Rising Star Buy: More Power for Power-One

This article is part of our Rising Star Portfolios series.

What do you call it when the market rewards your 143% year-over-year growth in annual revenue and very handily turning a loss last year into a profit this year, along with guidance of 80% revenue growth for the upcoming year, with a 21% shellacking of your stock price? I don't know about you, but I call it a chance to pick up some more shares.

The Messed-Up Expectations portfolio already owns shares of Power-One (Nasdaq: PWER  ) and, come tomorrow, will just about double its position. Let me tell you why.

Power-One reported earnings for the fourth quarter and full year late last week and beat expectations. Yet the guidance for first-quarter revenue was lower than analysts had hoped for, and comments by management about too much inventory in the system lent fuel to the selling frenzy. Articles with headlines such as "Power-One Is Dead Money" quickly followed, and the shares are back down near where I bought them three months ago.

Actually, the entire solar sector took a hit because of the bad news. U.S. competitors SatCon (Nasdaq: SATC  ) and Advanced Energy Industries (Nasdaq: AEIS  ) were down significantly, as were solar panel makers such as First Solar (Nasdaq: FSLR  ) and Suntech Power (NYSE: STP  )

Nothing's really changed
The arguments I made in my original buy article remain true. The market is growing rapidly despite slowdowns in single countries (last year it was Spain, this year it's supposed to be Germany); the company is expanding beyond Europe, opening a brand new manufacturing plant in Phoenix and China to serve the U.S. and Asian markets; and the company continues to gain market share, sitting at No. 2 at 13% -- up from 11% just last summer -- behind Germany's SMA Solar Technology which has about 40% share.

Furthermore, while the rest of the industry was raising prices in 2010, Power-One wasn't. Thus, it should not be hurt as much by an expected decline in pricing. Power-One is projecting just 8% to10% declines, well below industry analyst IMS Research's call of 10% to 15%.

All the commentary I've read since Thursday's release leads me to believe that the market is looking no further than the next one or two quarters. For instance, Mark Bachman of Auriga Securities, which still holds a $13 price target, said, "This stock is dead money for one to two quarters, and clients need to be comfortable with the second half sales ramp. Investors will shy away from the stock until they feel better about future inverter sales."

The trouble with that kind of thinking is that if we wait for evidence that investors are "comfortable," a significant portion of any upward movement will likely be missed. As Warren Buffett says, "You pay a high price for a cheery consensus."

Still a Messed-Up Expectation
At the pre-earnings release price of $11.75, Power-One had little growth of free cash flow priced in -- just 3.4% per year for five years, 1.7% for the next five, and nothing after that (using my normal hurdle rate of 15% to discount). This is much lower than what I believe the company is capable of. At $9.26 as of last Friday's close, expectations are that FCF will decline for the next 10 years.

If instead the company actually manages to grow FCF by just 10% a year for five years, 5% for the five years after that, and then no more growth ever again, then shares are worth at least $16 today. I think that kind of growth's more than doable.

The company has shown that it can successfully play in the power inverter space, moving rapidly to the No. 2 spot. It grew revenue at a phenomenal rate in 2010 without trying to gouge its customers with higher prices, and will now reap the benefits of that restraint. And, it is expanding into other locations, moving away from the more mature European market. All that adds up to a reason to buy.

But of course, this takes a longer viewpoint than just the next quarter or two.

Tomorrow, the Messed-Up Expectations will double its initial investment in Power-One, upping it to a 4% position.

Come visit my discussion board, read my take on the fourth quarter's release, and tell me if you think I'm right or wrong. Or just add Power-One to your watchlist.

Fool analyst Jim Mueller owns shares of Power-One, but not of any other company mentioned. He works for the Motley Fool Stock Advisor newsletter service. First Solar is a Rule Breakers pick. The Fool owns shares of Power-One. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool's disclosure policy is never messed up.


Read/Post Comments (5) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On February 07, 2011, at 8:22 PM, sdnayak wrote:

    It's a great Stock with solid Fundamental and growth prospect. It's amazing that the company is having more than 200% profit growth and solid Profit growth and has a PE of 12, Forward PE of below 6. This is incredible!! When the Analyst is talking about next one/two quarter he is not talking about Investing rather he is talking about Trading. The analyst must be using wrong word, fascinating world..Anyway,I would like to load for long term investment.

    Thx

    SDN

  • Report this Comment On February 07, 2011, at 11:29 PM, newestor wrote:

    While your does make some point, I would rather wait before I buy back. There is something known as Technicals which does not look into fundamentals. So wait few days(or weeks) before it gets upward momentum. AND you can put your money elsewhere now as everything seems to be rising now.

  • Report this Comment On February 08, 2011, at 8:16 AM, TMFGebinr wrote:

    Hi curlyhead,

    Ha! Hadn't seen that one. The one that got to me was Liquidity Services (LQDT) -- beat estimates, guided revenue below expectations, up 13% -- all this on the same day that Power-One did the same thing and lost 22%. <sigh> I will never understand the market's reactions on earnings.

    Hi newstor,

    You could very well be right that it will drift down some more before turning (assuming it does) -- I've been early before. We'll just have to see.

    Cheers,

    Jim

  • Report this Comment On February 08, 2011, at 10:26 AM, nonzerosum wrote:

    Good points, I doubled up too. Their balance sheet is lovely so they can outlast any slowdown. You have to believe that the entire solar sector is dead to justify this low price. People like Ken Fisher have advised their clients that solar is dead because of fracking and cheap natural gas forever (an argument that i find unconvincing, per my blog).

  • Report this Comment On February 08, 2011, at 6:12 PM, CSMhater wrote:

    I agree with the author's comment about most "investors" looking only a couple of quarters into the future. Although I have to agree with sdnayak and his comment about that being more of a trader than an investor. I, too, an sometimes perplexed by the market's reaction to earnings. If I remember correctly, there was a similar reaction to their 3Q earning announcements (trading around $11, dropped as low as $8.60 in the next couple of days). Also, during that release, PWER had raised their guidance for Q4 (which they beat even that!) and raised their guidance for 2011.

    While their ability to penetrate the U.S. solar market is still a bit of a question mark, I think their expansion into the Chinese market will be stronger than expected. My only real concern is their plan (or lack thereof) to enter the India solar market, where other companies seem to already be getting a foothold in.

    I think the stock will probably rise a bit before the end of Q1, then take another dip after the Q1 results; but then look for it to rise pretty steadily after that.

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