The problems in the solar sector are well known. Huge excess capacity, especially in China, has swamped the market and sent solar prices down 40%-70% over the past 12 months. But these cheap prices in many cases below current production cost, even in China mean we've reached a tipping point in the industry.
In many regions, I estimate it is now cheaper to install solar cells than to build a new coal-fired power station. This is even true without any assistance from state subsidies and explains why the volumes of photovoltaic (PV) projects rose a staggering 70% last year to 27.7GW, according to the European Photovoltaic Industry Association.
One company benefiting from this growth is Power-One. It makes inverters (which harvest solar or wind energy and convert the electricity produced onto the right frequency so that it can be pumped back into the grid). These account for 70% of sales. It also sells equipment that helps to regulate the power consumption of data centres and other IT operations.
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In 2011, the firm generated $1bn in revenues and earnings per share (EPS) of 88 cents. It closed December with a huge cash mountain of $204m (about $1.45 per share). During the fourth quarter, Power-One shipped enough inverters to give it the equivalent of a 10% global share.
Power-One (Nasdaq: PWER)
There are two areas of concern. One is Europe, the world's biggest installer. The other is the impact of further reductions in feed-in-tariffs' subsidies to consumers for adopting renewables. The good news is that any dip should be short-lived.
Germany, Italy, Switzerland and quite likely other countries such as Japan have decided to turn their backs on nuclear power after the Fukushima disaster. So renewables will still play a major role in future energy requirements.
Wall Street is forecasting 2012 turnover and underlying earnings per share of $962m and 55 cents respectively rising to $1.05bn and 67 cents in 2013. As such, I rate the stock on a ten-times EBITA multiple. After adjusting for the cash pile and $36m of preference shares, that generates an intrinsic value of more than $6 a share.
Investors should note that Power-One is a small business up against larger rivals, such as Siemens. Risks include price deflation, excess capacity and fluctuations in subsidies. But these are outweighed by the group's first-rate technology, strong balance sheet and excellent long-term prospects.
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