Power One Severely Undervalued Heading Into Thursday's Earnings

| About: Power - (PWER)
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In a previous article, I provided a company profile for Power One, Inc (NASDAQ:PWER) and presented an investment thesis which outlined the possibility for significant near-term price-appreciation, with its July 28th Q2 results as potential rebound catalyst. In anticipation of the earnings announcement later this week, here's an update to PWER's outlook:

SatCon's (SATC) disappointing earnings announcement and lackluster guidance for Q2 pummeled the entire sector, dragging PWER down about 6% on July 5th. SatCon reported weaker demand in European markets, especially Germany and Italy, after governments changed policies that offered incentives for solar technology. The day served as reminder that players in the solar arena and derivatives remain highly volatile. Power One is no exception with a beta of 2.17, and is currently trading at the bottom of its historical P/E channel, around 6.6x TTM on a range of 6.4 to 11.6.

Information sourced from the most recent S&P Compustat Company Report.

On a constructive note, however, the Federal Energy Regulatory Comission recently released a final version of guidance originally inked about to a year ago on how public utilities must approach and pay for grid upgrades. These rules and regulations eliminate uncertainty around grid improvements and may represent the beginning of a secular growth cycle in the industry. As a whole the domestic industry is shifting towards a smarter grid which better incorporates renewable energy. Transmission, construction and component suppliers all stand to benefit.

Power One provided $250 to $270M revenue guidance for Q2, with CEO Richard Thompson noting the company is specifically looking at geographic diversification, especially expansion in North America. He sounded cautiously optimistic on the previous earnings call:

Further, we expect our focus on new geographies, particularly North America and Asia, will add revenue in renewables and lead to improving profitability in both our Power Solutions and Renewable Energy Solutions SBUs.

Technicals remain very weak, with PWER trading significantly below 200 and 50-day SMAs of $9.10 and $8.04 respectively. Sentiment indicators point to the equity being oversold while the MACD has been wavering inconclusively for the last two months.

click on image to enlarge

Charts and data courtesy of stockcharts.com

Nonetheless, PWER has shown declining short interest over the last few months, a very positive sign indicating that traders recognize the stock is undervalued and there's more risk to short rather than long positions:

Settlement Date Short Interest % Change Average Daily Volume Days to Cover
06.30.2011 24,226,979 -17.07% 2,034,399 11.91
06.15.2011 29,213,425 -2.88% 2,120,495 13.78
05.31.2011 30,080,046 0.68 2,948,611 10.20
05.13.2011 29.878,193 -10.75% 4,650,2050 6.43
04.29.2011 33,475,105 -4.73% 3,353,438 9.98
04.15.2001 35,005,426 1.43 4,065,428 8.61
03.31.2001 34,513,596 -9.29% 4,123,537 8.37

Data courtesy of nasdaq.com

In anticipation of Thursday's earnings release, Power One looks severely undervalued, and its high beta makes it a great candidate for income-seeking investors looking to either establish long positions at a discount or profit from the volatility.

Those who want to position themselves for an immediate rebound should look at purchasing August 20th $7 calls currently trading around $0.50. This implies a break-even price of $7.50, a rather conservative target below 50 and 200-day SMAs. Barring a large quarterly miss or sustained macro uncertainty on debt worries, this appears to be an appealing opportunity to establish long positions.

October 22nd $8 puts sell for $1.35 per contract, returning an annualized 72% (for comparison purposes only). This implies a break-even price of $6.65, below the stock's 52-week low.

As always, high volatility stocks involve risk as well as the potential for significant reward.

Disclosure: I am long PWER.