In light of GT Advanced Technologies' (Nasdaq: GTAT ) recent crash on the stock market, I decided it was time to take a step back and re-evaluate the company. Usually a stock would never enter a point where 75% of its market cap is held in cash, the stock trades at a P/E ratio under 3 and has a backlog nearly four times the size of its business. But in the crazy world of solar, this is what GT Advanced Technologies investors are left with.
So let's start from the beginning with some of the company's basic statistics.
Result (Most Recent Available)
|Market Cap||$465 Million|
|Revenue/Earnings (TTM)||$955.7 Million / $183.4 Million|
|Cash/Debt||$350.9 Million / $75 Million|
|2012 Earnings-Per-Share Guidance||$1.30 to $1.40|
Source: company earnings press release and presentation.
To get a better insight into the company and try to understand why the market is so bearish on GT's future, I talked with CEO Tom Gutierrez lest week to shed some light on the situation. Following is my view of the company's businesses in light of the company's results and his insights.
The future of poly
Polysilicon equipment is one of GT's older businesses and accounted for 38% of fiscal 2012 revenue and nearly half of the bookings for the full year. But there are lots of problems with the poly business right now.
The solar industry has more poly supply than it will be able to use for probably the next decade, but curiously, GT has $880 million in poly backlog at the end of March. This appears to fly in the face of logic, but as I found out, not all poly is created equal and the cost structure of the installed capacity is what is really important.
Poly makers like LDK Solar (NYSE: LDK ) and Renesola (NYSE: SOL ) are bleeding red ink, and not all producers will be able to survive, solving part of the oversupply problem. Those who do survive will be companies that have a low enough cost structure and good enough quality to actually make money in the low-cost environment. This is where GT Advanced Technologies comes in.
New equipment has become so cost effective that it renders older equipment obsolete, making even marginal costs difficult to reach for older suppliers. All-in costs are now less than $25 per kilogram while cash costs are under $18 per kg for GT's product, with more cost reductions coming down the pipeline. This will push suppliers and capacity out of the market just on the basis of being too expensive.
So while the market looks at oversupply as a huge challenge, it's actually costs we should be concerned about. GT is making equipment that brings down costs and makes customers more competitive. This will help keep this business afloat in the competitive poly environment.
The future of PV
The PV market takes the trends in poly to the next level, and that has investors very nervous. PV accounted for 39% of revenue last year (down from 82% the year before), and bookings were a measly $49 million.
Right now, Chinese manufacturers hold most of the supply and are making incremental improvements in efficiency. But GT thinks it has a step change waiting in the wings, which could turn solar on its head. The company's HiCz technology is expected to bring cell efficiencies from 19% to up to 24% based on current technologies, at similar costs, and big players are starting to perk their ears up.
What I found interesting was where Gutierrez said demand for these new products were coming from. Europe, Saudi Arabia, and Japan were highly interested, and China may not be able to take this next step in technology. Chinese firms like Suntech Power (NYSE: STP ) , LDK Solar, Yingli Green Energy (NYSE: YGE ) and others have basically gone all-in with their current technologies by racking up massive amounts of debt. Unless they can make the same change that companies entering into the high-efficiency market can make, they may be left in the dust.
Gutierrez used the metaphor of having current Chinese market leaders perfecting the 10-speed bicycle with current technology while customers that are looking at the next generation of equipment are building the automobile. Recent quarters have shown that efficiency is becoming more and more important to sales, so the analogy at least makes sense in the abstract.
Sapphire and the future
One of GT's biggest moves in recent years is expanding into the sapphire business. This business is really just getting off the ground, but it generated $168.6 million in revenue in the fiscal fourth quarter. Another $761 million of backlog waits in the wings.
Initially, the sapphire business has been focused on the LED market, but there are many opportunities beyond LEDs. GT is looking at the power electronics market, and Gutierrez said it's looking into mobile glass applications and other industrial opportunities that could be just as big as LEDs.
Even the small sample size of revenue that has already been reported shows that the opportunity is enormous. To me, the sapphire business is like owning a call option. The downside risk is relatively low, but the upside potential is almost limitless, with new applications for sapphire products opening up as costs come down.
What's up with all that cash
I showed that GT is sitting on $350 million in cash, which could be used to buy back shares or pay a large dividend to shareholders. While management wouldn't (and couldn't) give me any insight into what it planned to do with all of that cash, I got the feeling that a large buyback or dividend wasn't likely in the near future. Gutierrez called a buyback "tempting" at these levels, but I got the feeling that the cushion helped him sleep at night and provided the ammunition to do strategically important technology purchases in the future.
Don't expect any big moves with the cash hoard, but it is a strength considering the stock is the baby that was thrown out with the bathwater.
Is GT Advanced Technologies a buy?
I've said before that bets in the solar industry and even LEDs right now are really a game of picking winners and losers. Many companies won't survive the shakeout for a variety of reasons, from financial health to uncompetitive technology. What is apparent is that those on the leading edge of technology will be the winners. Efficiency is becoming increasingly important in solar, and even at marginally higher costs, it is winning over low-efficiency products from First Solar and others.
With this in mind, I like the position GT Advanced Technologies is in, supplying the equipment that will make solar more efficient. It's the same reason I'm high on SunPower to emerge on the module manufacturing side. Competitors in both equipment and modules simply don't have the technology to take the industry to the next level the way these two companies do.
GT is even taking the all-important step of doubling down on its R&D efforts. In fiscal 2012 it spent $50 million on R&D, up from $24 million the year before. If the company is going to stay ahead, this investment will be key, and management seems to understand this very well.
I like GT's value and its future enough to keep my outperform call on My CAPS page, and I'm thinking about adding shares to my portfolio when our trading rules will allow it. The value just seems too good to pass up, and I don't see the business dying the way investors appear to be pricing the stock right now. However, if you're looking for another great energy stock, check out our analysts' pick for the one energy stock you'll ever need. This report is absolutely free, but you need to check it out now because it will be available for only a limited time.