GT Solar: Undervalued With Strong Momentum

Jan.15.11 | About: GT Advanced (GTATQ)

GT Solar (SOLR) is a global provider of Polysilicon production technology, silicon and sapphire crystalline growth systems for the solar, LED and other specialty markets. Customers include several of the world's largest solar companies as well as companies in the chemical industry. It operates through three segments:

Polysilicon Business

The principal products of the polysilicon business are chemical vapor deposition, or CVD, reactors, as well as engineering services and related equipment used to produce polysilicon, the key raw material used in silicon−based solar wafers and cells. The CVD reactors utilize the widely−used and proven Siemens polysilicon production process. Demand for Polysilicon is mainly driven by end-user demand for solar power.

Photovoltaic (PV) Business

The primary focus of the PV business is the manufacture and sale of directional solidification, or DSS, crystallization furnaces and ancillary equipment used to cast multicrystalline silicon ingots by melting and cooling polysilicon in a precisely controlled process. These ingots are used to make photovoltaic (PV) wafers which are, in turn, used to make solar cells. The PV business also provides services related to the production of PV wafers, cells and modules. Demand for PV is mainly driven by end-user demand for solar power.

Sapphire Business

On July 29, 2010, it acquired privately−held Crystal Systems, Inc., a crystal growth technology company that produces sapphire material used to manufacture material for LED applications, as well as other sapphire components used in the defense, medical and aerospace industries. This sapphire business manufactures its products with advanced sapphire crystal growth furnaces that incorporate the Heat Exchanger Method, or HEM, technology.

Let’s take a look at some key financial figures. The company has $251 million in cash and $0 in debt. Revenue has increased from $60 million in March 2007 to 544 in March 2010 (end of fiscal year). The Gross margin is around 40% with an operating margin of around 28%. The ROE and the ROIC are as impressive and currently reaching 66%.

The Earnings Power Value method will be used to get insight in the intrinsic value of the company. We’ll make the adjustments listed below to calculate the EPV value (without considering adjustments for future growth):

  • EBIT Margin of 28%SG&A,
  • R&D and Depreciation adjustment
  • Tax rate of 37%
  • Discount rate of 12%

This gives us a current earnings value of $9.81. The stock is currently trading around $10.75, slightly higher than the earnings value. The company has been growing aggressively in the last years. The three and five year annual average revenue growth is more than 100%. This looks like a good opportunity to buy a fast growing business against current earnings value and getting the growth almost for free.

We’ll take a look at the EPS and Revenue numbers for the last 6 fiscal quarters (the fiscal year for GT Solar ends on March) to determine the year-over year growth. Graph 1 below shows the trend for both numbers.

Graph 1: Quarterly Revenue and EPS Trend

Click to enlarge

(Click to enlage)

The year-over-year revenue increase for the last 2 quarters is around 100% and for EPS, it is double to 5 times. The company raised his guidance for fiscal year 2011 EPS to the range from $1.00 to $1.10 (up from $0.90 to $1.00). Assuming a P-E ratio of 15 would take the stock price range to $15 - $16.50 giving the stock a potential upside of 40% or more. The stock price is in a strong upward trend since December 2010 and having strong institutional support with 8 quarters of increased institutional buying. The last 2 weeks also see an increase in price combined with an above average volume.

Disclosure: Author long SOLR