Monday, February 13, 2012

Amtech Trades Like It's Broke

You probably won't find a lot of value investors in the solar industry. As a relatively nascent industry, it hasn't yet proved its economic viability. Moreover, that viability is based on the prices of substitutes (e.g. natural gas, wind power etc.) and perhaps the support of the agents of taxpayers (i.e. politicians). Finally, there is a commodity-like element to this industry, as companies fight to provide relatively undifferentiated products to customers only interested in price.

This introduces a ton of risk into the equation for anyone trying to value a solar stock to any reasonable degree of certainty. But sometimes, could a balance sheet be so pristine that it trumps many of the downside risks, leaving only the upside potential of this volatile industry to the investor?

After falling almost 20% on Friday, Amtech Systems (ASYS) now trades for $85 million despite a net cash position of $55 million and earnings over the last two years totaling $30+ million.

In the near-term, however, earnings will not be pretty. The industry is currently in a state of oversupply, meaning Amtech's solar cell manufacturing customers are hurting. As a result, they have reduced or pushed back their plans to buy the capital equipment (which Amtech provides) needed to expand production. Management predicts revenue will fall some 66% y/y in the current quarter, pushing the company into a loss position.

But because of the company's fortress balance sheet, might it be an attractive purchase anyway? The company should be able to ride out any short-term oversupply the market is experiencing. Furthermore, the company also sells its capital equipment to semiconductor manufacturers, diversifying its revenue base to some extent.

The question for investors is how long such an oversupply in the solar industry may last. Answering this question isn't easy, as a lot of moving parts (including the competitiveness of solar vs traditional energy, which is changing due to technology improvements) have to be taken into account. For those who understand the industry well and who believe the downturn to be temporary, however, Amtech may be a bargain.

Disclosure: No position

No comments: