This article is part of our real-money portfolios series.
In my Messed-Up Expectation portfolio, I've been a holder of inverter-maker Power-One (UNKNOWN:PWER.DL.DL) for just shy of two years. Unfortunately, all of the shares I've purchased are under water to a greater or lesser degree. However, if you haven't been paying attention to the company, then you'd be unaware that on many metrics the situation has improved. While the share price has, indeed, gotten worse, I happen to think that's (temporarily) a good thing, as it lets me buy more shares for my portfolio.
Points of improvement
I'll list three places where the company has improved and let you judge for yourself:
- Market share. When I first bought shares two years ago, it had climbed rapidly from holding 3% market share in 2008 to the No. 2 position at 11% market share at the time. Today, while still No. 2, its market share has continued to climb and now stands at 13% worldwide, behind Germany's SMA Solar Technology. In certain markets, it is even higher. For instance, it stands at 20% in Australia and at 22% for residential installations in California. The company is targeting overall market share of 20% in North America by the end of 2013. The company expects 15% of its inverter revenue in the current quarter.
- Improving financials. As of the end of fiscal 2011 (which ended Jan. 2, 2012), it has zero debt and is sitting on its highest cash balance ever at $287.4 million, including short-term investments. Over the past four quarters, it threw off $120 million in free cash, much higher than the $15 million generated in the year-ago period (though less than the $156 million produced the year before that).
- Increasing demand. Market research group IHS iSuppli, after raising projections for 2012 from 3.1 GW to 3.4 GW total capacity in North America, expects photovoltaic (PV) installations to increase 32% next year to 4.5 GW total capacity. IMS Research expects double-digit growth with the addition of 35 GW of installations worldwide in 2013. While older, core markets of Germany and Italy are expected to see declines, the Americas and Asia will more than make up for it. However, not all is dead in Europe. Southern Italy is now at grid parity for solar-generated electricity, thanks to higher levels of sunlight and electricity costs in general, an unsubsidized projects are growing, according to Power-One. And the company is expanding into the U.K. and other areas of Europe.
Point of worry
The inverter market is not without worry, however. One reason I believe that the share price of Power-One is so low is due to concern about competition. SMA Solar recently announced a profit warning and Satcon Technology, another competitor, recently declared bankruptcy. IMS Research expects inverter competition to be fierce throughout 2013 as solar demand climbs in more geographies and more companies get into the field. I expect Power-One, however, to survive. It has manufacturing plants in both North America and Asia to compete in those regions as well as in Europe; is expanding in Asia, North America, and Europe; and has a solid, and strengthening, balance sheet.
Of course, Power-One is also reliant on how well the PV module manufacturers do. First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) saw third-quarter sales slump. Market research hints that the early part of 2013 won't be any great shakes, either. But, the expectation is that by the second quarter next year, demand for and revenue from PV modules should turn around and start climbing again.
According to IMS, for inverter "manufacturers that withstand the challenges of 2013 and successfully penetrate these emerging markets, the future years are forecast to return to double digit growth as the PV market reaches greater maturity."
Given its position as the No. 2 inverter maker in the world, its geographic reach, and its strong balance sheet, Power-One should be there.