Wednesday, June 15, 2011

Suntech Power: Welcome to Sin City

If you don't think that investing in the stock market is a lot like high-stakes gambling, then perhaps a look at the short trading history of Suntech Power (STP) may change your mind. The equity went public in late 2005 when shares were sold at $15 to much fanfare, like many IPOs. They really tore it up for two years, and, in late December 2007, it reached a price very close to $90/share. That same year the stock earned $1.02/share and had a book value of only $5.80/share. It's earnings gave it a P/E ratio of 90, extremely high by any standards. Investor psychology had kicked in and the stock was swept up with two investing frenzies at that time, renewable energy and Chinese securities.

They say to never get between a man and a firing squad, and buying a stock with a P/E of 90 is just about the same thing. After the market imploded in late 2008, investors slammed the door shut on Suntech Power and it traded at $5.50. Ouch. It had a small revival in 2009, getting as high as $21, but has been sucking wind ever since and now goes for close to $8. It barely beat the widowmaker. However, this is not the end of the story with this security.

What jumped off the page while examining its metrics is that it now trades at a P/E Ratio of only 9 with 2011 consensus earnings at $.84/share according to Yahoo Finance. It's book value is $10.55/share, considerably higher than the current price and twice as much as when it was at its all time high. So what's wrong with this picture? Well, if the stock was so great at $90 with a P/E Ratio of 90, and, a book value of $5.80, why is it being shunned by selling at $8, especially if it's going for such a big discount? I've never been able to figure this out which is what makes investing so interesting.

Sure, Suntech Power has some serious question marks, but, it may just meet your investing criteria, especially if you are a bargain hunter. One big thing I like about them is that they are a leader in their industry. This is confirmed in a 5/31/11 Standard & Poor's report by Angelo Zino: "Suntech Power was the world's largest manufacturer of photovoltaic (PV) cells at year-end 2010...PV cells are devices made from silicon wafers that convert sunlight into electricity by a process known as the photovoltaic effect.".

ValueLine's Warren Thorpe takes this a step further in his 4/1/2011 analysis when he discusses Suntech's plans for next year: "Cost reductions should materialize in the coming quarters. Cell and module processing expenses are all on the decline, and the cost of producing wafers should begin to fall in tandem. If the company's in-house projections for their layouts come to pass for 2012..., Suntech Power will be one of the top low-cost producers of photovoltaic devices in the world.". It appears that they have their bases covered, so let's look at the industry as a whole.

In a factsheet provided by solar industry research firm SolarBuzz: "The 2010 global solar photovoltaic (PV) market size soared past the forecasts of the previous year, allowing prices throughout the PV chain to hold up much better than anticipated. Worldwide PV market installations reached a record high of 18.2 GW (gigawatt) in 2010, representing growth of 139% Y/Y (year over year). The PV industry generated $82 billion in global revenues in 2010, up 105% Y/Y from $40 billion in 2009. Meanwhile, worldwide solar cell production reached 20.5 GW in 2010, up from 9.86 GW in 2009.".

The increase in the number of PV gigawatts utility companies will be generating in the coming decade paints a picture of robust growth. China and India are two nations that have ambitious solar energy plans. In examining an Asia/Pacific factsheet from SolarBuzz, we can see that in 2009 China generated a minuscule 228 megawatts of solar energy and India's output was a microscopic 44 megawatts. However, India's Ministry of New and Renewable Energy released its National Solar Mission, outlining planned growth of the PV market to 20-22 GW by 2022. This pales compared to what China wants to do.

In the 5/25/11 Suntech Power 2011 Q1 conference call, Chief Commercial Officer Andrew Beebe reports: "We're particularly excited about the long-term potential of the Chinese solar market. A senior official of the highly influential National Development and Reform Commission recently stated that China's 2020 solar target would be increased from 20 gigawatt to 50 gigawatt. But this is not official policy." Since they are starting at basically zero, anything over 20 GW is a significant jump, and, let's not forget that Suntech Power is a Chinese company based in Wuxi, China.

I believe they would have an inside track on government contracts. Think locally, act globally. It works both ways. They don't have a 'Buy American' campaign going on in the PRC. I guarantee you that. As is, China only constituted 5% of Suntech's revenues in 2010. There's plenty of room for growth domestically, let alone spanning an entire globe that looks to be slowly weening itself off of fossil fuels and nuclear power.

