Small Cap Pulse

A-Power (Nasdaq:APWR) - Quick Take

2010-09-02T11:54:35Z

September 2, 2010 – We were asked recently about A-Power (Nasdaq:APWR), whether we are still bullish on the stock and whether we would suggest going long, or trading derivatives around it.

First, we are totally comfortable being long the stock. Having said that, with the broader markets being overbought – out opinion – we wouldn’t be adding to a long position until the markets sell off again and we see where the stock might pull back to on weakness.

In the meanwhile, here is our quick take:

• The business continues to whistle – In most recent Q confirmed guidance for FY10 from $380M in revs to $500M in revs and from $45M in net income to $60M in net income.

• Assuming this guidance, the stock is trading 0.5x FY10sales and 4.46x FY10 earnings.

• Our target multiples for a growth driven company like this is 1.25x sales and 11.2x earnings (the 11.2 earnings being derived from taking a 20% discount to the historical S&P;500 average of about 14x).

• Against target multiples, the implied stock price target should be $13.68 to $14.70.

• How to trade it – sell puts into weakness (the January 7.5 puts would bring in north of $2.50 on a down day, putting your cost for being put the stock at $5, which would be about .46x FY10 sales and 3.8x FY10 earnings – both very attractive entrance points. If the stock trades up above $7.50 you pocket the premium sold on the puts, and look for an opportunity to do it again). I would not be selling calls on this stock anywhere below my target $13 to $14 range in between now and February).

Important Disclosure:

This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment

BP’s $90 Million Investment in Verenium (Nasdaq:VRNM) Bodes Well!

2008-08-06T09:08:57Z

August 6, 2008 – Verenium (Nasdaq:VRNM) announced this morning it is getting an investment from BP PLC, which will help to shore up its balance sheet as well as provide a key value-added partner for its future development efforts. This should provide the Street with a much stronger level of confidence that the company is going to have the staying power to bring next-generation cellulosic biofuels to the markets.

The stock was pounded last month as concerns mounted about the impact of biofuels on agriculture, the relative uncertainty about the success of next generation biofuels, as well as whether support will still be in place for them by the time they are fully market-ready, and in particular, due to the fact that Verenium has been looking for strategic investment for some time now and hadn’t been able to produce much in the way of results.
This morning’s news is a major development. At yesterday’s close of $2.02, the stock is trading about 2.5x sales (ttm), and about 2.11x our forecasted 2008 sales of $75 million. We think with the BP relationship in place, the stock could trade up to a 3x 2008 multiple, which would put the stock closer to $3.17. This would be the high end of our target range, but we think the news should provide a catalyst for the stock to begin trading in this $2 to $3 range in the second half of the year.

We commented a few weeks ago, July 7, when the stock was hitting $1.60 that accumulation was a good strategy for investors that are able to stand the volatility, and the stock bounced off a low a week later of $1.05, but has managed to climb back over $2 leading into this morning’s news on several positive developments, including a Department of Energy grant, a joint development agreement with an Asian partner, and a grant from New Zealand’s Foundation for Research.

We are still accumulating on any market weakness under $2 and are more bullish than ever on Verenium’s ability to withstand the storm and lead the next generation of biofuel companies.

Disclosure Note: SCPEditor is LONG VRNM.

Still Buying LDK Solar (NYSE:LDK) on any Market Weakness - Volume Breakout Yesterday

2008-05-22T07:23:20Z

May 22, 2008 – LDK Solar (NYSE:LDK) broke out on volume in yesterday’s session, closing up $3.19, or 7.7% on 10.1 million shares. Average daily volume for the stock is 4.1 million shares. We have been recommending LDK to our readers since last June, when the stock traded at about $31. Since then the stock has run to more than $70 – twice.

The company is probably one of the most misunderstood, if not mistrusted solar companies in the market. But we see that as an opportunity to buy on weakness. We won’t get into the reasons why the stock has been so volatile, but will only point out that it remains one of the top three solar companies available to investors in the market today (we also like First Solar (Nasdaq:FSLR) and SunPower (Nasdaq:SPWR) though we think the latter two are probably priced at steep premiums at this point). In the midst of the volatility, LDK has continued to execute.

Yeah, we know that the company has had to deal with declining margins, but it is well on track to bring its new plant online later this year which should turn that story around. Management is calling for gross margins to increase to 42% to 50% in 2009, up from 26% to 31% this year. Meanwhile, it expects to ramp capacity from 800MW to 1,600MW from 2008 to 2009 and wafers shipped from 560-508MW (recently increased this guidance from 510-530MW) in 2008 to 1050-1,150MW shipped in 2009.

