GT Solar (Nasdaq:SOLR) Dips Further - We Think This One Is Oversold

Nov 12, 2008
Author: SCP Editor

November 12, 2008 – GT Solar (Nasdaq:SOLR) closed yesterday’s session at $3.85, trading 2.25x trailing twelve-months’ revenue and 0.87x our forecast for its current fiscal year’s revenue of $630 million; and 15.23x trailing twelve months’ income and 5.61x our forecast for its current fiscal year’s income of $98 million. For a company with revenue growth last year of 306% and expected revenue growth this year of 158%, and expected net income growth of 171%, we think this stock is way oversold.

GT Solar is an equipment supplier for the solar industry. Its equipment and services enable upstream solar manufacturers to produce polysilicon, wafers and modules. The company has benefited from strong growth in the solar industry, and we expect it to continue to benefit from growth in the global solar market for the foreseeable future. So why is the stock trading at such a discount to its growth, and to our projected growth?

We think that the primary reason is that the markets are overreacting to concerns about the impact the current global financial and credit crisis will have on solar projects, solar demand and capital expenditure budgets from customers. In recessionary environments, manufacturers and providers for manufacturing equipment are typically amongst the hardest hit, and GT Solar has been no exception.

But again, we think the selloff in GT Solar’s stock has been overdone. The trends driving solar growth remain well intact, including the goal for many countries to become energy independent, legislation in the form of renewable portfolio standards, feed-in tariffs and other rebates, concerns about climate change and solar technologies’ evolution to reach grid parity (which will enable solar to compete with conventional energy sources without need for subsidy).

To be fair, the global financial meltdown and ensuing recession has dampened global demand and has created a momentary bull market for the dollar, which in turn has deflated commodities so rising energy prices haven’t been as much of a driver to solar lately. But we see this as a short-term dynamic, and believe that energy prices will trend substantially higher in the mid-to-long term, which will create further pressure to develop adopt more efficient renewable energy sources like solar.

In the U.S. alone, industry experts have projected that the renewal and eight-year extension of the ITC will be a catalyst for about $130 billion of investment into solar through 2016.

Here are some statistics to consider:

·         World solar cell production reached a consolidated 3,436MW in 2007, up from 2,204MW in 2006.

·         The global PV industry produced about $17 billion in revenues in 2007.

·         There is plenty of room for solar to grow – in the most recent month reported by the Energy Information Association (July), solar represented 105 thousand megawatthours or (.0002) of the total energy produced in the U.S., which was 402,139 thousand megawatthours. Even so, on a year-over-year basis, comparing July 2007 to July 2008, solar energy produced increased by 21.6%.

Solar is a growth industry, with or without a recession, and the commitment is there, more than ever on a global basis to increase solar energy’s contribution to the world’s grids. Against that backdrop, GT Solar, being one of the leading providers of specialized furnaces used to melt polysilicon and cast multicrystalline ingots to produce polysilicon (the key feedstock used in solar cells), will continue to have demand for its products.  

We liken GT Solar’s position in the solar industry to what Applied Materials position has been in the semiconductor industry. The increasing speed and efficiency of semiconductors has been largely the byproduct of companies like Applied making better equipment to enable the semi industry to continue its evolution. We see the same dynamic developing in the solar industry for companies like, and specifically, for GT Solar.

In terms of our valuation and price targets for the stock, we think that given the company’s impressive growth rate and market opportunity, a 1.5x current year price-to-sales and a 10x current year price-to-earnings matrix is absolutely defensible. That would give us an implied trading range for the stock between $6.60 and $6.80, or at least 70% to the upside. Given the fact that stocks in general, and GT Solar in particular have been beaten up so much of late amidst the massive selloffs in the broader market, we think the stock can achieve this target in a short period of time. After all, the stock was trading in this range less than one month ago.  

Important Disclosure Note: SCPEditor does not own any SOLR. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.