In looking at the Suntech Power annual report, the company warns investors that: "Demand for our products depends substantially on government incentives aimed to promote greater use of solar energy...Governments in many of our key markets, most notably Italy, Germany, Spain, the United States, France, South Korea, Taiwan, India, Japan and China have provided subsidies and economic incentives to encourage the use of renewable energy such as solar...".

The shaky economies of these countries, especially in the developed world, may be a smoking gun in regards to potential growth slowing. However, I believe that renewables are here to stay and that although anticipated growth may decrease somewhat if there is indeed some sovereign belt tightening, we're just in the early innings of this industry. Suntech Power could very well maintain their leadership position and offer you boundless profits going forward, especially when it's selling for 20% under book value. The question still remains, is this the right time to buy a stock like Suntech Power?

In going back to Andrew Beebe and the 2011 Q1 conference call, he states specifically that, "...the next two to three quarters will be challenging.". Much of this has to do with an oversupply in the industry. Semiconductors are a boom and bust business. Solar wafers are no exception. According to analyst opionion on Yahoo Finance, a majority of them think you should keep your powder dry when it comes to Suntech Power. Out of the 41 analysts that cover the stock, 22 have a hold rating while 10 rate it a buy or strong buy, and, 9 have a negative opinion of it. That's not a strong endorsement.

Normally, I would take a flier on a market leader in a growth industry with a valuation so compelling. However, I believe we are still in a corrective mode in the market, and, although it may not drop like it did in late 2008, there is still too much debt in the system. That's why I'm in cash and have positions in both ProShares UltraShort S&P 500 (SDS) and Direxion Daily Small Cap Bear 3X Shares (TZA). I've made my bets that the market is going lower and Suntech Power with it.

Friday, June 10, 2011

The Future Starts Slow for Itron

Apparently investors never got the memo that Itron (ITRI) is the global market leader in smart utility meters. The stock has a 2011 P/E ratio of only 11 with a 5 year growth rate of over 10% according to Yahoo Finance. Itron was trading as high as $80 a little over a year ago and has experienced some rough price/action in a choppy tape of late. It sells for $48 now, a 52 week low. Itron is exhibit-A of why long-term investors should not chase stocks with high P/E ratios, even if their prospects are good.

Perhaps some of the price erosion can be attributed to an over baked security, but you wouldn't know it from looking at its chart back in 2008. Before the market crash, the stock traded near $110 and seemed to have a force-field around it on its upward trajectory. Nothing could penetrate it, and its P/E ratio reached 33. Back in the years before 'The Great Recession', Itron was caught up in the clean energy frenzy which was a recipe for disaster if you were one of the last investors piling in to these equities.

The stock dropped from $105 to $34 almost overnight in the 4th quarter of 2008. Patient investors could have picked it up for a song and it is still reasonably valued two years later. However, there is much conjecture on which way the market is heading these days. Whether you want to add a quality company like Itron to your portfolio is a glass half empty/glass half full scenario. Let's get up close and personal with it to see what you think.

Itron CEO Malcolm Unsworth really nailed it in the Q1 2011 Conference Call when he said: "One thing that's important to understand is that you can't stop technology.". Earlier in that same report he enunciated: "Itron is the global leader in technology solutions for electric, gas and water utilities, at a time when the utility industry has begun the most significant technology upgrade cycle in it's history. The conversion to smart meters has progressed the fastest in North America, but it's spreading quickly to other parts of the world.".

The question you may be asking yourself is what exactly is a smart meter. That answer is provided courtesy of Standard & Poor's analyst Angelo Zino in their 4/28/11 report on Itron: "Smart meters initiate and respond to two-way communication with the utility to automatically collect and transmit meter data frequently to support various applications beyond monthly billings. Itron's smart metering solutions offer more features than advanced metering systems. Smart meters can send and receive detailed data, collect and store interval data, and interface with other devices.".

It's basically a broadband based computer that receives and transmits data to and from the utility company. The smart meters can be automatically updated by downloading programming information from the Internet, just like you do with cloud applications on a PC. Itron will sell a lot of these systems because just like when you walk into a Ford (F) dealership, they try to sell you an Explorer or an Edge, not a Model-T. Utilities save a lot of money using the smart meter systems. They reduce headcount and the meter reader will go the way of the milkman.

