Here are eight reasons why shares of GT Advanced Technologies (GTAT) are still extremely undervalued.
Valuation - GT Advanced Technologies is trading at 5x earnings and will still have a backlog of $1.1B at the end of CY12. The renewable energy equipment industry trades at a 9x ratio, while the market trades at almost 17x. GTAT's depressed multiple is due to the company's dependence on solar (slightly more than half of current $1.6B backlog). With shares this low, GTAT is a classic case of the "baby being thrown out with the bath water." Everyone is convinced that the entire industry is doomed, so even the few survivors' multiples are being flattened. When more competitors fail and GT Advanced Technologies is there to pick up even more market share, currently more than half of all Chinese solar installations, GT Advanced Technologies will be able to increase its 40%+ gross margins and 15% bottom line even further.
Cash Flow - Bears will note that cash flow was -$12 million for the fiscal year ended March 31st, 2012. During a time when competitors like MEMC Electronic Materials Inc. (WFR) are scrambling to survive, GTAT purchased Confluence Solar for $60M. Confluence is the maker of HiCz technology that GT Advanced Technologies hopes will change the game in solar starting in 2014. You may be wondering why a purchase of a company that isn't supposed to have any real effect on earnings until CY13 the earliest is significant. The same questions were asked when GT Advanced Technologies purchased Crystal Systems in July 2010 for $80M. Since then, the company has grown so quickly that it represents almost half of GTAT's $1.6B backlog.
The Crystal Systems sapphire business alone, with 40% gross margins, is worth about $1 in EPS on the backlog alone. If GT Advanced Technologies spun the company off completely, it would be worth a hefty multiple due to the growth from $100M at Crystal Systems in July 2010 to $216M today. Slap a 9x multiple on the sapphire segment, still conservative for such growth, and $800M backlog, and you get $9 per share for Crystal Systems ALONE in 2014. Bears should also note that GT Advanced Technologies paid off an additional $20M in debt that it was not obligated to do AND paid off other debts of $91M totaling $111M in FY12. The company did take on an additional $75M in debt for a net debt payment in FY12 of $36M.
Technology - Customers like YGE are beginning to see the value that GT Advanced Technologies' products can create. There is true value in spending to upgrade your existing GT Advanced Technologies equipment. Solar companies need to be more efficient than ever and GT Advanced Technologies is helping them.
Backlog - As I mentioned earlier, the backlog is currently at $1.6B and is expected to be $1.1B at the end of CY12. Gross margins for all segments are above 40% and the bottom line continues to be in the 15% range. If GT Advanced Technologies does not add a dime to the backlog during the rest of CY12, it would still be a great value investment. If the current order from a large Saudi Arabian player comes to fruition,
Our polysilicon order pipeline remains active as well and we are competing for several projects in the Middle East and Southeast Asia that could represent an additional $400 million to $500 million in potential sales. One of our primarily competitors in these markets recently filed for insolvency protection, which we believe enhances our chances to prevail should these deals move forward.
I can see EPS jumping to $2 in 2013. If you attach an industry multiple to the shares you arrive at $18 per share for GTAT.
Management - CEO, President & Director Thomas Gutierrez has outlined his plan for the company and it involves transitioning from a solar company to a technology equipment manufacturer. The purchase of Crystal Systems was the first step in his grand plan and I am impressed. Management has shown it can make decisions to help grow the company for tomorrow without wasting today's funds. GT Advanced Technologies has over $330M in cash, and I cannot wait to see how the company makes use of it.
Opportunities - Sapphire in tablets and cell phones have become the logical next step for the company's crystal growth technology. If GT Advanced Technologies continues to lead the industry and help lower the price of sapphire, we may find another multi-billion market for GTAT to enter. This would help diversify the business and expand the earnings multiple.
Governments- When a country as large as China outlaws incandescent light bulbs, that creates a market that didn't exist for LED light bulbs. GT Advanced Technologies is well positioned in China and will capitalize on the country's desire to become more energy efficient.
With the price of oil rising and the constant instability of the Middle East, there will always be a threat that fossil fuels will cause a global crisis. If a military such as our own would like to be truly independent of fossil fuels, it would invest in alternative energy technology. Our Humvees and tanks are destructive - if they have gas in the tank. This weakness can be exploited by an enemy, so our government should focus more military spending on alternative energy projects - benefiting GT Advanced Technologies and the industry overall.
Short Interest - Finding a great value investment like GT Advanced Technologies does not come around often. Finding a great value investment with a short interest of 25% is extremely rare. Often the shorts are right, but this time they are wrong. The short interest will provide a catalyst that will propel the shares towards my $18 price target by the end of 2013.
Disclosure: I am long GTAT.