More Sun for the Buck

08/20/2008 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith and Joshua Levine of ChangeWave Investing say a small company has technology that produces solar energy much more efficiently.

Emcore (Nasdaq: EMKR) is in the driver's seat on concentrated photovoltaics, and the stock is a great value for investors now.

The company, which also sells products in the fiber optics sector, plans to spin off its solar power business in 2009. Our conservative post-spin-off value for the combined companies is $15-$17 a share, but it could be much higher depending on sales backlogs.

Traditional solar panels produce electricity based on variables like the quality of the silicon used in the cells, the size of the solar cell, the amount of sun exposure, and the efficiency of its conversion technology.

Concentrated photovoltaics take a different approach. Emcore has combined light-magnifying reflectors with smaller, highly efficient solar cells to realize greater power production at a lower cost per watt than other solar producers.

EMKR's high-efficiency cells are able to get about a 300% improvement in efficiency over First Solar's (Nasdaq: FSLR) products. Plus, Emcore's CPV panels are designed to move with the sun, which keeps them in the optimal position to get the most energy from the sun for a longer period of time.

Our research tells us that there are some major catalysts for the stock coming in the next few months:

* A major international manufacturing conglomerate is ready to bring EMKR to Asia and India in a big way. Expect to see a deal in the next 30 to 60 days.

* Three major California utilities are ready to announce big CPV projects with EMKR.

* General Electric (NYSE: GE) has been buying shares in EMKR-it held 690,000 shares as of April 30th. We wouldn't be surprised to see more purchases in its next earnings report.

* EMKR's CPV backlog now looks to exceed $100 million and should pass $200 million by year end.

And perhaps most importantly, EMKR is now in talks with a number of investment banks to spin off its CPV and solar panel business at a valuation that's twice the level of the company's current configuration.

Based on valuations of private CPV companies that have little or no sales, we would put the value of an EMKR spin-off at more than $750 million.

Emcore missed forecasts in its fiscal third-quarter earnings report that came out last week as gross margins in the terrestrial solar business were below expectations. But now expectations should be more in line with reality.

We value its fiber optic business around $320 million and its nonterrestrial solar chip business at $100 million.

The entire market capitalization of the company is $400 million, so we are essentially getting the exciting CPV business for free.

This is the kind of gem we're always looking for: a rapidly emerging new technology and the IP leader. What's not to love?

Buy Emcore under $6 with a target of $15 by late 2009. (It closed above $5 Tuesday-Editor.)

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