In a 12/10/2010 ValueLine report by Sigourney Romaine, we get an idea about just how large Itron's potential market is: "About half of the electric meters in North America are now 'smart', but the worldwide proportion is only around 10%, with similar numbers for gas and water. The European Union's 2020 Directive aims to reduce carbon emissions and total energy use by 20% by 2020 and also raise the contribution of renewables by 20%. That should significantly boost demand for Itron products...".

ValueLine's Sigourney Romaine continues with this theme in the 3/11/2011 analysis: "AMI (advanced metering initiative) pilot project in both Europe and North America ought to produce solid earnings growth in 2012. The five largest European countries all have 'smart grid' AMI pilot projects that have either begun installation or are schedule to start this year or next. More U.S. projects ought to join them.". She states that the market is huge for these resource saving devices.

One thing I really like about Itron as they move into the future is their new partnership with Cisco Systems (CSCO). In a 9/1/2010 joint press release from the two companies, Cisco's standards-based IP architecture to power Itron's market leading smart meter system, they announce, "...the two will deliver a definitive 21st century Internet Protocol (IP) based communications platform to the smart grid market and help advance more consistent and reliable energy across the electric distribution system and into homes and businesses.".

The press release goes on to say they: "...will collaborate on solutions that will transition smart metering technology into an open and interoperable, enterprise-class network for utilities. Specifically, the two companies will develop a standards-based, highly secure technology for full IPv6 of field area communications to support smart metering, intelligent distribution automation and interfaces to the customer premise.".

If you are not familiar with IPv6, it's the newest standard for Internet 2.0 which allows for network security, simplifies data processing by routers, and, enables more Internet addresses for the Web. In Sigourney Romaine's 6/10/2011 ValueLine report: " North America, Itron recently licenced Cisco's IPv6 software package to improve two-way communications in Open Way advanced metering projects, and that should lead to more AMI (advanced metering initiative) work.". Open Way is Itron's smart meter software system and solutions.

During the latest conference call, Itron's CEO gave an ambitious 5 year plan to double sales by 2015. You may think investing in this company is a sure-fire way to a big pay-off, a golden opportunity to deliver a payload, however, there are some red flags associated with Itron. I believe they are still deep in the weeds. The big sticking point with me is that they carry a lot of debt. As of 3/31/2011, current assets are $892 million while current liabilities are $714 million. I prefer a lot less debt than that. I think they'll rise above it, but it may take some time to work off some liabilities, especially if they go on an acquisition binge which CEO Unsworth alluded to in the conference call.

Another item that caught my eye is that consensus earnings estimates growth from 2011 to 2012 will be flat. Yahoo Finance posts $4.23 earnings/share for 2011 and only $4.22/share the year after. I think there is more hell to pay on the downside of the market on a macro level, and it's a storm that will sink all ships. I realize Itron has a P/E ratio of only 11, but it can go lower. That's not to say somebody's got its number, it's just that we really haven't had that 10% to 20% correction in the market that I've been looking for. Itron doesn't pay a dividend, so it's not a widow and orphan stock, but it is a good company with a bright future although it may take another year to get there.

Wednesday, June 1, 2011

Aruba Networks Snaps Back to Reality

In my fact finding mission to unravel the mysteries of the telescom, I came across Aruba Networks (ARUN) when it burst onto the scene by way of inclusion in the Investor's Business Daily top 50 stocks, commonly known to investors as the IBD 50. I think it's worth noting that equities on this list tend to be flavors of the month with sky high P/E ratios trading on fumes, but they can also be the stocks of our time with the technology, products and services that will lead us forward. If you are a short-term investor, this is a great list to cherry-pick holdings. If you are a long-term investor, it's a great list to watch for stocks to buy once they come back down to earth.

I believe that Aruba Networks is a speculative equity, but not a speculative company in that they will be in the conversation of wireless infrastructure leaders for the next decade. If you look for them on the IBD 50, you won't find them there anymore. On 5/19/11 they reported better than expected numbers in their Q3 earnings call transcript, but tempered their outlook for Q4. Traders pinned their ears back and kicked the stock to the curb, putting a hitch in its giddyup. The equity was up 57% in 2011, trading at about $32.50 before the announcement and when the dust had settled on the day after, it was down 17% to $27. At the time of this writing, it has rebounded slightly to $28.

