September 2, 2010 – We were asked recently about A-Power (Nasdaq:APWR), whether we are still bullish on the stock and whether we would suggest going long, or trading derivatives around it.
First, we are totally comfortable being long the stock. Having said that, with the broader markets being overbought – out opinion – we wouldn’t be adding to a long position until the markets sell off again and we see where the stock might pull back to on weakness.
In the meanwhile, here is our quick take:
• The business continues to whistle – In most recent Q confirmed guidance for FY10 from $380M in revs to $500M in revs and from $45M in net income to $60M in net income.
• Assuming this guidance, the stock is trading 0.5x FY10sales and 4.46x FY10 earnings.
• Our target multiples for a growth driven company like this is 1.25x sales and 11.2x earnings (the 11.2 earnings being derived from taking a 20% discount to the historical S&P;500 average of about 14x).
• Against target multiples, the implied stock price target should be $13.68 to $14.70.
• How to trade it – sell puts into weakness (the January 7.5 puts would bring in north of $2.50 on a down day, putting your cost for being put the stock at $5, which would be about .46x FY10 sales and 3.8x FY10 earnings – both very attractive entrance points. If the stock trades up above $7.50 you pocket the premium sold on the puts, and look for an opportunity to do it again). I would not be selling calls on this stock anywhere below my target $13 to $14 range in between now and February).
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This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment