BTU International (BTUI) is a global supplier of advanced thermal processing equipment and processes to serving markets in solar cell, nuclear fuel and fuel cell manufacturing as well as electronics assembly and semiconductor packaging. Before reporting disappointing earnings Tuesday evening, BTUI had a market cap of $117M.
This small company caught my big interest after I noticed BTUI attributed large downside guidance to a major solar customer who " … advised its suppliers that equipment deliveries have been put on hold …The delay in the execution of this order relates to a major part of the in-line diffusion equipment orders we announced this past January." On January 10, BTUI soared 20% on news of two new orders for Meridian in-line diffusion furnaces worth $18M in revenue. The customers are both located in Asia, one being a new customer. Both customers are/were expanding capacity. At that time, these orders seemed very solid:
"We recognize that when the solar industry is ramping at a rapid pace, it is a difficult time for customers to change their manufacturing process… However, with strong pressure to lower cost per watt, in-line, diffusion makes a strong case by offering state of the art cell efficiencies for existing and advanced cell processing, coupled with a lower cost of ownership."
As a result of the delay, BTUI guided second quarter revenues down as much as 37% from $27.13M to $17-18M. While BTUI asserted that this delay may just represent a shift of revenues into the back half of the year, by indicating "the timing of shipments of this order might affect our overall rate of growth for this year," BTUI suggests there is some material possibility this order may be outright canceled. This warning was enough to drop the stock 21% in after-hours trading, effectively erasing January's gains from the announcement of the new orders.
BTUI also noted that inventories are building in the solar supply chain, causing prices to drop on solar panels:
"The solar industry is presently going through what we believe to be a short-term cycle. The industry is absorbing a significant amount of capacity additions, coupled with uncertainty about feed-in tariffs in Europe. We believe that inventory levels are higher than expected leading to price pressure for solar panels. Accordingly, we have lowered our short term expectations for the rate of capacity expansion in silicon based solar cells. We remain bullish on the medium and long term outlook."
The scenario of a second half slowdown as a result of last year's industry-wide announcements of massive capacity additions -- see almost any earnings report from last year's third and fourth quarters, like ReneSola (SOL) -- was hotly debated. It looks like the alarm bells are ringing loud and clear now. I fully expect solar to go into an extended correction as this reality fully sinks in and formerly bullish analysts start slashing estimates and ratings. I agree with BTUI that this inventory glut should be short-term, but cyclical sell-offs can be swift and deep. However, such a correction should set up some great buying opportunities by early summer.
Although BTUI has been stuck in a trading range for most of the year, it held a 40% year-to-date gain going into earnings.