The Best and Worst
Stocks of 1997
Winner -- Spire Corp.
(Nasdaq: SPIR) Price -- $14 7/8
The Company's Biz. Spire Corp. is a development-stage company that appears to many investors to have "developed" in 1997. The company's main business is making capital equipment to manufacture silicon photovoltaic modules that convert solar rays into electric power. This equipment is used to create production lines that assemble individual cells into strings, laminates them together, and tests whether or not the strings work. The largest supplier of photovoltaic module manufacturing equipment in the world, Spire believes it is the only company that manufactures all of the equipment necessary to make photovoltaic "solar cells" into modules.
Spire Corp. also manufactures complex optoelectronic devices using metalorganic chemical vapor deposition (MOCVD). The optoelectronic wafers and devices are used for applications that allow machines to see (opto-) electronically. Spire developed this technology to integrate it with its photovoltaic technology for applications like solar cells on satellites. With more than 500 satellites scheduled for launch in the next five years, the company believes that current manufacturing capacity will not be sufficient and that it can enter this market successfully. The annual revenues from this market should reach $200 million, based on current market pricing.
Finally, the company has developed processing services targeted at the biomaterials market that utilizes the company's ion implantation and ion beam assisted deposition (IBAD) technology. The company developed IBAD as a result of the solar cell technology, but the company now uses this technology to deposit thin microscopic coatings onto medical devices. A common application is putting an antimicrobial coating on orthopedic implants or catheters. For instance, this coating would be put on titanium devices used in joint replacement surgery. The company markets this coating service under the names IONGUARD and IONCIDE.
Spire currently books most of its research and development expenses as revenue, through government contracts. Spire retains proprietary rights to the technology after granting the government a non-exclusive license.
The Story. To this point, the Spire story has been one of a company that has generated more cash over the past nine months than it had lost over the previous four years. The new "PV Rooftop Program" in Japan accounts for a good bit of the increase as 40,000 homes are going to be equipped with photovoltaic modules. To take advantage of this opportunity, the company entered into an agreement with the Marubeni Corporation in March of 1997 to distribute and occasionally manufacture Spire equipment in Japan. This potentially explains why export sales accounted for 36% of sales in the first nine months of 1997.
Projections for the photovoltaic module market are pretty aggressive. These modules have the potential to provide access to electricity to unelectrified rural areas throughout the world. Analysts believe the market will grow at a 25% to 50% rate through the year 2000. Photovoltaic module manufacturers worldwide plan to expand capacity by 58% in 1998. This would translate into $25 to $40 million in total revenues for the industry, versus $20 million in 1997.
The bulk of the company's $12 million in product revenues in the first nine months of 1997 came from sales of photovoltaic equipment, indicating that the company has captured the vast majority of this market. This market, combined with the potential of the company's optoelectronic solar cell and IBAD business, has attracted many investors. The company has reported two $0.22 EPS quarters in a row.
How Could You Have Found This Winner. Earnings, baby, earnings. With $0.53 per share in trailing earnings after years of losses, Spire would have to lose 8 cents per share in the fourth quarter to meet the lone analyst's estimate of $0.45 per share currently out on the company. Even the first quarter showed increasing gross margins and flat operating expense relative to sales that allowed operating margins to rise sharply. Operating margins, net of a one-time charge, rose almost 12% in the first nine months of the year compared to the same period a year ago.
The Future. Spire filed for a secondary offering on December 3, planning to issue 1.725 million shares including 700,000 currently held by insiders. The company plans to use the proceeds of this offering to expand its solar cell manufacturing capacity, increase manufacturing capacity and marketing support for its biomedical coating offerings, and for working capital. This is pretty important, as right now the company has only one manufacturing facility that it wants very badly to expand.
For those worried about the insider selling -- don't. Even after selling some shares, Chairman and Chief Executive Officer Roger G. Little will still own 27.5% of the outstanding shares. After the offering, Tucker Anthony, First Albany and Advest (the companies handling the offering) should all come out with positive ratings, potentially giving the stock a boost. Given that the company has 52 cents in trailing EPS and estimates call for only 45 cents this year, there is plenty of room to increase estimates, even given the 33% increase in shares outstanding from the secondary offering.
This is hardly a risk-free investment. Spire Corp. has not yet proven the ability to increase revenues at a sustainable pace. From 1992 to 1997, revenues were virtually flat with the company alternately generating profits and losses with no apparent pattern. However, in the first nine months of fiscal 1997, the company has turned a cumulative loss since 1992 into break-even results. Another risk to consider is that some of the company's revenues come from government contracts. Since revenues from contract research and development represented 35% of sales in the first nine months of 1997, any change in government funding (as was suggested by the recent federal budget) could impact Spire's bottom line. Finally, given the tiny size of the company, operating earnings are going to be extraordinarily variable and sensitive to minor fluctuations in revenue.
-Randy Befumo (TMF Templr)
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