Evergreen Solar’s sudden resurgence in October remains a mystery to me. Nothing in the recent third quarter earnings report explains the sudden return of enthusiasm to the stock. On the other hand, there was just enough reassurance in the report to once again suspend fears of the worst outcomes. ESLR remains a speculative play on the company’s survival through some tough headwinds. However, as long as the general headlines stay positive for solar, the stock should be able to continue riding solar’s coattails.
In forming my opinions, I reviewed the earnings release and earnings presentation, listened to the conference call, and scanned the Seeking Alpha transcript for the conference call. This summary is not a comprehensive review of these materials. Instead, it represents the items that caught the most of my attention. You can get a summary of the financials from Greentech Media here: “Update: The Rise and Continued Fall of Evergreen Solar – Q3 financials don’t signal a return to profitability any time soon.”
The number one short-term issue for ESLR remains survivability. Due to on-going losses and negative cash flow, ESLR’s debt levels remain very high compared to cash on hand. As of the third quarter, ESLR reported $93.3M in cash versus $451M in total debt. The debt breaks down as follows:
- $249M on a 4% note due in 2013
- $165M on a 13% note due in 2015
- $37M loan and accrued interest due in 2014 due to the Chinese government.
Evergreen spends about $31M annually on the cash interest expense on the convertible debt. That is a sizeable sum for a company with year-to-date revenues of $249.5M and a net loss of $54.5M. Nevertheless, management reassured analysts that the company is properly resourced to meet its liquidity needs. The company has enough cash to sustain current and planned burn rates for the next 18-24 months. This is an improvement from the dire language thrown around in previous earnings reports over the past year or two. Over this time, financing events have bolstered the company’s prospects for survival and are primary tools for bridging the company to the day when it can finally earn money. Accordingly, management indicated that they “…fully recognize the need to take advantage of opportunities that enable us to further strengthen our balance sheet and improve our long-term financial position as they present themselves. We will continue to evaluate our capital structure and opportunities to strengthen our financial position, so that we are prepared to address our longer-term liquidity requirement.” I have to assume this means ESLR will sell even more equity if the stock builds enough gains in the near future.
During Q&A, CEO, COO, and President Michael El-Hillow reiterated ESLR’s commitment to achieve profitability in 2013 assuming the company is fully operational at that time. This timing is extremely critical given the due dates of ESLR’s debt and the high cost of servicing part of that debt. Interestingly, operations at the Wuhan plant in China will generate profits over the next two quarters. The Chinese government and banks require two quarters of profitability to qualify for the kind of loan that ESLR received. This is a key item to watch since Wuhan is a critical component of ESLR’s strategy to drive down product costs:
“We are achieving most of our major milestones, but we have yet to reach the most important one in our view, sustained profitability. Our focus on this goal is intense and requires us to substantially scale operations in a low-cost manufacturing region and to further [develop] our unique furnace technology, including our programs to develop an industry standard-sized wafer.” (ESLR needs to create a standard-sized wafer to enable licensing of its patented technology).
ESLR did not describe any penalties for failing to reach profitability at Wuhan over the next two quarters.
As usual, ESLR management made multiple references to their efforts to create and keep jobs in the U.S. And as usual, it created awkward theater given ESLR expanded production to Wuhan to lower material and labor costs – not to mention no analyst on the call asked about these issues (they only care to the extent ESLR’s cost structure goes lower). Management even pointed out that its Devens facility (in Massachusetts) is in an area with high manufacturing costs.
A trade dispute between the U.S. and China presents the latest obstacle to ESLR’s U.S. operations. Last week, the Department of Commerce’s International Trade Administration concluded a seven month process and issued a preliminary finding that China unfairly dumps aluminum extrusions in the U.S.:
“Commerce preliminarily determined that Chinese producers/exporters have sold aluminum extrusions at a margin of 59.31 percent, ad valorem….The merchandise covered by this investigation is certain aluminum extrusions which are shapes and forms produced via an extrusion process of aluminum alloys. The major alloying elements in the subject merchandise are manganese, magnesium, and silicon. These products are generally used in construction applications and are incorporated into window and door frames and sills, gutters, and solar power frames. They serve as parts for cars, trucks and both structural and decorative elements on boats. They also serve as furniture parts and in a variety of other consumer and industrial goods.” (I placed the emphasis to note that the U.S. is well-aware of the use of these products in the solar industry).
