Marcial: A Power Surge for GT Solar?

Whenever the subject of solar energy comes up, analysts invariably express concerns about the challenges that confront the industry. Indeed, solar-related stocks are mostly trading below their 52-week highs, as the housing slump weakened demand for solar wafers or panels. And the financial crisis also restricted the flow of credit for housing and solar energy projects.

However, it may well be a good time for investors to catch some rays. Attractive opportunities could arise in selected solar companies as demand should come back with the economic recovery. Also benefiting the solar sector are the various tax breaks and low-interest loans the government is currently providing as part of salvaging the beleaguered housing industry.

One outfit some analysts consider undervalued, with perhaps one of the stronger balance sheets in the solar segment, is GT Solar International (SOLR), the world's largest provider of specialized manufacturing equipment and services essential for the production of photovoltaic wafers, solar cells, modules, and polysilicon. (This column featured another solar-energy stock, First Solar (SOLR), on Aug. 9.)

GT Solar went public on July 23, 2008, as the financial crisis and economic downturn were gathering steam. Its initial offering price was 16.50 a share, but the stock has wilted since, closing at 6 a share on Sept. 22.

At that price, some analysts say the stock is a giveaway.

high-quality polysilicon shortageAnalyst Theodore O'Neill of investment firm Kaufman Bros. says GT Solar is undervalued because it is still No. 1 in the silicon solar equipment market, with a hefty order backlog worth $1 billion.

"Shares of GT Solar trade on orders for new equipment and those orders are starting to go up," says O'Neill, who rates the stock a buy with a 12-month target price of 9.

The solar bears argue that there is a global oversupply of polysilicon—and that won't change in the next 12 months. But GT Solar's management disagrees, notes O'Neill, insisting that the world doesn't, in fact, have enough high-quality polysilicon.

He thinks the time is ripe for buying into GT Solar. "You buy shares of equipment companies when you think orders have reached a bottom," says O'Neill, but their shares often move up before it is clear that orders have improved.

He notes that the stock did poorly in 2008 because of declining order momentum. Now, O'Neill's earnings model suggests a potential upside to 13.50 a share by fiscal 2011 (ending Mar. 31), when he expects the company to earn $1.07 a share, up from an estimated 58¢ in fiscal 2010. It earned 61¢ in fiscal 2009.

solar wafer demandSome analysts regard GT Solar as a safe play in solar. "GT Solar is one of the most defensive ways to gain exposure to the solar space," says analyst Pavel Molchanov of investment firm Raymond James & Associates (RJF), who rates the stock outperform. "It boasts what we believe is the best balance sheet in the space [with zero debt and a cash balance of $1.13 a share] and what we estimate is fiscal 2010 free cash flow of $98 million," says the analyst.

Where would GT Solar's new orders come from in light of the weak demand in the first half of 2009? Analyst Jeff Osborne of Thomas Weisel Partners Group (TWPG) (it has done banking for GT Solar) figures the orders may well still come from the company's key customers, including LDK Solar (LDK), Yingli Green Energy (YGE), and Trina Solar (TSL).

Several major customers have shored up their balance sheets recently, notes Osborne, "which bodes well for GT Solar." He expects $100 million to $150 million of possible orders coming in the next six to nine months from companies planning to expand capacity in 2010, when "demand for solar wafers should be healthier globally."

He rates GT Solar overweight, since he views the solar equipment business as a "relatively safe place to invest in the turbulent solar sector." He acknowledges that there may be some near-term headwinds in the solar market, but "we see the valuation of GT Solar already reflecting this," says Osborne.

For investors still uncertain about the future of this crucial corner of green energy, GT Solar may well prove to be a bright spot.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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