Foolish Forecast: Energy Conversion Devices

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Three quarters in a row, cutting-edge alternative energy technology company Energy Conversion Devices (Nasdaq: ENER) has disappointed the Street. Will it do so again when it reports its fiscal fourth-quarter and full-year 2006 earnings tomorrow afternoon?

What analysts say:

• Buy, sell, or waffle? Eight analysts follow Energy Conversion Devices, and despite the disappointments, all of them still rate it a buy.
• Revenues. On average, they're looking for 23% sales growth tomorrow, to $25.8 million.
• Earnings. The usually money-losing company is expected to report a $0.14-per share loss.

What management says:
Energy Conversion Devices, aka ECD, aka ECD Ovonics, aka United Solar Ovonic, wants to make your car go farther and faster for cheaper. The company works in the field of "alternative energy" in a number of ways, chief among them solar power, and nickel metal hydride (NiMH) battery technology used in hybrid automobiles.

In March, the company conducted a follow-on stock offering of 8 million shares, generating gross proceeds of $375 million, of which nearly half will be used to fund the expansion of production of solar power cells. This appeared to mark an increased focus on the solar power side of the business. But the firm hasn't been inactive on the car front, either, announcing that GM's new 2007 Saturn Vue Greenline hybrid SUV will use NiMH batteries manufactured by ECD joint venture CobasysLLC (with Chevron (NYSE: CVX)).

What management does:
Your first glance at the chart below will likely suggest to you that ECD suffered a catastrophic loss of profitability two quarters ago. That's not quite true. What happened is that 18 months ago, ECD reported a hugely "profitable" quarter when it licensed its intellectual property to joint venture/subsidiary Cobasys, resulting in a surge of super-high-gross-margin revenues that helped the company's cash position not at all.

Margins %	12/04	3/05	6/05	9/05	12/05	3/06
Gross	49.8	51.2	54.7	55.9	16.2	20.5
Op.	26.4	26.7	27.6	27	(37.7)	(29)
Net	29	29.4	32.2	27	(35.2)	(26)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As CEO Robert Stempel explained at the time, "This [is a] one-time, non-cash event." The "non-cash" event inflated the firm's rolling gross, operating, and net margins for four quarters, but once the "one-time" event was gone, it was gone. Now we're back to watching gross margins slowly inch upwards, and watching the negative operating and net margins become less so.

Through the first three quarters of fiscal year 2006, product sales are up 72%. That's good. The problem is that these sales don't generate much in the form of gross margins. That's bad because those sales are not generating enough margin to cover operating costs or increased capital expenditures. So tomorrow (or a few days later, because ECD is not in the habit of providing the cash flow statement you'll need to look for this, in its earnings releases), look to see how quickly the firm is burning through the cash it netted from its March stock offering. At last report, the firm had nearly tripled its rate of negative operating cash flow through fiscal Q3 2006, even as it ramped up capital expenditures -- yielding massively negative free cash flow. As much money as the company raised earlier this year, if it keeps burning it at this rate, ECD is going to be needing more fuel itself pretty soon.

Customers:

• Ford (NYSE: F)
• GM (NYSE: GM)
• Matsushita (NYSE: MC)
• Sanyo (Nasdaq: SANYY)
• Toyota Motor (NYSE: TM)

For further Foolish thoughts on Energy Conversion Devices, read:

• Power Up Your Portfolio
• The Hybrid Invasion
• Energy Surprise

Fool contributor Rich Smith does not own shares of any company named above.