STR Holdings Inc.: Large Buyback And Improved Results Going Forward

Apr.29.14 | About: STR Holdings, (STRI)

Summary

On March 7, 2014, the Company announced that it had purchased 15.6 million shares of common stock at $1.54/share to end with 26.3 million total outstanding shares.

On January 21, 2014, the Company announced a new contract manufacturing agreement with a Chinese solar encapsulant manufacturer FeiYu to meet increased demand from several top-tier solar module manufacturers.

FeiYu commenced manufacturing in early January with production expected to increase "steadily over the next several months." The Company expects steadily improving top and bottom line results going forward.

STR Holdings, Inc., (NYSE:STRI) is a provider of encapsulants to the solar industry since 1944. The encapsulant is a critical component used in photovoltaic solar modules. The Company developed the ethylene-vinyl-acetate (NYSE:EVA)-based encapsulants for use in commercial solar module manufacturing in conjunction with the Jet Propulsion Laboratory of the California Institute of Technology under a NASA contract for the United States Department of Energy and Development Administration. The Company's encapsulants are used in the solar panel technologies, including crystalline silicon and thin-film. The Company also offers inspection, testing and audit services to assure that consumer products meet safety, regulatory, quality, and performance and social standards.

STRI is currently trading T $1.54 or well below the $1.75/share cash that resulted after the Company purchased 15,611,958 shares of company's common stock at $1.54 per share as announced on March 7. 2014. The Company paid $24,042,415.32, excluding fees and expenses for about 37.3 % of total number of shares of company common stock resulting in 26.3 million issued and outstanding shares as of March 5, 2014. STRI funded its purchase of shares tendered in offer using portion of its cash and cash equivalents.

The massive share buyback could prove to be a brilliant move by STRI management if their projections of increasing revenues and improved bottom-line results materialize. If nothing else, it is an unprecedented vote of confidence in the Company's future. Another significant vote of confidence was evident on March 14, 2014 when Director Bryant R. Riley filed that he had purchased 187,000 shares of common stock at $1.55/share.

In recent announcements, STRI management sounded bullish about its prospects in 2014 and beyond. On January 21 2014, STRI announced that it had inked a contract manufacturing agreement with Chinese solar encapsulant producer FeiYu due to "increased demand for STR's products from top tier solar module manufacturers in China." The announcement further stated that FeiYu commenced manufacturing in early January, 2014, with production expected to increase "steadily over the next several months." It should be noted that STRI is also in the process of renovating its production facility in Suzhou, China which it expects to commence operations in Q2 further adding to capacity to meet demand from several top-tier solar module manufacturers.

In an effort to improve the bottom line, and to meet Chinese module manufactures' requirement for just-in-time delivery, STRI will cease production at its Johor, Malaysia facility by the end of the first quarter of 2014. To further preserve cash, and to accommodate anticipated demand by its top-tier Chinese module manufacturing prospects, STRI management has stated that it will seek to outsource the production of its next-generation encapsulants to more China-based manufacturers like FeiYu. Also as a cost-cutting move, the Company has recently reduced its headcount at its Connecticut facilities. In October 2013, the Company further streamlined its operations and eliminated the positions of Chief Operating Officer, Vice President of Human Resources, Chief Technology Officer and Vice President of Finance, effective November 15, 2013, transferring responsibilities to others in the organization.

The bullish case for STRI is that at the current stock price, the Company is very attractive. The Company's poor performance of the last two years has been mostly due to macroeconomic shifts that were out of the control of management. But recent trends indicate that production of solar panels is expected to increase significantly in several areas of the world such as China, Japan, Jordan, Saudi Arabia, India, Africa and South America and in several niche applications. According to a recent report by Goldman Sachs, the rooftop solar market will grow at a rate of about 45% from 2013 to 2016. More recently, on April 24, 2014, Governor Andrew M. Cuomo announced a nearly $1 billion commitment to NY-Sun, which will significantly expand deployment of solar capacity throughout the state and transform New York's solar industry to a sustainable, subsidy-free sector. I expect similar announcements by other states and governments as they seek to minimize their dependence on fossil fuels. The sector bullishness is exemplified by large cap solar plays like First Solar (FSLR) which recently provided stellar financial guidance for FY 2015 and 2016, targeting an EPS range of between $4.50 and $6.00 (versus a consensus of under $4 per share). Another example is SunPower (NASDAQ:SPWR) which had a strong first quarter, with year-over-year revenue growing 9% and net income swinging from a $54.7 million loss in Q1 2013 to a $65 million profit in Q1 2014.

To underscore the combined benefits of higher expected production and the Company's aggressive cost-cutting moves, Joseph C. Radziewicz, STRI's Vice President and Chief Financial Officer recently stated, "We continue to execute our turnaround strategy by implementing our China Tolling Plan and reducing our cost structure," ……"Based upon these actions, we expect to grow our top-line and improve our financial results as we progress through 2014 while maintaining a healthy cash balance even after repurchasing approximately $24.0 million of our common stock earlier this month in the Dutch auction tender offer."

The potentially significant upside on the share price, if the Company successfully executes its growth plans, has not gone unnoticed to large opportunistic investors like well-known activist Lloyd I. Miller, III. Mr. Miller, who has served on the board of some of his largest holdings, filed form 13-G with the SEC on April 16, 2014 stating that he now owns 6.4% of the Company's common stock. Several large institutions and funds own almost 90% of the Company's common stock. This is unheard of for a company trading at $1.54/share.

I believe that STRI's share price is at an inflection point with potentially significant upside going forward - if company management is successful in executing its business plan short and long-term. Several large institutions and well-known investors are banking on it. However, those considering in investing in STRI are encouraged to carefully read and understand the risks associated with investing in this (or any other company) as stated in 10-K and 10-Q filings with the SEC.

Disclosure: I am long STRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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