Energy Conversion Devices (ENER) shares are trading lower this morning after Hapoalim Securities analyst Aarow Chew launched coverage of the company with a Sell rating and $1.50 price target, well below Monday’s closing level at $5.11.
“Though shares may be tempting at ~73% of tangible book value as earnings improvement points to a potential turnaround, we see continued downside,” he writes in a research note. Chew contends FY Q4 cash flow was driven “solely by superb working capital management,” but that sustainable cash generation will require positive pre-tax profits.
“Guidance suggests continued losses, while unabated cash burn makes debt refinancing doubtful,” he adds. “With dilutive equity issuance maybe the only answer to the [company's 2013 debt maturity], we see the stock approaching $1.50 within 18-24 months.”
He gets to that number several ways. “Negative EPS, EBITDA, and EBIT rule out traditional multiples to value ENER, and we don�t consider the use of tangible book value appropriate in light of continued cash burn.,” he writes. “However, dilution from the exchange of 100% of debt for stock between $4 and $5 suggests a tangible book value of $1.50 in FY13. Even in a best case scenario of 100% utilization at 300 MW of capacity, cost/watt of 95 cents, product [gross margins] of 25%, and system [gross margins] of 15%, no interest expense but taxes, we calculate diluted EPS of 15 cents, which at a sector multiple of 10x suggests $1.50.”
ENER today is down 21 cents, or 4.1%, to $4.90.
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