GT Advanced Technologies (GTAT) closed Thursday at $5.00 and is either on the verge of some disastrous developments or is selling at a ridiculous discount to fair value. GTAT has net balance sheet cash (cash minus debt) of $2.19 a share and earned $1.44 per share during the fiscal year ending March 31, 2012. This means it has a PE of less than 4 and, with balance sheet cash backed out, an enterprise PE of about 2.
GTAT has three lines of business - polysilicon (manufacturing and selling silicon deposition reactors), photovoltaic (manufacturing and selling directional solidification crystallization furnaces) and sapphire (manufacturing and selling sapphire material and equipment). The first two businesses involve sales to the solar energy industry and are responsible for GTAT's low valuation. The assumption is that the solar industry is in decline and that these businesses are threatened. The third business involves sales primarily to the LED lighting business and is, thus, independent of developments in the solar industry. All three businesses involve the production of crystals and this is,in essence, GTAT's "core competence." In all three businesses, GTAT appears to be cutting edge and is constantly investing in R and D to maintain its competitive position.
Historically GTAT was almost entirely dependent upon sales to the solar industry. In fact, the company was named GT Solar International until less than a year ago. However, the fastest growing part of GTAT's business is the sapphire business and, as of March 31, 2012, the sapphire business constituted 43 per cent of GTAT's $1.8 billion backlog of orders. The year over year growth in the sapphire backlog is roughly 300 per cent. This business has the potential to grow substantially as there are prospects that sapphire may be deployed beyond the LED industry.
GTAT has a huge backlog which is, to some extent, a double edged sword. At $1.8 billion, the backlog is almost $15 a share. And the backlog is anchored with customer deposits ($332 million), letters of credit ($109 million), and deferred revenue ($196 million). The low PE, the huge amount of balance sheet cash and the rock solid backlog make this story appear to be too good to be true. Investors should read through GTAT's annual report and understand the accounting implications of the backlog and the deposits. In a real sense, it is true that a good deal of this year's income is already in the till. However, this also means that much of the balance sheet cash is in the form of customer deposits which must be earned by the delivery of product. GTAT's real vulnerability would be to a rash of order cancellations leaving it exposed to liabilities (GTAT identified $418 million of commitments it has made for purchases of materials and products that are not carried as liabilities on its balance sheet). This is perfectly correct accounting practice and GTAT should be commended for this disclosure. And GTAT has assets in the form of inventory and vendor prepayments that must be considered in projecting the flow of revenue and activity. But GTAT is not in the position of simply being able to close up shop and walk away with the $2.19 a share of balance sheet cash. The cash is part of a flow of funds and deliveries that will unfold over the next year or so.
GTAT's management has demonstrated that it is nimble and capable of proactively reacting to industry trends. I don't think that there is any significant chance that GTAT will be trapped in the middle of commitments to its suppliers and cancellations from its customers. But investors must be aware that the analysis of a company like GTAT is different in important respects from the analysis of a soft drink producer. The progress of the "pig through the python" will unfold over the next few quarters. Of course, by the time it becomes clear that GTAT is experiencing solid cash flow and growth in the sapphire business, the stock will be much, much more expensive.
GTAT has been unfairly tarred as a "solar" company and its stock has sold off as part of the general revulsion to this industry. I have written about the importance of revulsion in identifying opportunities to buy stocks at deep discounts. GTAT is an excellent example of misplaced revulsion. For me, this is a real table pounder. I am a strong conviction GTAT long.