EMCORE (Nasdaq:EMKR) Has Been Strengthening - Our Viewpoint

Aug 28, 2008
Author: SCP Editor

August 28, 2008 – EMCORE Corporation (Nasdaq:EMKR) is trading at about $5.80, up 4% on the day, and 48% since its intraday low on August 8. But year-to-date, it is about 63% off its $15.68 opening price. The news and momentum for EMKR has been generally positive lately, and so we decided to take a closer look to see how much more upside we should expect in the second half of the year.

Recent Highlights

·         Stanford Research initiated coverage on EMKR with a BUY on August 15.

·         In most recent quarter, it reported $75.5 million in revenue, up 70% Y/Y and up 34% on a sequential basis. Revenue for the nine months ended June 30, was $178.7 million, up 46% Y/Y.

o    Fiber Optics Segment – Revenue increased by $26 million, or 94% to $53.6 million on a Y/Y basis. Management reported that growth is being driven by demand in its parallel optical receivers and for its recent acquisition of Intel’s Optical Platform Division.

o    Photovoltaics (PV) revenue increase $5.1 million, or 30% to $16.8 million. Its newly introduced concentrator PV (CPV) products for commercial and utility scale applications is a growth driver here.

Our concern is that gross margins in the PV business are dismal, at negative 3%, which are creating a drag on consolidated gross margins, which were 18% in the most recent quarter. The fiber optics gross margins are ok, at 27%, but still not blowing anyone away. Management did say, its GM for PV improved on a sequential basis, which is true, but the business has clearly got to manage efficiency in this segment more effectively to boost margins to an acceptable level. Until then, we think that the stock is going to continue to get a discount in the markets.

In terms of growth drivers, EMKR is becoming increasingly well positioned in the local area network and storage area market, through its acquisition of Intel’s Optical Platform Division, and in the growing utility scale solar market as well as the satellite solar power generation market. As it gets its manufacturing line issues under control in the CPV business, this should be a significant contributor to overall revenues.

The promise of CPV is that it will greatly lower the cost of solar electricity production by reducing the use of semiconductor material while enabling a more cost effective use of high efficiency semiconductors.

Recent CPV announcements:

·         August 5 – two supply agreements for solar cells and receivers worth more than $40 million.

·         July 9 – two supply agreements for solar cell receivers worth about $29 million.

·         May 5 – a $28 million supply agreement with ES System for solar cell receivers.

·         April 10 – a supply agreement to supply CPV systems to XinAo Group in China.

·         April 2- a $4.6 million follow-on production order for solar cell receivers from Concentration Solar la Mancha.

The stock is currently trading at about 2.2x trailing 12-month sales, and at 2.10x our estimates of $215 million in revenue for FY 2008. We think that this is a discount relative to some lackluster margins, and that the company will work this out heading into 2009, which should justify a more aggressive multiple, of 2.5x sales. At 2.5x our 2008 estimates, this would result in an implied market cap of $536 million, or a stock price of $6.50, assuming 82 million shares outstanding.

Clearly, Stanford Research, who has a price target of $10, and Roth Capital, who has a price target of $14.60, are making more aggressive assumptions than we are. We think that the longer-term potential in EMCORE’s business ultimately will warrant these kind of price targets, but until it has demonstrated it has overcome its margin issues in its PV business we will continue to think that they are a bit overstated.

Important Disclosure Note: SCPEditor is LONG EMKR  


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