3 Reasons to Buy Power-One

Power-One (Nasdaq: PWER  ) has been crushed on the stock market along with virtually every company competing in renewable energy. An abundance of supply of everything from solar cells to wind turbines to inverters has caused prices to plunge and companies to struggle making money as a result. As a result, more and more companies are running into serious financial trouble and even filing for bankruptcy, part of a major shakeout going on in the industry.

Despite worsening financials for companies, the value proposition for renewable energy has never been better, which provides an opportunity for investors. As one of the likely survivors, I think there are three key reasons to buy Power-One right now.

Balance sheet
Power-One's EBITDA and earnings per share have fallen off in recent quarters as competition has put pressure on margins, but the company has gone to painstaking efforts to shore up the balance sheet. Since the end of 2011, the company has had zero debt and now has $224 million in cash on the balance sheet.

To put this into perspective, the cash alone is nearly half of the company's $532 million market cap. Essentially, the market is pricing the company more as a failing company than a company that's growing profitably.

What's strange is that Power-One isn't the only company in the same position. GT Advanced Technologies (Nasdaq: GTAT  ) and First Solar (Nasdaq: FSLR  ) are both sitting on strong balance sheets with profitable businesses (discounting First Solar's recent writedowns) but can't get any respect from the market.

Emerging market
Power-One's stock has fallen along with the rest of the solar industry, but that doesn't mean that the solar business is dying. In fact, solar is expected to grow this year despite subsidies being slashed around the world. The reason for the growth is that solar is becoming economically affordable, and as it passes through grid parity, demand should explode.

Emerging markets go through ups and downs, and the current cycle is nothing investors should be surprised about. Consolidation will take place but when it does the winners who emerge will be able to take advantage of a market that will grow by leaps and bounds in coming decades, which is why leadership now is so important.

Market leadership
The inverter business will likely go through a painful shakeout as the laggards of the industry are pushed by the wayside. Inverter companies like SatCon Technology are on the brink of collapse, which may be bad for the headlines, but it's great that Power-One will have to compete with fewer suppliers. With Power-One owning the No. 2 position in the growing PV market, I like the company's prospects.

This isn't to say that competition won't be tough. Enphase Energy (Nasdaq: ENPH  ) blasted into the market over the last few years, and others will emerge as well. American Superconductor (Nasdaq: AMSC  ) is attempting to make a splash in utility scale inverters and can offer a suite of products to installers as well. But both companies are smaller, and American Superconductor is currently on the brink.

What I think separates Power-One, and makes its market leadership relatively safe, is its long history and strong balance sheet. In the inverter business, like in solar modules, these things matter because buyers want to know they're buying quality products and that warranties will be honored. The competition simply won't trample Power-One soon.

Foolish bottom line
These three factors combine to make a compelling investment case, but it isn't the whole story. I'll be back later this week with three reasons to sell Power-One and a final call on the stock.

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Fool contributor Travis Hoium owns call options in American Superconductor. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Power-One. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On July 21, 2012, at 5:32 AM, mentor101 wrote:

    I think PWER is much more than decribed in the article.

    The company has two devisions: Power Solutions and Renewable Energy. Power Devision was a loss making activity years ago and has been transformed into a moderately and steadily profitable business today with about 300 million in revenues. They have many licencees for digital power which gives a steady stream of income. In addition Power Solutions devision is slowly growing again and should be worth about one time revenues or about 300 million or about 66 % of the actual enterprise value.

    Market cap is 156*4.5= 702 million.

    Net cash should already be at 250 million as the 2Q is over and results certainly better than the 1Q. So the enterprise value is around 450 million.

    This means that Renewable energy is valued only 150 million which is extremely low as it has remained profitable and generates about 70 % of total revenues.

    Renewable Energy developped alot of promising new products recently coming into production in the 2 H of 2012. These products are micro inverters for roof top and the Ultra inverter line for utility scale PV fields.

    Of course it has to be seen what these new products will do to the bottom line but at least they are ready and can give the company a new boost soon.

    Management tells us that their products are among the most efficient in the market and that the declining Euro works in their favor. In addition the company has about 300 million of NOL's in the US which have a value because of the new factory in Arizona.

    As renewable energy and in particular PV will see a new boost in the coming years (think about China, the Middle East, Japan) it looks about certain that a new phase of growth for Pwer is around the corner.

    So from an investment perspective, now is the time to get shares still cheaply. I will not be surprised to see the stock going over 10 and perhaps 15 within 1 or 2 years. Great value below 5!

  • Report this Comment On July 21, 2012, at 1:54 PM, tjsimone wrote:

    Travis

    Thanks for your article, ad opinion, they are appreciated. Articles always well written, and un-biased, and must admit you are the only MF author I trust, and can use as a basis for further research. Very Much Appreciated...

    TJ

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