All of this amounts to a revenue forecast for 2008 of $1.18 billion, where we are forecasting $188 million in earnings, or about $1.77 per share, up from $524 million in revenue and $139 million in earnings, or $1.37 per share in 2007. We discounted our forecasted stock price using P/E and P/S methods by 30% based on the fact that we are forward-looking and due to margin pressure in 2008 and have arrived at a forecasted trading range by the end of 2008 of $57 to $64. In which case, we think the stock still looks attractive at the $44 level where it closed yesterday (we caveat that by noting that we think the stock could pull back in the midst of broader market weakness which we fully expect in the near term).

Keep in mind also that the company is sitting on backlog of 1,078MW in 2009, 1,221MW in 2010 and 7,151MW in the 2011-2018 period. We estimate that this collectively represents a backlog of $18.9 billion.

Disclosure Note: SCPEditor is long LDK

What Is Deal With Dais - Lack of Volume?

2010-08-05T10:07:04Z

August 5, 2010 - We were asked by a couple shareholders of Dais Analytic Corporation about the lack of volume traded in the stock, and whether this is, in fact a ‘real’ company. We think it is. Below is the question (names and key data excluded for privacy purposes and our response):

Investors:

hi ~

we would like to know whats the latest and what are you and your firm doing to get dlyt in more shareholders hands? the volume is pathetic!

seems as tho since tim got the 200mm contract, the stock spiked for 2 days and is now at a whopping 35cents!..........

we were under the assumtion that we have a REAL company here and that tims technology is truly “cutting edge”......i know things dont happen overnite.....but========= whats in the NEAR future and do they have earnings and the status of the BIG contract? regards

SCP Editor:

Thank you for reaching out – currently there are less than 500 shareholders. Our rule of thumb is that it until we get to 4,000 or so shareholders the stock will not trade with any real liquidity, so our goal is to get there. Our plan consists of working with the company to:

• Create more steady news flow demonstrating that the company is making progress and setting reasonable expectations with the Street
• Getting out to more investor conferences and events – announcements on this front to come
• Staying consistent with road shows – plan to do at least 2-3 annually – just completed NYC, Boston and West Coast

To your point, this is a real company. I am extremely upbeat on the prospects of the business. My sense is the Street is discounting the announced contract to inner Mongolia by 100% and until we demonstrate (book) revenues from that contract in our financial statements that risk discount will persist. However, when we do start booking those revenues I think this will be a significant shift in terms of how the company is being valued.

Right now, the Street is looking at the stock based on ttm (trailing 12 month) performance which is about $1.5-$2M, so a $10.5M valuation may look even a little top-heavy (against peers in the alt energy and clean tech sector) on a P/S basis. But if that China contract ($48M) is real, which we believe it is, then think about this. If a business wanted to purchase Dais, and did its diligence to confirm the credibility of the contract, then a transaction would likely happen at about 2x-3x EBITDA of the business (acquirerors typically want payback in 2 years at the outset).

At 30% GM, the China contract represents about $10-$11M in EBTIDA, all things being equal. 2x-3x EBITDA would be $20M+ (double the current stock price) on the low end, and this is not taking into consideration the ConsERV business, which on a stand-alone business is about at cash flow break even and projected to grow by triple digits over the next couple years, and the Intellectual Property (patents) that the company owns.

In any case – this stock has tremendous upside. The analysis above is based on a single contract to a single water treatment facility. There are hundreds being built in China in the next several years. Water is a huge global issue. Dais has a better technology to support efforts in treating water and in desalination. This is the story we are communicating. It will catch on, and investors that get in early will, in my opinion, be rewarded!

Please don’t hesitate to contact me if you have further questions, and I appreciate your candor in your questions.

Important Disclosure: This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment.

SCPEditor is managing partner of Aspire Clean Tech Communications, a corporate communications and strategic advisory firm to alternative energy and clean tech businesses. Aspire is engaged by Dais Analytic Corporation to perform related services.

Will a National RES Drive Alternative Energy Stocks?

2010-07-28T09:26:31Z

July 28, 2010 – This morning a reader asked us:

“What is your take on the outlook for renewable energy stocks with respect to whether Congress passes a national Renewable Energy Standard?”

Our take is that the states have been doing most of the heavy lifting to date, in terms of driving uptake of alt energy projects. At the national level, it does look like we are going to get some version of an RES but it is getting watered down each day. The opposition has effectively framed the debate pitting adoption of clean energy technologies on one side and jobs/economy concerns on the other.

