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Company Overview

GT Advanced Technologies (GTAT) is a global provider of production technology in the solar and LED market.

Solar: The firm offers equipment used to produce polysilicon (main material used to make silicion-based solar wafers and cells) and multicrystalline silicon ingots (used to make photovoltaic, PV, wafers which are then used to make solar cells).

LED: GTAT also offers equipment used to create sapphire boules (used to make sapphire wafers, the preferred material for manufacturing LED devices) and also sells sapphire material directly to customers (which is used for LED and other specialty markets.)

Current Industry Overview

The solar industry currently is in a slowdown and looks to be facing consolidation heading forward. The main reason: Over-capacity. Many firms have developed over-capacity over the years despite the fact that the current underlying demand is not strong enough to support it. The most recent example of this was the bankruptcy of Solyndra, the supposed US solar scandal (in my opinion the magnitude of this event is greatly exaggerated). The firm simply was no longer able to compete mainly due the plummeting of polysilicon prices (from $300/kg back in 2008 to a current market price of $40/kg) and increased competition. In addition to this, governments around the world have started to cut back on the subsidies provided to the industry. The main reason is that the solar market has attracted large amounts of competition recently, pushing prices to new lows that giving out large subsidies was no longer justifiable. With such increased barriers to entry, the only firms that can remain profitable in the future are those with the most cost-effective means of production.

How does this affect GT Advanced Technologies?

GTAT currently provides production equipment to both big and small solar manufacturers. With this recent slowdown, analysts forecast a decrease in demand for equipment until at least mid-2012 due to the current over-capacity, and decreased capital expenditure from solar manufacturers due to falling margins. Many analysts are currently questioning whether GTAT will be able to continue its double-digit revenue growth heading forward.

Company Highlights

GTAT currently offers some of the most cost-efficient equipment in creating polysilicon and PV wafers (the firm’s current product, SDR 400, is able to produce polysilicon at an all-in-cost of around $25/kg compared to the market average of $40/kg). This was one of the driving forces which helped cause the dramatic decrease in polysilicon prices in recent years.

The company is a key supplier to many of the world’s leading polysilicon and solar companies and also has a strong presence in China. GTAT has been doing business in China since 2002 and has strong relations with many of the Chinese solar industry leaders (The company has supplied equipment to 3 of the top 8 leading PV manufacturers in China). According to SolarBuzz, China (including Taiwan) has accounted for about 68% of the world’s solar wafer manufacturing capacity in 2010.

In addition to the company’s presence in China, GTAT also recently booked deals in Korea (an exercise of a $33 million option from the contract with OCI Company, Ltd announced back in May) and in Saudi Arabia, a $47.7 million deal for polysilicon equipment with Polysilicon Technology Company, the first active polysilicon production project in the Middle East at this time according to Marketwatch.

Along with the company's strong reputation and customer relations, GTAT also continues to expand its revenue sources through high quality acquisitions. Recently, the company acquired Confluence Solar with its ‘Hi-Cz’ technology (allows PV wafers to be produced with increased efficiency with low cost tradeoff). GTAT expects to launch the product by the company’s fiscal year 2013 (mid-2012). With the continued falling government subsidies, the increase in cell efficiency generated from new technology should help GTAT continue to cement its position as one of the market leaders in multicrystalline silicon ingots production equipment. There was already rumored interest among PV manufacturers in Europe after the acquisition.

Financial Highlights

Key Financials compared to the industry:

Key Financials:

GTAT

Industry Average

Industry Median

P/E

5.22

23.71

14.595

Forward P/E

5.32

30.40

12.71

PEG

0.52

1.37

0.95

P/Book

3.39

2.062

1.185

P/Sales

1.05

2.70

1.47

P/Free Cash Flow

2.57

25.87

21.10

Gross Margin

45.50%

26.68%

43.53%

Operating Margin

31.54%

-69.95%

9.62%

Profit Margin

20.79%

-70.31%

7.36%

Debt to Equity

0.30

0.53

0.15

Return on Equity

70.06%

-2.33%

9.97%

Return on Investment

38.51%

-4.26%

8.13%

From the table, we can see that GTAT clearly has strong financials compared to others in the industry. Some may have concerns when looking at the relatively higher P/Book ratio and Debt to Equity Ratio; however since GTAT is a growth company, a high P/Book ratio is not really representative of its assets since large amounts of R&D is expensed annually. The Debt to Equity Ratio is also not much of a concern due to the fact that the company has 3.5x the amount of cash and cash equivalents compared to its long-term debt.

Valuation

Using Multiples Approach:

Multiple

Price Using Industry Average as Multiple

Price Using Industry Median as Multiple

P/E

$36.97

$22.76

Forward P/E

$46.51

$19.45

PEG

$21.45

$14.87

P/Sales

$20.93

$11.40

*Did not use P/B since the firm is in the growth stage and using P/B multiple tends to be misleading

Using current industry multiples, it can be said that the company may be undervalued with a price range of $11.40 – $22.76 based on the industry median (In my opinion, the median is a better estimate since it is less skewed by extremes in the industry). To further confirm this mispricing, I would also look at the EV/sales and EV/EBITDA multiples to see whether it is reiterated.

Using DCF Approach

Using a conservative estimate for a revenue growth rate of 10% for the next 5 years and gradually decreasing it to a 2% stable growth rate in year 10 for estimating its terminal value, here is the expected range of share price after a sensitivity analysis:

GT Advanced Technologies Sensitivity Analysis

Discount Rate

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

Terminal Growth Rate

0.5%

$ 24.28

$ 24.12

$ 23.97

$ 23.82

$ 23.67

$ 23.52

$ 23.38

1.0%

$ 25.16

$ 24.99

$ 24.83

$ 24.67

$ 24.52

$ 24.36

$ 24.21

1.5%

$ 26.16

$ 25.99

$ 25.82

$ 25.65

$ 25.48

$ 25.32

$ 25.16

2.0%

$ 27.32

$ 27.14

$ 26.95

$ 26.78

$ 26.60

$ 26.43

$ 26.26

2.5%

$ 28.67

$ 28.48

$ 28.28

$ 28.09

$ 27.91

$ 27.72

$ 27.54

3.0%

$ 30.27

$ 30.06

$ 29.86

$ 29.65

$ 29.45

$ 29.25

$ 29.06

The range from the DCF model shows the company should be priced around $23.38 – $30.27 which is well above the current price of $8.14. The numbers used for the analysis were from the recent 10K report instead of TTM numbers due to the fact that I did not have access to such information; however the growth rate used for the next 5 years was based on the recent re-advised expected growth rate for the company’s 2012 year end by the company’s management.

Conclusion

I am long GTAT based on my opinions that:

  • The company has strong growing revenue streams backed by innovative technology while maintaining high margins; I also foresee that the company’s management will continue making good acquisition and technology decisions based on its past performance.
  • GTAT has an established presence in China (which in my opinion will continue to have high demand for solar power for the long-term) and the fact that the firm continues to expand its customer base in emerging markets (i.e. recent Middle-East deal).
  • I believe that factors such as the euro-crisis, recession fears and an overly negative solar industry outlook in the short term have caused the markets to over-react - along with the fact that GTAT is categorized with the other solar tech stocks despite its strong fundamentals.
Source: GT Advanced Technologies: Growth Stock For The Long-Term