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This article is part of our Rising Star Portfolios series.
We're about two weeks into the Rising Star Portfolios and I'm pleased to note that my first pick, Transocean, has climbed about 6% since I bought it back at the beginning of the month. While that doesn't mean much over the long haul, it is gratifying nonetheless.
AC/DC rocks out
For Power-One, AC/DC isn't about rock and roll, it's business. The company manufactures inverters that change DC electricity produced by solar and wind to AC electricity fed into electrical grids. While it is fairly new at this game, having entered the market in 2007, it has quickly rocketed to the No. 2 position in market share, behind German SMA Solar Technology.
So far this year, Power-One has shipped 1.7 GW of inverters, with nearly half of that in the third quarter. Compared to the market opportunity, however, there's plenty of room to grow. According to the Renewable Energy Policy Network for the 21st Century's (REN21) 2010 report, at the end of 2009, globally, there were 21 GW of solar photovoltaic (PV) power connected to the grid, with 7 GW added in 2009. That has grown at an average annual rate of 60% for the past five years and was up 53% last year. At even half that growth rate going forward, the opportunity for Power-One is enormous.
You've got a short
Today's worry, and probably contributing to the 9% drop in share price at the end of last week, is the ability of Germany especially, and the EU in general, to continue to grow their solar infrastructure in 2011. For me, however, that is more of a short-term worry. Spain -- the largest adder of solar power capacity in 2008 -- cut way back in 2009, but the market continued to grow. In other words, the market's not reliant on a single country. Plus, Germany has a lot invested in renewable energy, with more than 300,000 jobs tied up there. That's nearly the same number of jobs in its other large industry, automobile manufacturing. Germany's not about to abandon the field.
The focus for growth also seems to be shifting away from Europe and toward Asia, where Power-One also operates. China, for instance, is committed to renewable energy and was the world leader in adding capacity in 2009. Power-One is adding to its own capacity to serve that market.
The long-term growth trend is not going away. In fact, in REN21's view, it has reached a tipping point. For example, more renewable energy capacity was added in the U.S. and Europe for each of the last two years than conventional power (coal, gas, and nuclear). For the entire world, that situation isn't too far away -- over the last two years, 47% of total capacity added was renewable energy.
A second concern is that Power-One is tied to the solar industry hand and foot. To a certain extent, that is true. However, Power-One's inverters are also used for wind power, where it is showing success. Further, it is not tied to any single solar PV manufacturer. It's indifferent to whether it is selling to farms constructed by Solarfun Power (Nasdaq: SOLF ) , First Solar (Nasdaq: FSLR ) , or SunPower (Nasdaq: SPWRA ) . No company accounts for 10% or more of its sales.
Power it up
I believe that given the recent share price and the prospects for this company, the market is handing me a classic Messed-Up Expectation (MUE) opportunity. At a 15% discount rate, the market, as of Friday's close, is expecting trailing free cash flow (FCF) to drop by 3.1% per year for the next five years and then never grow again. In other words, last quarter's results of $59.3 million in FCF, if annualized, would have to drop by 36% for the next year, and then drop by 3.1% year over year after that.
For a company that has been growing so strongly since entering the power inverter market and for a market that is expected to continue to grow rapidly, that is a MUE regardless of a possible hiccup in the near term.
Therefore, the MUE Port will be buying between $340 and $360 worth of shares tomorrow, which represents a 2% portion of my total assigned capital. For now, I'm content to hold it to the smallest starting size, but I'll be looking to add to the position if the company continues to execute well and the market continues to show its disdain via a MUE.
Come join me on the MUE Port discussion board to discuss this company -- there's already a lot more there -- and others.