- Increasing order backlog brings certainty to future earnings.
- The fundamentals of the company are improving.
- The company is focusing on the high-growth business segment.
GT Advanced Technologies (GTAT) has had an amazing start to the year and the stock is up over 96% year-to-date. The stock has continued its momentum from the last year when it recorded stellar returns and it is up about 490% during the last twelve months. The growth prospects of the company after its deal with Apple (NASDAQ:AAPL) have made it an immensely popular investment choice with the investors, and the rise in the stock price is justified in my opinion. There is a massive growth opportunity for the company as the electronic device manufacturers turn their focus from the gorilla glass provided by Corning (NYSE:GLW) to the sapphire glass provided by GTAT.
Increasing Order Backlog
GT Advance Technologies has a substantial amount of order backlog which is yet to be accounted for in the coming quarters. As of December 2013, the company had an order backlog of $602 million which is equal to more than twice its revenue for the previous year. The highest backlog of the company is in Polysilicon segment with $299 million of orders followed by sapphire business segment with $292 of orders and Photovotiac business with $11 million of orders. These huge amounts of order backlog add certainty to the future revenue of the company and subsequently, to the profits of the company.
The main growth outlet for the company will be the sapphire segment, as I mentioned above, and GTAT's agreement with Apple will be a game changer for the company. Apple has decided to make an advance payment of $578 million for the five years starting from 2015. The payment will either be in the form of cash or will be reimbursed for the orders of Apple.
In addition, the company has recently signed another contract worth $336 million to provide equipment and technology to Cosmos Chemicals Berhads. The company will provide the gear for 25,000 metric ton annual (MTA) polysilicon capacity to Cosmos Chemicals. Considering this figure, the company now has a total order backlog of $938 million. The global demand for polysilicon-based solar energy is rising. This is supported by the fact that polysilicon demand is expected to rise 25% this year to 282,000 metric tons.
Fundamentals will Improve
The company beat the earnings estimate for the fourth quarter; however, the revenue figure was lower than the estimates. There was a substantial increase in the research and development expenses as well as interest expense. The guidance for the first quarter of the year is also disappointing and the expected revenues and earnings figures are below the estimates. However, the forecast for the full is year is better than what the market expected, indicating that the majority of the revenue will be coming in the later part of the year. For the full year, the company expects revenue in the range of $600-700 million and EPS of 2-18 cents - consensus estimates for the full year EPS were 8 cents.
Moreover, the company has recently announced its new solar technology called Merlin. This technology allows the company to substantially decrease its manufacturing and installation costs. In addition, it increases the panel efficiency of the company's product by replacing the silver bus bars by a flexible grid. As this technology gets into momentum, we may see a significant decrease in operating costs of the company. However, the majority of the revenue for the company will come from the sapphire segment. The stock is currently trading at a forward P/E ratio of about 22, which is expected to come down to close to 12 by 2016. Improving fundamentals and the growth in the business segments gives strength to my belief that the rise in the stock price is justified.
Focus on High-Growth Business Segments
The solar and LED segments have become intensely competitive and the problem of overcapacity has driven a number of players out of the market. However, more recently, the segment has made a strong turnaround due the robust demand. As a result, the prospects of the solar and LED segment are bright in the short-medium term. The prices of polysilicon has made a strong recovery and it is currently selling for over $20 per kilogram, compared to $16 at the start of the last year. Despite the strong recovery in the market, the company is focusing on high-growth segment of sapphire glass, which is an astute strategy in my opinion. The superior performance of the sapphire glass has attracted manufacturers like Apple to consider the product for its devices, which will result in continued growth in the revenues and earnings of the company. I believe GTAT is positioned very nicely for future growth due to the recovery in the solar and LED segment coupled with the growth opportunity available in the sapphire segment.
In my opinion, GTAT is one of the most attractive investments present in the market at present. The growth in the respective business segments is clear and the fundamentals of the company will be very attractive. I believe there is still a lot of potential in this stock and we will see it trading at a substantially higher price by the end of the year. As the company reports impressive performance during the later parts of the years, the stock price will be positively affected.