This action means that ESLR’s material costs will increase over the next three months as the company scrambles to secure alternate suppliers. ESLR explained that it is like any other U.S. manufacturer that finds it necessary to source material outside of the U.S. in order to remain competitive. Management lamented that the government’s action may eventually force ESLR to move more (all?) assembly outside of the U.S. so that the company could continue to access cheap Chinese aluminum extrusion.
Management was very vocal in expressing its frustration over this trade action. They claimed they will pleading their case with politicians from state legislators, to the governor of Massachusetts, to politicians in Washington, D.C. I expect their efforts to fail; this issue is likely intractable. Even if ESLR can make a case that these punitive duties will cost valuable Americans jobs at its Devens facility, the petitioners that initiated this action will outweigh ESLR’s concerns with their own claims about the jobs their plants and industries are losing to the cheap Chinese product. These petitioners have already received the welcome ear of the government.
The stakes are high as demonstrated by the U.S.’s recent announcement that it will investigate claims of anti-competitive behavior from China across a wide array of green technologies. China and the U.S. are clearly locked in the throes of a trade war, and solar is caught in the middle of it. ESLR management did not mention this particular dispute, but management did note the large sums of money China is funneling into its solar companies. The context was positive because ESLR thinks it might be able to tap into this money by one day licensing its technology:
“There’s no doubt that the Chinese government’s provided billions. And we know for a fact, if you take the top 67 companies in China, the Chinese government has committed about $35 billion to these companies admittedly in frame agreement. So where do we stand? We’ve talked for the longest time that we want to leverage our technology…Now we’re at the point of making it a standard-sized wafer. Our perspective is this, if we can show the government, the lending authorities, et cetera, in China that we have a standard-sized wafer that can compete, or even in this case, beat the rest of the industry, the funding out of that will be substantial. “
While ESLR gushes over the supportive Chinese government, it continues to complain about the lack of support form the U.S. government. In the case below, ESLR is having trouble getting support for a Korean customer:
“…we had our first meeting with the Chinese government the week before Christmas of 2008. I went to China for three months and at the end of the fourth quarter, we had a loan to pay for 2/3 of our factory in China, no interest or principal due for five years. That’s what the United States companies would get in China. We have a Korean customer that’s been trying to fill out paperwork to get a loan from the Export-Import Bank. And a year later, can’t get $6.8 million. We know the situation we face. We are an American company. Obviously, we’re hoping to see some support from the U.S. government. But it is amazing, as everyday goes by, there’s less and less support that comes out of the U.S. Government.”
With Republicans taking over the House of Representatives and talk of “austerity” growing in the U.S., ESLR can probably expect less support, not more.
Clearly, ESLR still suffers from many headwinds, and it is difficult to see through to the profits that supposedly await investors in 2013. While I found no news to justify ESLR’s October surge (perhaps a delayed reaction to September’s surge for solar?), I decided to keep my speculative trade going in ESLR anyway based on the technicals of a potential bottom in the stock. I even added to the position when the stock opened for trading down 11% (note I am now using the “#120trade” hashtag to flag my trade-specific tweets). It was a timely move (so far) as ESLR ended the day up 3%. The stock continues to vacillate around its declining 200-day moving average (DMA). I am expecting ESLR to eventually bounce from here, but it will likely take some time without any immediate catalysts. Further gains will likely come in fits and spurts.
The biggest near-term risks to the stock are another financing event that dilutes the stock, a crippling escalation in the trade dispute between China and the U.S., and a severely overbought stock market.
This chart summarizes the near-term technical situation. It appears the stock is coiling for another large surge. A break of the post-earnings lows ($0.83) would seriously downgrade that bullish prospect.
*Chart created using TeleChart:
Be careful out there!
Full disclosure: long ESLR