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This article is part of our Rising Star Portfolios series.
So there I was, all set to buy my final position of Power-One (Nasdaq: PWER ) for my Messed-Up Expectations portfolio. News of a short-seller on Friday on top of the market's realization that Italy was probably going to cut back its solar subsidy had driven the stock price all the way down to the low $7 range.
But then, yesterday, the price jumped nearly 13% back to the $8 range, and the opportunity disappeared. (The rules for this portfolio require that I publish a "buy" article, and then buy the shares the following day.) I already have 2/3 of my full position in the $8 range and wanted a real drool-inducing price to justify increasing the position to my largest, "full conviction" size within the portfolio. Mid- to low-$7s, yes; mid- to low-$8s, not quite.
Now let me explain why I wanted that price so that the next time it drops down, instead of writing a 680-word article like this one, I'll be able to put out one of just six words: "I'm buying. Read this for why." Then link back to this article. (Though the Fool's editors might have something to say about that. Please, may I?)
It's going places
I've already written about the phenomenal growth Power-One has seen as it moved from No. 9 to No. 2 in the global inverter market. I've also covered the disappointing guidance that management gave for the first quarter and what analysts said in response -- something about "dead money" for a quarter or two.
Since then, however, demand for solar panel modules has been higher than usual for the first quarter, which implies that inverter demand has also been higher. Plus, Power-One has started shipping inverters from its new Chinese manufacturing plant and is producing inverters at its new Phoenix plant, as demand shifts away from Europe to North America and Asia.
Not only that, but with Germany and other countries re-evaluating their nuclear power policies in the wake of what's happening in Japan, wind's and solar's prospects are looking up. JA Solar (Nasdaq: JASO ) , the other stock that short-seller had bet against, is up 5.5% today, GT Solar International (Nasdaq: SOLR ) is up more than 6%, and direct competitor SatCon (Nasdaq: SATC ) is up 0.9%.
But what if it doesn't?
Set all that aside, however. Assume that Europe remains Power-One's primary source of inverter revenue for years, but Europe's going to cut back on its installations, led by Germany and Italy. Europe accounted for 55% of total revenue in 2009 (last available report). If I assume all of that was from inverters and that it's going to lose 50% of that for this year, what would that do to free cash flow and the expectations baked into the stock price?
Holding all else constant and using last available numbers for depreciation and capital expenditures, reducing 2010's European inverter revenue by 50% would result in FCF of $96.6 million for 2011. At Friday's closing price of $7.27, expectations baked in were for that number to grow by just 4.2% per year for four years, 2.1% for the next five years, and then no more growth (using my standard 15% hurdle rate to discount).
Even at yesterday's closing price of $8.20, the expectations were 7.2%, 3.6%, and 0%, respectively. With the stock up more than 7% as I write this morning, it's just running further away from my ideal buy price at the moment.
On the bright side -- if you're looking to buy -- Power-One has a pretty volatile stock, so I might just get my opportunity again, once today's enthusiasm with solar power settles down. Regardless, I'm glad that the MUE port already owns 80 shares, and I'll be looking to add more if the price comes back down again.