Is Energy Conversion Devices Ready for a Comeback?

Energy Conversion Devices (ENER) is an interesting tale - this has been for many many years a "hope" stock i.e. more promise than execution - I remember the hoopla surrounding it at the turn of the century ... the last time people were all hyped up about alternative energies (at the time the big fuss was about new wave car batteries and the like).

his company has morphed over the years with a confusing array of business lines (trying to decide what it wanted to "be"), but recently has added a newer and more-business savvy executive team, and while they still have a few business lines .... the excitement is their solar business, which has turned into the dominant line at the company.

Much like First Solar (FSLR), ENER has a thin film process, so by staying away from the polysilicon shortage issue they have some potential to sidestep some issues currently facing the rest of the industry. The company is out with earnings and put in a surprising act, instead of a 6 cent loss, we have a 17 cent gain. So perhaps the long-awaited and promised turnaround is finally here.

We'd like to see another quarter or so of this to call this a confirmed turnaround but speculators could care less about that... the stock is up 26% in premarket. This is a name I've been keeping 1 eye on, but with results like this it's time to put both eyes here.... another quarter like this and you'll get Cramer talking about how this is the next First Solar.

Revenue growth in solar was fantastic and gross margin exploded 11% higher... that's a heck of an achievement. As one of the great philosopher's of our time would say... "That's hot." I have to do some homework with the guidance, but on first glance the 2008 full year loss estimate and 2009 profit look like they vastly understate profit potential; which is my favorite type of story. We'll be interested on a pullback, although the hype on a name like this could carry this one very far in a quick time.

• Total consolidated revenues for the quarter were $70 million, up 24 percent from second quarter revenues of $56.4 million, and 155 percent higher than third quarter fiscal 2007 revenues of $27.4 million. Solar product sales were $64.9 million, a 31 percent sequential increase and a 193 percent increase over the prior-year quarter.
• Net income for the third quarter was $7.0 million, or $0.17 per share, compared to a net loss of $5.4 million, or $0.14 per share, in the second quarter of fiscal 2008, and a net loss of $6.9 million, or $0.17 per share, in the year-ago period. Third quarter results include preproduction costs of approximately $751,000 and restructuring charges of $2.4 million, representing $0.08 per share in the aggregate.
• Gross margin on product sales in the solar business was 30.7 percent in the third quarter, compared with 19.2 percent in the second quarter. The gross margin improvement was driven by better factory utilization and yield, and favorable customer/product mix.
• United Solar Ovonic produced 21.6 MWs in the third quarter and 47.4 MWs for the first nine months of the fiscal year. The company confirmed its plans to expand and add 120MWs of additional nameplate capacity to its existing Greenville facilities. ECD will be able to internally fund this expansion through available funds and cash flow from operations. This previously announced expansion will increase the company's nameplate capacity to approximately 300MWs by the end of fiscal year 2010.

Guidance

• Total consolidated revenues are expected to be between $73 and $78 million for the fiscal fourth quarter ending June 30, 2008 and between $246 and $251 million for fiscal 2008. Solar product sales for the fourth quarter are expected to be $68 to $73 million, and $222 to $227 million for fiscal 2008. For the fourth quarter, ECD expects it will maintain the 30 to 31 percent gross margin it achieved in the third quarter. Restructuring costs are expected to be between $2 to $3 million for the fourth quarter and $10 to $11 million for fiscal 2008. Preproduction costs are expected to be approximately $1.5 to $2 million for the fourth quarter and between $7 and $8 million for fiscal 2008.

Disclosure: No position

Comments

[David Lentz]

I wouldn't make too much of any perceived similarities to First Solar's thin-film process. I'm pretty sure (but do your own due diligence to confirm) that ENER does not rely on tellurium in their product, so any concerns about raw material scarcities would not apply there.

Also, the Energy Conversion Devices' PV technology lends itself to some interesting packaging (the "solar shingles" product), that I have not seen elsewhere in the industry. If the housing industry ever recovers, and homebuilders start looking for value-added features, simply replacing conventional roofing with solar shingles is about the cheapest way to add solar electric power to an (appropriately oriented) house. While ENER (along with the rest of the PV industry) is clearly targeting the commercial properties market for now, when they eventually turn toward the individual homeowner, things will get exciting. The rooftop space may not be as large individually as commercial properties, but what they lack in size they make up in numbers. ENER seems uniquely poised to dominate the home PV marketplace.

(full disclosure: yes, I do own shares of ENER, doesn't everyone who speaks well of any particular stock?)

[steve pluvia]

1. ENER has an a-SI product with VERY low efficiency [6-7%]; a-SI is not cost competitive with c-SI or CdTe.

2. Comparing FSLR to ENER is ridiculous. ENER cannot cost compete and has no technology improvement on the horizon that will ever allow them to reduce the installed cost of their product to a price competitive with CdTe or CIGS, or Chinese produced c-SI when poli prices drop.

