Shares of GT Advanced Technologies (Nasdaq: GTAT) have been beaten up this week on a plan to add debt to the company. An initial announcement of a $175 million debt offering was actually bumped up to $205 million on Tuesday. The notes carry a 3% interest rate and can be converted into cash or stock at the company's discretion at maturity in 2017. But is it bad news for the company?
The move is at least a bit curious considering the company had $332.4 million in cash at the end of the second quarter and just $145 million in long-term debt, with very little of it coming due in the next year. But it may be an opportunistic move by management to pull money from the debt markets with an eye on expansion or even a big share buyback. After the debt offering the company will probably have more cash than its market cap so a buyback would be a welcome site for some.
But maybe the more important question is if the fundamental value behind GT Advanced Technologies has changed in the past two weeks?
What's changed?
Since I took a deep dive into GT Advanced Technologies in June (which can be reviewed here) a few things have changed. First, we knew that the U.S. was imposing tariffs on Chinese solar cells, but since then Europe has joined the fray. This could pose an additional challenge to Chinese solar customers, who have driven sales in recent years.
Second, Chinese solar manufacturers have started to show serious weakness. Suntech Power (NYSE: STP) is caught up in a fraud case and may soon lose its spot as the largest module manufacturer, Trina Solar (NYSE: TSL) recently highlighted plans to focus more on project developments, and LDK Solar (NYSE: LDK) looks like it's hanging by a string after reporting another massive loss.
What hasn't changed is that GTAT keeps making technology improvements that will essentially force manufacturers to upgrade existing equipment or buy new equipment. The company recently announced new DSS technology upgrades that will improve quality and productivity in its PV products. These incremental improvements may not seem like much but with the sapphire and solar markets changing quickly every improvement manufacturers can make is a big deal. Companies with the newest equipment, best technology, and lowest cost structure will win but it's always a game of keeping up with the Joneses.
This means that the long-term thesis hasn't changed, but it may be more lumpy than previously anticipated.
What not to worry about
In a downgrade earlier this week, Canaccord Genuity's analyst Jonathan Dorsheimer pointed to Apple's (Nasdaq: AAPL) choice not to go with sapphire cover glass for the iPhone and potentially other products is a negative for GT Advanced Technologies. Wait, what?
I could point to weakness in LED pricing, weakness from solar customers, or a number of other potential pitfalls but has the market really been pricing in huge demand from Apple? Smartphones and tablets are a potential market in the future for sapphire, but does a single product put these markets in question? Is a company with a P/E ratio of 4.5 and a boatload of cash really falling because Apple didn't choose its customers to supply product? That seems like a stretch to me.
If Apple would have chosen sapphire cover glass it would have been awesome, but these types of demand sources should be looked at as a call option, not the base business right now.
What we should worry about
A tariff from Europe on Chinese solar products could impact GTAT in a negative way next year. The company said such in an update to 2012 guidance, although it may also provide opportunities outside of China because the company sees opportunities for polysilicon products in Southeast Asia and the Middle East next year, which could be pushed along if tariffs are imposed. This may not be a negative in the end but it may make earnings even more lumpy, which should at least concern investors.
The sapphire business was on fire a year ago at this time, but orders have slowed down and we should keep an eye on whether backlog is converted into actual sales. If customers begin pushing back or canceling orders this could be a big negative for the company. Management pushed back expected revenue of $50 from the third quarter to the fourth, which hopefully isn't a sign of things to come.
Foolish bottom line
GT Advanced Technologies still expects revenue of $925 million-$975 million in 2012 and earnings per share of $1.30-$1.40. When combined with over $330 million in cash at the end of last quarter the company's value is still strong.
On a technology front I think the company is just starting to hit its stride. The HiCz product for solar should launch next year and could be a game changer for solar efficiency. Whether demand comes from China, Europe, the Middle East, or the U.S., I expect the solar market to grow and GTAT should benefit.
Pushing back revenue from the third to the fourth quarter is a bit of a concern, and if fourth-quarter results fall short of expectations the stock could fall again. But for now I think the stock provides great potential with some downside protection for investors. I'll keep my outperform call in MyCAPS page and I'm considering buying shares in the near future.
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