Monday, August 30, 2010

Company Focus: GT Solar International, Inc.

GT Solar International, Inc. (Nasdaq: SOLR) is a provider of polysilicon production technology, and sapphire and silicon crystalline growth systems and materials for the solar, LED and other specialty markets. The Company’s principal products are:

*Chemical vapor deposition (CVD) reactors and related equipment used to produce polysilicon, the key raw material used in silicon-based solar wafers and cells; and

*Directional solidification systems (DSS) furnaces and related equipment used to cast multicrystalline ingots by melting and cooling polisilicon in a precisely controlled process. These ingots are used to make photovoltaic (PV) wafers which are, in turn, used to make solar cells.

GT Solar recently acquired the privately-held Crystal Systems, Inc. Crystal Systems is a crystalline growth technology company that manufactures large area sapphire substrates used in the LED, defense, medical and aerospace industries.

GT Solar’s 1Q11 ended July 3, 2010. Revenue for this quarter totaled $135.2 million, compared to $194.7 million in 4Q10, a 30.5% sequential decline and $71.8 million in 1Q10, an 88.3% increase. Revenue for the first quarter included $23.7 million in the polysilicon segment and $111.5 million in the photovoltaic (PV) segment. In the twelve month period ending July 2010, sales rose to $607.6 million from the FY10 total of $544.2 million, an 11.6% change. The consensus estimate of nine analysts following SOLR is for FY11 revenues to come in at $735.32 million. Estimates range from $596.3 million to $782.7 million.

The Company had net income of $16.5 million in 1Q11, as compared to $33.3 million in 4Q10 and $7.8 million in 1Q10. Earnings per share in 1Q11 on a fully diluted basis were $0.11, versus $0.23 in 4Q10 and $0.05 in 1Q10. The consensus forecast for FY11 is $0.93. The estimates range from $0.85 to $0.97. Analysts are revising their estimates both up and down.

The balance sheet is strong with cash and short term investments totaling $276.5 million at the end of 1Q11. The Company reports no long term debt. Total liabilities are $545.5 million. GT Solar reports strong and growing free cash flow per share. As of 1Q11, GT Solar reported trailing twelve month FCF of $0.78/share as compared to $0.98/share in FY10 and $0.57 in FY09.

The Company is consistent in generating gross profits. Since FY06, the gross margin has ranged from 37.8% to 40.2% with an average of 39.11%. Operating margins have improved from a low of -44.0% in FY06 to 26.4% in FY10 and 25.6% for the twelve month period ending 7/10. Net margins have also changed from a low of -46.6% in FY06 to 16.0$ in FY10 and 15.8% in the trailing twelve months. The company does not pay a dividend.

Risk Factors

At first glance, GT Solar is an attractive investment for the long-term investor. They are engaged in what is perceived as a growth industry. The Company has a healthy balance sheet, a history of sales and earnings growth and generates free cash flow. Capex is not a major factor as the Company outsources most manufacturing activities. A look under the hood, however, reveals a number of significant risks.

At the macro level, the solar energy industry relies upon government subsidies to compete with hydrocarbon based sources of energy. Until this disparity in cost is rectified, solar energy will never be as widespread as many people think. Another macro issue is China. The majority of sales come from Chinese companies. Any slowdown in the Chinese economy, changes in exchange rates and political/military instability will have a damaging effect.

More importantly, we think, are the company specific risk factors. SOLR depends on a very small number of customers. In FY10, one customer accounted for 34% of revenue. In FY09, four customers represented 62% of sales and in FY08, one customer accounted for 62% of revenue. Clearly, the loss of one customer would have a devastating effect on the Company. Additionally, GT Solar has a very small product line. Sales of the CVD reactors, DSS furnaces and STC converters accounted for 91% of revenues in FY10.

All-in-all, GT Solar may be an attractive speculative investment. The operative word here is speculative.

Disclosure: The author has a long position in SOLR.