3. The shingle solar product is a JOKE;
A) it cannot be serviced or cleaned,
B) it will get shredded by ice in heavy snow;
C) installed costs are ridiculously high

disclosure -- we do not have a short or long position in ENER, but we know the solar space well.

[meursault]

I've not yet seen much attention drawn to what may be the most exciting aspect of ENER (and I am long the stock). Two weeks ago the company filed a patent application the likes of which I've never seen before. My experience with patents--while not vast--is that the patent attorneys are usually very cautious and conservative in their claims. If you invented an antigravity machine that was powered by rubber bands, the inclination of the attorney would be to say something like the "instant invention may have some utility in the transportation sector." He would certainly not say, even if he privately believed it, that the device would change the nature of life as we know it. The broader and more grandiose the claims, the more scrutiny they get from the patent examiner, so the best course is to appear modest. But it is just such language that we find in US Patent Application 20080090022 filed by Stanford Ovshinsky on April 17, 2008, and assigned to ENER. (The application can be examined at
www.uspto.gov/patft/ )

Some background: Mr. Ovshinsky has been called by some the "Thomas Edison of our time," and has more than 300 patents to his credit. ENER essentially was formed as a company to commercialize his inventions, and hopes to achieve sustained profitability this summer, a goal that seems plausible given the recent earnings report. You'll see for yourself if you care to glance through the application, but in essence it claims a new way to achieve true mass production of thin film solar panels. We're talking about miles and miles of the stuff. Given the feasibility of mass production on this scale, energy becomes virtually free. Take a couple of miles of this stuff and float it in the ocean. If you want, you can harvest the electricity directly. Or pass the current through the water and now you have an almost inexhaustible suppy of hydrogen, which can be used for vehicular transportation. And as a side benefit you can recondense some of the gases back to pure water. Fresh water from seawater--goodbye drought. The claim is that this device will effect a global change from a carbon to a hydrogen economy. Incidentally, war will end, as war is at root a competition for natural resources, and now we will have the technology available to magnify beyond all precedent the most fundamental of resources--energy and water.

Large claims! Normally, I'd be tempted to dismiss such as the ravings of a lunatic, but the guy does have 300 patents to his credit. Needless to say, if only 1% of his claim is accurate, imagine what the stock of a company owning a patent on such a device would be worth.

[LearningCurve]

My interest in Ovshinsky began with 'meeting' him in the film, "Who Killed the Electric Car". Call me sentimental, but that occasion caused me to take my initial look at solar energy as a long term play... and particularly to look at ENER.

[gebby]

i was surprised that stephen leeb recommended selling ener this morning and buying fslr instead. he had recommended buying ener so he is taking a profit. fslr he said is growing faster right now.

[tessant]

huge move yesterday, hard to be a buyer at this moment. i am very interested in their PRAM, which could be big...

-scott
solarfeeds

[solar jim]

Regarding meursault's post and the new patent that was filed...

At first, like many things, I thought 'yeah right, here's someone pumping up so they can dump later'...

Went to the USPTO site and checked it out. While it has only been filed and the actual implementation of this tech/machine may take a few years to work out the kinks, I have to admit this sounds very interesting. They claim to be able to use a plasma deposition process instead of the current process that will enable an increase in the run rate per machine/line from the current rate of about 30Mw per line to Gw's per line in the same space due to increased throughput rates from new deposition process. If actually true then this is big. Really big. The question is how long it takes to actually implement. Now I wonder if the reconfiguration of their plant has anything to do with this machine/process, or if its just normal optimazation of current plant space.

[David Lentz]

Hey, Steve ... for someone who "knows the solar space well", you seem remarkably ill-informed.

1) the ENER products have efficiencies about double what you quoted, and mentioned in the last conference call refinements that product efficiencies in the 15% area. Granted, their technologies produce lower efficiencies than crystalline silicon technologies, and maybe a bit less than the thin film stuff, but it's really the $/watt that matters, once you get beyond the output levels required to be useful.

2) Again, I think I would look at the prices of products being delivered before I made any rash statements about "cannot cost compete". If they are doing so poorly, who bought all that product to enable them to report the nice revenues and profits?

3) The solar shingles have a 25 year warranty, the lowest installation cost of any solar product, and what's this about "servicing" or "cleaning"? Do other solar manufacturers require servicing or cleaning of their products? I can just see Wal-Mart and other corporate users of rooftop solar arrays sending an employee out daily to squeegee their panels...

Steve, I gotta tell ya, I don't think you know beans about anything but your own convictions. Show me the data to back up your ridiculous statements.

[David Lentz]

My mistake -- ENER's current products are producing in the field efficiencies of about 7.5%, about the same as competing c-Si products (I have not yet located any CdTe actual measured in-the-field efficiencies, but I would think they are higher than that. In the lab efficiencies are a considerably different animal, and have little bearing on in-the-field efficiencies of real products. The ENER mention of 15% efficiencies in their conference call refers to lab measurements, which will doubtless be lower when/if implemented in actual products.