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jsnyder
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Individual investor for 11 years, retired physician.
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  • AIXG: don't catch the falling knife
    AIXG is a German company, in a duopoly with VECO, selling the equipment that makes LED lights.  They are an immensely volatile Story Stock (beta 2.75), with the stock going from $4 to $44 (2009 low, to 2011 high).  The Story: LED is a disruptive innovation, which is on the cusp of replacing incandescent and fluorescent lighting.  Manufacturing costs for LED lights, although high today, are expected to drop 30%/year.  Revenues are expected to grow 30%/year.  The equipment-makers have very high barriers to entry.

    Let's look at how AIXG has performed, over the last 6 years:

    FYSalesEPSGross Margins
    2005173M-0.7827%
    2006217M 0.1037%
    2007295M 0.2640%
    2008401M 0.3741%
    2009428M 0.6845%
    20101030M 2.4852%

    In addition, they have no long-term debt, and 291M in cash and ST investments.  Pretty impressive: every number on that chart, gets better every year.   So, is the story real?  Yes, it is.....but don't buy the stock now.

    Here's why:  The Chinese are doing, in LED, the same thing they are doing in solar.  They are pouring money into it, ratcheting capacity up far above demand.  They are deliberately causing a price war, which will drive out of business their high-cost foreign rivals.  For now, China wants market share and jobs, not profits.  AIXG's huge increase in sales, in 2010 and 2011, can't be repeated in 2012, and maybe not in 2013 either.  There is just too much capacity, now and coming on line, and the market for LED lights isn't big enough yet.

    Going to Home Depot's website, I can buy a 4-pack of CFL (compact fluorescent lights), to replace a 40W incandescent, at $1.62 per bulb.  The cheapest equivalent LED light I can find, is an EcoSmart A19 bulb, for $15.97.  The LED light (Model # ECS 19 WW 120) uses 8.6W of power, but the CFL (Model # ES5M8094) uses just 9W, only slightly more.  And the CFL puts out more light, at 550 lumens to the LED's 429.   So, why would anyone buy the LED light that costs almost 10 times as much?  I don't see LED going mass market, for general lighting, until prices come down a lot.  Until then, LED simply isn't competitive with CFL.  The Story, for this Story Stock, is real, and it will happen. But not in 2011, and probably not 2012 either.

    After hitting $44 early this year, AIXG has been in a powerful downtrend.  They warned today,  and fell below $17.  The stock has not been above its 50 day moving average, since April.  The 200-day crossed below the 50day m.a. in July.  There is no indication the downtrend is over.  Look at the charts of VECO and CREE, and it's clear this isn't just a company-specific downtrend.

    Don't be fooled by the dividend yield, into thinking this is a value stock.  American companies try to pay a stable and growing dividend.  European companies, as a rule, pay a certain fraction of their earnings.  In cyclical industries (like the capital equipment AIXG makes), that means the dividend will vary a lot, year to year. Based on their track record over the last 5 years, AIXG pays about 1/3 of their earnings in dividends.  The last dividend was $0.84, which is a 4.9% yield at today's stock price.  But that's by far the highest dividend they've ever paid.  If I'm right about a cyclical downtrend in the LED equipment market, next year's dividend is unlikely to be anywhere near that high.

    disclosure: no current position in AIXG.  I'll probably be a buyer sometime in 2012. 




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Sep 15 5:52 PM | Link | Comment!
  • Solar gross margin trends
    Solar company gross margins:

    Company20101Q112Q11
        
    FSLR46%46%37%
    YGE33%27%22%
    TSL31%27%17%
    JKS29%26%25%
    SPWRA23%20% 3%
    JASO22%17%-3%
    LDK22%32% 2%
    STP17%19% 4%
    CSIQ15%15%13%
    HSOL21%16%?

    All data from company reports or latest guidance.

    What this means:

    1. Margin compression has been severe in 2Q11. This list just includes Tier 1 big companies. In addition, there is a long list of Tier 2 and Tier 3 companies, whose results are worse than anything on this list. Current industry conditions cannot continue for more than 1 or 2 more quarters. Capacity is being taken out, companies are going bankrupt. Single-digit or negative gross margins for many companies are going to bring a dead halt to their expansion plans. Credit conditions are tightening all over the world, including in China. Companies dependent on borrowing or secondary stock offerings, are in serious trouble, especially if their debt is mostly short-term.

    2. The ranking of companies for full-year 2010, is close to the rankings in 1Q11 and 2Q11. That is, the good companies stay good (relatively), and the bad companies stay bad. Well-managed companies perform better (again, relatively), no matter what industry or macro conditions are. This should tell us, who the survivors are going to be, in this industry.

    3. Gross margin results from a combination of many variables, only some of which are publicly known.  Buying or making polysilicon cheaply, low cost manufacturing, brand premium pricing (if any), and maintaining 100% capacity utilization are important.

    4. LDK, which had surprisingly high margins in 1Q11, missed their guidance by a mile. Their awful 2Q11 results, match their awful balance sheet.

    5. SPWRA is showing that low manufacturing costs trump high solar conversion efficiency, in this industry. They keep talking about their "brand name" and "high quality", and the Chinese keep taking market share. SPWRA is on the same road as Q-Cells: a dead end.

    6. JKS had higher margins than TSL or YGE for 2Q11, but lower for 2010, because they buy their poly in the spot market. This is a risky strategy, which works well when poly prices are falling, like now. But, at other times in the past (and probably in the future), it won't work. This is not a sustainable advantage.

    7.  FSLR doesn't need to buy wafers, as they use a different technology (CaTe), than all the others (who use c-Si).  As poly and wafer prices decrease for the c-Si companies, FSLR's advantage (in manufacturing costs per watt) also decreases. For now,  FSLR is so far ahead in manufacturing costs, I confidently predict they will still be at the top of the gross margin rankings, in 3Q11 and 4Q11. This is definitely something to watch, though, long-term.

    8. There doesn't seem to be any "economies of scale". JKS, with less than half of STP's revenues in 2Q11, has gross margins far better. Big isn't better.

    9. Experience also doesn't matter. If anything, the longer a company has existed, the worse it does. STP is doing worse than its younger Chinese rivals. All the European companies aren't even on my list. They are the oldest in the industry, and most of them are dying. Older isn't better.

    10. Once the solar industry gets through this painful phase, we'll see a few survivors dominating the industry. Poly and panel prices will stabilize, at prices low enough to cause a big increase in demand. The survivors will be vertically integrated, sell globally, have manufacturing capacity measured in gigawatts/year, low manufacturing costs, and access to cheap capital.

    disclosure: I am long FSLR, YGE, TSL, JKS

    Disclosure: I am long FSLR, YGE, TSL, JKS.

    Additional disclosure: I am an individual investor, with no connection to the securities industry or the solar industry. All the numbers in my article come from company quarterly reports, or most recent company guidance.
    Aug 22 11:54 PM | Link | Comment!
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