After all, doesn’t renewable energy require perpetual subsidization given the fact that they are significantly more expensive than conventional sources of energy like coal, oil and nuclear? This point in itself is contentious given the fact that these industries continue to enjoy plenty of subsidies and breaks in their own rights.

Moreover, the math on conventional fuel and energy sources is a little fuzzy when it comes to true cost because it does not take into account the health and environmental costs of using them, and in many cases there are plenty of post-consumption costs that get passed through to consumers like decommissioning costs for nuclear.

In order to get a national RES, there is going to have to be sufficient votes on Capitol Hill, and in order to get sufficient votes on Capitol Hill, interests protecting conventional fuel and energy sources will be accommodated. So a national RES in itself is helpful in terms of ensuring that there will be a commitment on a national level to adopting cleaner energies, but we just don’t see this policy in itself doing much more work than what is in place today – at the state levels. DSIRE has a great website (http://www.dsireusa.org) which keeps up with the latest developments both at the state and federal level.

The RES is good for investors in alternative energy because it creates a framework and provides some level of certainty that there will be an ongoing commitment to clean technologies. It ensures a certain level of demand in the market place. But at the end of the day, alternative energy and clean technologies are going to have to compete on price on their own basis.

So the RES is a good thing and should be seen as a catalyst for alternative energy stocks. But it gets murky quickly from that point, in terms of where to invest. All alternative stocks are not created equally, and only the companies that are introducing and commercializing truly differentiated technologies that are capable of creating scale and driving costs per watt lower to the so-called level of grid parity are going to win in the long run.

For example, look at First Solar (Nasdaq:FSLR). In the solar space it quickly gained a leadership position by introducing a low-cost technology that could scale. While its modules are not as efficient as other crystalline modules, they are sufficiently lower priced to ensure strong demand. It has continued to add manufacturing capacity and improve manufacturing efficiencies driving costs of manufacturing per watt lower. Consequently, it has become the most profitable business in the solar market. It is the low cost producer of a leading edge technology.

That being said, over the past few quarters, First Solar’s module efficiency has flat-lined around 11%, while competitive crystalline technologies have gotten cheaper, and more efficient. Critics argue that First Solar is going to lose its competitive advantage on pricing and in the market as this gap closes. At some point it may. Advocates argue that First Solar has invested in R&D;and will be showing improvements in module efficiencies in the near term which will enable it to maintain its appeal in the market place.

This is an unfolding story, but gets to the heart of exactly how competitive the markets are and important shifts that can happen which can either keep a market leader in the lead, or cause them to lose share. In the background is the RES and other policies which will ensure that there is a consistent state (and potential federal) framework to support the industries. But it is still up to each company on a competitive basis to make the investment case.

Important Disclosure: This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment.

Dais Analytic Looks Cheap Here

2010-06-03T07:21:00Z

June 3, 2010 - Dais Analytic Corporation (DLYT.OB) is a nanotech business focused on applications for energy recovery/efficiency and water treatment. The stock is currently trading at $0.25 to $0.30, a market cap of about $8.8 million. It just announced that it has commenced shipments on a $48M order, which, assuming 30% GM and current levels of op ex, would drive about $10M or so in EBITDA alone.

It expects to book the $48M in the next 12 months, so we are looking at a business with a trailing 12-month revenue run rate of less than $2M that is looking forward to a run rate over the next 12-months approaching $40-$50M. This kind of growth should drive a valaution of at least 4-5x EBITDA, in our opinion, which, would equate to an implied $40M to $50M valuation assuming our projected EBITDA on the recently announced $48M contract. This would, in turn, translate into a stock price target of $1.36+ assuming the same amount of shares outstanding today.

For full disclosure - the SCP Editor, and author of this commentary, is managing partner of Aspire Clean Tech Communications, which is an advisor to Dais. If you have any questions about Dais, please call us at 760-798-4938.

Important Disclosure:

CBEH July 7.5 Puts up 20%

2010-06-03T07:12:03Z

June 3 - On May 25, as the markets were reeling, we suggested selling puts on China Integrated (Nasdaq:CBEH), which is a strategy we like when markets are selling off. The general thesis is to sell puts on stocks you want to own at lower levels. It is a way to get paid to purchase a stock you want to own anyway. If the stock doesn’t hit a level sufficient to be put to you, you pocket the premium and it turns into a nice short-term trade (assuming the expiration date on the stock isn’t too far down the road).

The July 7.5’s we suggested about a week ago are up 20% this morning since the day we suggested them.

