A Solar Encore for EMCORE?

What with Google's (Nasdaq: GOOG  ) recent gigawatt gambit, it seems like everyone's jumping on the solar bandwagon these days. Just yesterday, semiconductor maker EMCORE (Nasdaq: EMKR  ) announced a substantial contract to supply concentrating photovoltaic (PV) power systems in Canada. My reaction: What do they know about solar?

Quite a lot, as it turns out. EMCORE has been in the solar business for many years, providing satellite power solutions to aerospace folks like Boeing (NYSE: BA  ) and Lockheed Martin (NYSE: LMT  ) . This smallish player had simply slipped my sonar. So today, I'll be concentrating on the solar concentrator purveyor. Let's begin at the beginning, shall we?

Dusting off the SEC filings nobody reads
When digging into a public company's history, I always find it instructive to look back at the firm's earliest prospectus or annual report, particularly the segment outlining the business strategy. This is a key element in persuading early investors to part with their money.

In the case of EMCORE, a compound semiconductor supplier, it's hard to understand why anyone did. If I may paraphrase, the three prongs of the company's strategy consisted of:

  1. selling a lot of different stuff,
  2. getting cozy with major customers in order to land big orders, and
  3. spending a lot on R&D.

That has to be one of the least compelling strategic plans I've ever seen. Each prong hinted at how EMCORE might have carved out a competitive advantage in the electronic components market over time, but the company certainly did not begin with one.

After two fiscal years of operating losses, EMCORE spiced things up a bit with this new strategic imperative: Target potential high-growth markets. Though vague, it was a step in the right direction. That was also an early sign that the company's business wasn't quite taking off.

In the fiscal year 2001 10-K, the strategy of what I'll call "buying our way into better markets" was introduced. That was the second red flag. Finally, in the following year, a humble and rather embarrassing strategic goal was appended: Try to generate operating cash flow.

Arrested development
Fast-forward to today, and despite some cost-cutting efforts, not a lot has changed. EMCORE, and its CEO in particular, have demonstrated pretty remarkable staying power, despite the years of mediocrity. The head honcho managed to multiply his total cash compensation by two and a half times between 2003 and 2006, so he's not only hung around -- he's been rewarded handsomely by what I can only imagine is a fiercely independent board of directors.

So what can possibly turn things around at EMCORE? I think, after many years, the company has found its high-growth opportunity in terrestrial solar.

With the intensity of 1,000 suns ...
Unlike some other entrants, EMCORE is a natural-born competitor in terrestrial solar. The company's expertise in compound (as opposed to traditional silicon) semiconductor materials has enabled it to develop highly efficient solar cells. With multiple absorptive layers, these multijunction cells take in a lot more sunlight than traditional solar cells. And much like First Solar (Nasdaq: FSLR  ) and its cadmium telluride thin-film cells, EMCORE and its gallium arsenide (GaAs) cells aren't subject to the silicon squeeze.

These little guys have been really useful in satellite applications, because they're more resistant to radiation, making them a natural fit for outer space. And now, this type of cell, which is reportedly pushing 40% efficiency in solar concentrators, is coming down to Earth.

Concentrators, which use optics to multiply the sun's rays dozens, hundreds, or even a thousand times over, are the only way that compound cells can compete with silicon on the ground -- inch for inch, they're much more expensive. That's why these cells are about the size of Lincoln's head on a penny. Also, since they require direct sunlight, concentrating systems need to track the movement of the sun. From what I gather, concentrating PV isn't necessarily a slam dunk, but it does promise to be competitive, particularly in sunny locales. You know, like Ontario.

The Foolish bottom line
Before you get too excited, EMCORE doesn't have this market all to itself. Boeing's own Spectrolab unit is a primary competitor, and solar giant Sharp has prototyped a GaAs solution, though it seems to prefer elbowing its way into the thin-film market. Still, it's hard to see EMCORE failing to grab some significant share here, even if it's overshadowed by Sharp.

If there's one prong of the original strategy that EMCORE has made good on, it's that R&D spending. As of late 2006, the company employed more than 100 people in R&D, more than double the most recently reported number at much larger SunPower (Nasdaq: SPWR  ) . Even Evergreen Solar (Nasdaq: ESLR  ) , which is no spendthrift, only had 61 folks in R&D as of a year ago.

For shareholders' sake, let's hope EMCORE's strategy finally bears fruit. Just remember, hope is not a strategy.

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