ABB merger details
ABB Ltd (ADR) (NYSE:ABB) expects the acquisition will start contributing to its profits within 12 months. These lofty valuations breathed some life in solar stocks, which seem to be battered beyond recognition. However, the natural question is if ABB’s bet on the solar industry can be generalized for solar panel and module manufacturers.
Much to the chagrin of such companies, ABB Ltd (ADR) (NYSE:ABB) made it very clear that it has no intentions of getting into the low-value line of business, even though it believes the solar market will see tremendous growth in the future as electricity costs rise.
Unlike solar panels, where Chinese innovation is more than apparent, solar inverters are complicated pieces of technology and are difficult to replicate. This means margins are higher and thus valuations are also much better.
ABB is making an investment on the solar industry with this deal, which bears significant risks (mainly related to competition/pricing and grid parity/subsidies) but also great opportunities (photovoltaic inverters annual volume growth of more than 10%, penetration in Asia, aftermarket growth).
Photovoltaic inverters have been a strategic focus area for ABB in recent years and while it has looked to expand previously on an organic basis, this deal provides a more significant footprint relative to ABB Ltd (ADR) (NYSE:ABB)’s current sales.
Other winners…
Apart from Power One Inc (NASDAQ:PWER) (in which the rally has played out), the beneficiaries of the transaction are likely to be companies such as Enphase Energy Inc (NASDAQ:ENPH) and Cree, Inc. (NASDAQ:CREE) which also benefit from high barriers to entry. The industry is led by SMA Solar Technology AG – a German company – but has enough space for newcomers and small companies.
Even after the major boost recently, Power One Inc (NASDAQ:PWER) trades at a price-to-earnings multiple of just 18. On the other hand, Enphase Energy Inc (NASDAQ:ENPH) is a small player in the space with a market capitalization of $239 million. The company sells its products through OEM’s, distributors as well as directly to installers. Enphase Energy Inc (NASDAQ:ENPH) is a growth-phase company and though it does not make profits as of yet, it has been expanding its reach into solar-panel manufacturers and installers.
While both Power One Inc (NASDAQ:PWER) and Enphase are inverter manufacturers – there are some differences between the two. For starters, Power-One offers some of the best free cash flow metrics in the space (whereas Enphase Energy Inc (NASDAQ:ENPH) had an operating cash burn in 2012 and is likely to again have one in 2013) as well as a cash balance that was 54% of market cap in recent days.
Enphase Energy Inc (NASDAQ:ENPH) is clearly a much less mature business, but offers its own positive attributes: the industry’s leading micro-inverter platform, a commanding share in the U.S. rooftop market, and much faster than average top-line growth.
Investors seem to be taking note of Enphase Energy Inc (NASDAQ:ENPH)’s micro-inverter technology and have sent the stock up 65% over the last six months. This is a remarkable turnaround for the stock after hitting a low in November. The company has a debt-to-equity ratio of 0.2 and its stock is currently priced 24 times next year’s expected earnings.
Surprises down the value chain
North Carolina-based Cree, Inc. (NASDAQ:CREE) is a surprise entry in this list as the company is better known as a LED player. However, Cree, Inc. (NASDAQ:CREE) manufacturers a wide range of silicon carbide (SiC) based MOSFET’s, which are used in solar inverters.
These products form the company’s power-products portfolio, which sold goods worth a total of $22.6 million in the three month ended December 2012. Although this contributed only 7% to total revenue during the period, higher margins in these niche products effectively resulted in a contribution of 9.2% in gross profits.
The company states its MOSFET’s offer faster switching speeds than comparable silicon-based power devices for a given power level. This also means its products are priced higher and have limited market penetration, but the business is nevertheless growing at a healthy rate (59% for the latest quarter and 23% for the past six months).
The downside with Cree, Inc. (NASDAQ:CREE) is that its stock price may be a bit overvalued, even at a forward price-to-earnings multiple of 31, and it cannot be considered a solar play.
Foolish bottom line
All in all, the transaction is a resounding reminder that all is not lost on the renewable front. However, the gains are evidently limited and a broad-brush approach of buying solar panel manufacturers is not likely to work. At least, it did not work for Siemens AG (ADR) (NYSE:SI) and Bosch which have recently ended their ventures.
The article Are These Solar Bets Winners? originally appeared on Fool.com and is written by Jacob Wolinsky.
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