Important Disclosure:

Evergreen Solar (Nasdaq:ESLR) Deceivingly Cheap at Current Levels

2008-06-12T09:52:41Z

June 12, 2008 – Evergreen Solar (Nasdaq:ESLR) is presenting this morning at Thomas Weisel’s Alternative Energy Conference and we decided to take a look at the stock to determine whether it is timely or not. The stock closed yesterday at $9.15, putting it at a P/S (ttm) of 14.12, which is pretty rich. For example, LDK (NYSE:LDK) is holding a 5.78x P/S (ttm), Sunpower (Nasdaq:SPWR) is at 6.87x P/S (ttm), Yingli Green Energy (NYSE:YGE) is at 2.98x P/S (ttm) and Suntech is at 3.82x P/S (ttm). The leader in the midstream solar market in terms of market cap is First Solar (Nasdaq:FSLR) with a whopping 31.85x P/S (ttm). Granted, the P/S (ttm) metric is backward looking and perhaps Evergreen is getting a premium relative to future expectations.

The stock rallied recently to the $12 level when the company announced close to $1 billion in contracts through 2013. This is a big jump from the $78-$79 million posted over the past 12 months which is the number supporting the 14x multiple. The company has intimated that deliveries for the contracts will start this year, so if we factor a contribution of 5% of the recently announced contracts into our forecasts for 2008, then our P/S (2008) multiple comes in at 7.62x, and we come up with a price target at $16.94, a premium of 85% from current levels. The current market cap is only about 1.11x the contracts that ESLR just announced.

We think the stock should move higher from here and would be accumulating at the current $9.38 level.

Disclosure Note: SCPEditor has no position in ESLR.

Selling July 7.5 Puts on CBEH

2010-05-25T11:23:28Z

May 25, 2010 – Selling July 7.5 puts on China Integrated, at $0.50. The company recently guided for FY10 revenues at $387 million and net income at $49.5 million. If the stock moves below $7.50 and we get put the stock, we own it at $7 (exercise price less the premium received to sell put). At $7, our entrance point is at a $299.6 million market cap, or .77x this year’s guided revenue and just over 6x this year’s guided earnings.

The company has a diversified fuels (petrol and biodiesel) business in a growth market – China, with expanding distribution. A $7 entrance point, in our opinion offers little downside risk if we are put the stock. If the stock maintains above $7.50 between now and the July expiration date, we pocket the premium on the put.

Important Disclosure:

China Integrated (Nasdaq:CBEH) Looking Attractive Here

2010-05-17T12:31:18Z

May 17, 2010 – China Integrated (Nasdaq:CBEH) announced this morning that it is on track to increase biodiesel production by another 50,000 metric tons to 150,000MT hitting 60-70% capacity by Q111, where the addition in production capacity is expected to contribute an additional $27 million top-line and $9 million in net income to FY11 financial results. Moreover, the additional production technology is expected to drive production costs down by about 20%. The stock has sold off a bit lately due to broader market weakness, which we think is setting up for an attractive buying opportunity.

Key Metrics

• Y/Y revenue growth as of Q110 was 86.5%, with blended gross margins of 12.2%
• Sequential revenue growth as of Q110 was 11.9%
• Y/Y biodiesel revenue growth as of Q110 was 32.4%, while margins expanded from 23.7% to 31.5%
• Sequential biodiesel revenue growth as of Q110 was (-16.5%)
• Y/Y net income growth of 60%
• Projecting FY10 revenue growth of 33.6% to $387 million and FY10 net income growth of 30.5% to $49.5 million

The stock is currently trading at slightly more than 1x P/S (ttm) and at 0.9x FY10E sales; and at 7.45x P/E (ttm) and at about 7x FY10E income – conservative multiples on all accounts for a growth business in China’s burgeoning fuel and alternative fuels markets.

Back in December 2008, when the stock was a $4 (see post on this site), we looked at the fundamentals, the company’s performance and forecast and thought the stock looked cheap (thought it could trade up to $9.80 to $11.80 based on 2x FY08E sales and 12 FY08E income). It traded on the OTCBB then. Since that point, the stock has graduated to the Nasdaq, trading as high as $12.31.

Based on multiples of 1.25x FY10 sales and 12x FY10 income, we think the stock should trade back to the $12.75 to $15.60 range, which represents a 44% to 76% premium from current levels. Again, the stock could pull back amidst broader market weakness. We have been calling for the DJIA to pull back to at least 10,383 and the S&P;500 to 1,109 in the near term. In which case, we would likely get more aggressive in terms of accumulation of CBEH. But at current levels, we think it is worth at least establishing a position.

Important Disclosure: