GT Solar Plans Conservatively in the Midst of Boom in Solar Demand

A few days ago I posted a piece on GT Solar International’s latest quarterly earnings results and erroneously quoted material from a Seeking Alpha transcript for last year’s fiscal 3rd quarter conference call as if it were current. I apologize for the confusion that caused. I have removed that article, and I am posting this piece as a correction and replacement. Interestingly enough, last year’s conference call was structured a lot like this latest one. Instead of the “bubble talk” I cited, this year, GT Solar (SOLR) referred to the cyclical nature of the solar industry to explain its conservative planning despite bullish industry projections for solar demand in 2011. SOLR anticipates a slowdown in its PV (photovoltaic) business in the second half of 2011 similar to the one it experienced, and feared, in the second half of 2010.

SOLR also expressed caution about the demand picture in Germany, Italy and other European countries due to cuts in solar subsidies. The company also expects some slippage in customer projects into late FY12 or early FY13 given the aggressive nature of existing plans to add capacity.

I was particularly eager to dig into SOLR’s results because the market gave a very lukewarm reception to what I thought were decent headline results and guidance. SOLR is still trading around the same price as it did before earnings. To update and correct my previous commentary, I listened to the conference call and reviewed the earnings presentation.

For FY2011, SOLR tightened up the lower range of its guidance and increased the upper ranges ever so slightly:

Revenue: from $775-$850M to $835-$860M
Gross Margin Percentage: from 40-41% to 41-42%
EPS Fully Diluted: from $1.08-$1.18 to $1.15-$1.19

More importantly, SOLR’s preliminary guidance for FY2012 provides a very wide projection that includes the potential for flat revenue growth next fiscal year.

Revenue: $850M to $1B (YoY growth from -1% to to 20%)
Gross Margin: 40%-42%
EPS Fully Diluted: $1.25 -$1.50 (YoY growth from 5% to 30%)

Given the downside risks, I will assume that, in the best case, the market will pay no more than about 10x forward earnings until we get more clarity on the second half of the year. In the worst case, I will asume the market will only pay 7x earnings. These assumptions lead to a price range over the next year of $8.75 to $11.50. In other words, SOLR may already be fairly valued at current levels, and it may take a positive earnings surprise to push SOLR much higher from here.

Note well that SOLR’s guidance assumes that solar demand will materialize at the lower ranges of analyst estimates. This approach means there could be some upside surprises to SOLR’s results if solar demand remains robust. The likely slowdown in PV sales and the timing of revenue recognition for Sapphire systems generate the large variation in the guidance. SOLR expects to narrow its guidance in the next conference call and provide more visibility into the second half of 2011.

I sold my holdings in SOLR ahead of the conference call, mainly to reduce my overall exposure in solar stocks. With the market generally stretched and overbought, I am less comfortable holding a large amount of speculative stocks. I remain a buyer of SOLR on dips.

Interestingly enough, call buying in SOLR was very strong last week with heavy activity in the Feb 10 calls expiring this Friday. At one point last Wednesday, volume was 6,010 calls versus an open interest of only 1,230 calls. At the open on Wednesday, open interest was 2,022.

Here are some additional highlights from the conference call that were of particular interest to me (listed in the order in which the comments appeared in the call):

  • Order rate has declined from prior quarters as anticipated.
  • Shipped a record (over) 480 DSS units.
  • A lot of technical advancements, including polysilicon equipment helping customers to meet new Chinese power usage regulations.
  • 2 customers generated 10% or more of SOLR’s revenue; the largest customer generated about 19% of revenue.
  • 98% of revenue (is still) from Asia.
  • R&D spending will continue to increase.
  • The $0.46 quarterly EPS last quarter was the highest in company history.
  • Cash and cash equivalents = $320.4M up from $294.2M last quarter.
  • Q3FY11 end cash balance reflects the use of approximately $203 million during Q3 to complete the share buy back of 26.5 million shares and draw down of $125M term loan facility during Q3.
  • Seeing some caution from customers about the sustainability of the current pace in solar demand
  • Passed on some orders, but have taken on large market share. Expect market share to be more normalized going forward (similar commentary from last quarter’s results).
  • The PV side of the business is more of a book and ship.
  • SOLR has essentially trained its customers to plan for shorter lead times on DSS shipments. On the polysilicon side of the business, SOLR does not have customers who suddenly wake up one morning and realize they have insufficient capacity: It could take 2 years to recover from such a mistake.
  • SOLR will be a niche, specialty player in Sapphire equipment for now.
  • While shortages in polysilicon are materializing, expecting a lot of capacity to arrive over the next 18 months.

  • SOLR has had a breakout year in 2011
    SOLR has had a breakout year in 2011

    *Chart created using TeleChart:

    Be careful out there!

    Full disclosure: no positions

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