 30.39%. Net income climbed tenfold to $76.2 million or 52 cents per share. However, the global recession has dimmed the company’s near-term prospects. Tight credit conditions and higher borrowing costs have made it difficult for customers to secure capital. Fiscal Q4 sales could be up as little as 6%. Net income could fall by almost 20%.

Management warned that some customers have asked to defer delivery of equipment. This is problematic since the company generated 82% of first nine month revenues from just four customers. Almost two-thirds of revenues were from the sale of DSS units. Shares of SOLR collapsed soon after last July’s IPO on news that LDK Solar, one of its largest customers, signed a contract to purchase furnaces from a rival. This resulted in several class action lawsuits against SOLR accusing it of misrepresenting the health of its relationships with key customers.

We believe these concerns are already reflected in the stock’s price, which is now a fraction of the offering price. Furthermore, SOLR is becoming less reliant on DDS sales. In fact, DDS sales accounted for just 42.2% of fiscal Q3 revenues, down from 91.2% for the first half of the fiscal year. Similarly, efforts to diversify the customer base will make the company less dependent on a small number of key customers.

Despite a sequential decline of about $80 million, backlog stood at $1.33 billion at the end of fiscal Q3. Furthermore, backlog quality is very high. In fact, customers must pay non-refundable cash deposits of 20-40% of the projected value of their orders. They also must provide letters of credit for the remainder. SOLR has no debt and $93.7 million in cash, giving it flexibility and the necessary financial resources to develop efficient production technologies that help customers reduce their manufacturing costs.

Comments

[123andy:]

My GT SOLAR shares trade at substantially lower price than this chart shows. Whatsup?

May 07 10:59 AM

[Wisdom vs. ...:]

123andy: it is a percentage chart, not cash

thanks for a factual solar blog, rare & refreshing

May 07 02:16 PM