Sunday, August 15, 2010

Company Focus: Tractor Supply Company

The term, “gentleman farmer”, evokes for me an image of the English countryside. I see tidy villages and thatch roofs. Closer to home, I see the retail farm and ranch stores operated by Tractor Supply Company (Nasdaq: TSCO). Tractor Supply is the largest retail farm and ranch store chain in the United States. The Company operates more than 900 retail stores in 44 states in town’s outlying metropolitan markets and rural communities. It also sells through a website.
Tractor Supply is a niche retail operation. Its stores compete with the big-box home centers Home Depot and Lowes but provide a more specialized experience and product line. The Company sells equine, pet and small animal products, including health-related products and feed, among others; hardware and seasonal products including lawn and garden supplies and equipment; clothing for the entire family; and, maintenance products for the farm.
For FY10, the Company anticipates net sales to range from $3.49 billion to $3.53 billion and EPS to range from $4.00 to $4.10. Analyst estimates range from $4.03 to $4.23. The consensus forecast is for FY10 EPS of $4.11. It seems the analysts are a bit more optimistic than the Company. In 2Q10, net sales increased 12.6% to $1.07 billion from $946.5 million in the prior year second quarter. For the first six months of 2010, net sales increased 11.3% to $1.78 billion from $1.60 billion in the first six months of 2009.
In the second quarter, net income was $76.5 million, or $2.05 per diluted share, compared to $54.8 million, or $1.50 per diluted share in the prior year period. The first half of FY10 saw net income growth. Net income during the first six months of 2010 was $85.8 million or $2.31 per diluted share compared to net income of $55.2 million or $1.51 per diluted share for the first six months of 2009.
We are seeing growth in the top line sales and in diluted EPS. We also see expansion of gross margins. Gross margin increased in 2Q10 to $358.8 million or 33.7% of sales, compared to $301.2 million or 31.9% of sales in the prior year quarter. For the trailing twelve month period ending 6/2010, gross margin is 33.1%; higher than any prior fiscal year back to 2005. Similarly, the operating margin of 6.8% was higher than in previous years.
The Company reports very high levels of efficiency. Return on equity is 19.6% and return on assets is 11.3%. The current ratio is a healthy 2.1X the liabilities to assets ratio is a moderate 40.1%. The Company reports a nominal $1.2 million in long term debt. TSCO has cash flow of $2.41 per share and free cash flow of $2.78 per share. Tractor Supply is funding organic growth through the prudent use of cash flow. During the first six months of 2010, Tractor Supply opened 38 new stores and closed one store.
The Company declared a quarterly cash dividend of $0.14 per share and the board of directors approved a two-for-one stock split. Annualized, the dividend is $0.28 per share and represents a payout ratio of 7.0%. The dividend yield is approximately 0.8%.
With a TTM price-earnings ratio of 17.4X and a forward PE of 16.7X, TSCO is trading at a premium to the market. The long-term average PE is about 20X so TSCO is selling at a discount to its historical average. The EV/EBITDA ratio is about 7.75X; a relatively modest ratio.
Disclosure: Author has a long position with TSCO.

Friday, August 6, 2010

Company Focus: Hawkins, Inc.

Hawkins, Inc. (HWKN) distributes bulk chemicals and blends, manufactures and distributes specialty chemicals. Hawkins currently divides its business into two broad segments: industrial and water treatment.
The industrial segment provides industrial chemicals, products and services primarily to the agriculture, energy, electronics, food, chemical processing, pulp and paper, pharmaceutical, medical device and plating industries. This segment’s principal products are acids, alkalis and industrial and food-grade salts. For the quarter ending 1Q11, sales for this industrial segment increased $0.1 million, or 0.2% to $49.8 million as compared to the same period of the prior year. Reduced selling prices in response to lower raw material costs offset the impact of increased sales across product lines.
The water treatment group specializes in providing chemicals, equipment and solutions for potable water, municipal and industrial wastewater, industrial process water and non-residential swimming pool water. Water treatment sales increased $1.0 million, or 4.2%, to $24.9 million for the three months ending June 30, 2010 as compared to the same period in the prior year. The sales increase is primarily due to increased sales of manufactured and specialty chemical products, partially offset by lower prices due to lower raw material costs.
Investment Thesis
Hawkins is a small player in a fragmented, competitive cyclical commodity business. Its competitive advantages include flexible, value-added services; strong financials and effective management. Sales for the first quarter ending June 30, 2010 were $74.7 million and represented an increase of 1.5% from $73.6 million in sales for the first quarter of fiscal 2010. Net income for the quarter was $7.3 million, or $0.71 per share, compared to net income of $6.1 million, or $0.59 per share in the same period of the prior year. For the trailing twelve months ending June 30, 2010, the company reports EPS of $2.46 compared to $2.33 for FYE 3/10. Two analysts provide estimates for FY11. They estimate EPS to range from $2.29 to $2.34 and average $2.31. Only one analyst provides an estimate for FY12 and that is $2.56 per share.
The current PE is about 13.6X based on trailing earnings and the forward PE is about 14.3X. Both of these multiples is in line with the historical average multiples. Price-to-Book, at 2.65X is somewhat higher than the historical average as is Price-to-Sales at 1.32X .
Hawkins has a strong balance sheet. As of 1Q11, the company reported cash and equivalents at $46.9 million and total liabilities at $32.6 million. There is no long-term debt. The management is doing a good job in controlling costs. Gross margin, at 26.0% is higher than it has been in any year since FY06. The operating margin is a 16.0% and again at its highest levels in years. Return on equity has grown from 12.0% in FY06 to 20.8% in 1Q11. Similarly, ROA has grown from 9.8% to 16.4%. Both of these metrics are far better than the industry medians.
The company has announced its regular semi-annual dividend to be $0.30 representing a 7.0% increase over its last regular dividend and a special dividend of $0.10 per share. This is the 26th consecutive that Hawkins has paid a dividend. At recent prices, the Company is providing a yield of about 1.8%.
Hawkins is a small, nimble company successfully executing its mission. It has a consistent history of growth and dividends; a strong balance sheet; and, effective management. Notable investors including Charles Royce, Mario Gabelli and T. Rowe Price, among others, hold shares of HWKN.

Disclosure: The author has a long position in HWKN.
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