According to a 5/20/11 article by J. Bonasia of Investor's Business Daily, Aruba Network Dives on Disappointing Outlook: "Aruba makes equipment for wireless local area networks. Such WLAN gear lets workers in remote offices securely connect tablets, smartphones and laptops to their computer networks...Aruba installs its security and management functions on mobile devices. The software then hooks into wired networks through an access switch. Ensuring the security of wireless devices is a growing priority for tech managers. Most mobile devices aren't issued by companies, but instead are acquired ad hoc by workers.".

This phenomenon is what CEO Dominic Orr refers to as BYOD (Bring Your Own Device) in the Q2 earnings call transcript from the prior reporting period. In previous technology generations, it was the corporations that spurned technology growth. Now it is the consumer with the advent of Apple (AAPL) and Google (GOOG) based mobile devices. People own them, prefer them and want to use them for work. They're not waiting till next year for Microsoft (MSFT)/Nokia (NOK) products.

In the Q2 conference call, Mr. Orr addresses the explosive growth for his company and the industry it's in, and, cites not only the onslaught of smartphone and tablets in the workplace causing demand for Aruba's products, but: "...the sharp increase in demand for multimedia-rich mobility applications, particularly video, has set a new bar for user expectation and a network that must not only connect but deliver the experiences and user demand...the rise of both server and desktop virtualization has quickly increased the business relevance of the incoming wave of new mobile devices and tablets...And most of all, it's about providing a comprehensive security implementation to ensure the accelerated path to mobility is a safe one."

To paint a picture on just how fast Aruba Networks grew this past year, we just have to look at their recent earnings history. According to Yahoo Finance, trailing twelve months earnings per share is three cents with a P/E Ratio of 1,000 for the same time period. Consensus earnings estimates for 2011 is $0.59/share with a P/E Ratio of only 47. The problem arises when we look out to 2012 and see that earnings are supposed to grow only 10% with an EPS of $0.65. Things are decelerating, but perhaps the analysts are low balling their projections. I tend to think earnings will be better than the 10% estimated, just by the nature of the industry they're in - Wireless Local Area Networks.

In previous posts I've discussed my belief that we are in the beginning stages of a new technology era. This includes local area networks that have traditionally been wired, but are increasing becoming wireless. John Henry built the transcontinental railroad with his sledgehammer, but the steam-drill made him expendable. Hence the proliferation of WLAN in the enterprise and the growth of companies like Aruba Networks. In fact, the sector is dominated by just two companies, Cisco Systems (CSCO) by a wide margin and Aruba at a distant second place.

In a press release by Aruba on 5/24/11, Aruba Networks Makes Great Strides in Wireless LAN Market Share: "Aruba networks today announced that its market share in the Enterprise WLAN space had sequentially increased to 15.9 percent according to a research report by Dell'Oro Research on Friday, May 20th...This result marks an acceleration of Aruba's market share gains, primarily at the expense of Cisco...Illustrating the healthy WLAN growth, as well as Aruba's strong competitive posture, the market grew 22% from CYQ1 2010 to CYQ1 2011, while Aruba's revenue grew 52.5 percent that same period.".

Going back to the J. Bonasia article in Investor's Business Daily, "Another source of growth for Aruba involves the move from an older wireless networking standard called 11g WiFi to a faster standard, 11n.". That's a boost for Cisco's sales, too, and we can surmise that there is a little game going on between the two companies, but Aruba may have just played a trump card with their recent introduction of MOVE (mobile virtual enterprise) architecture, at least in the short term.

CEO Orr addresses this technology in the most recent conference call: "Aruba MOVE integrates wireless, wired and remote silos into one cohesive access solution enables by cloud -based mobility services. Access privileges are context aware, meaning that they are based on user, device, application and location, and this dictates the type of network resources each person is entitles to access.". The company feels this could be a boon for business in that it improves productivity and reduces costs for their customers.

Cisco recently decreased their guidance because of a pullback in government spending. I'm not sure what kind of an impact that will have on Aruba Networks going forward because they do have exposure to some government entities like the FDIC and the United States Air Force. It is my belief that this equity will remain shell-shocked in no man's land, trading in-sync with the overall market until next quarter when we can get a better look in the uptake of the MOVE architecture. I like these technology pure-plays like Aruba, much more than I like industry behemoths like Cisco.