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ENER AT A GLANCE

P/E ► 513 VERY HIGH EV/EBITDA ► 16.6 AVG ROA ► 1.5% AVG ROE ► 0.1% AVG Debt to Equity ► 0.541 AVG Current Ratio ► 4.57 AVG Interest Coverage Ratio ► 1.07 AVG

 

 

 

 

 

 

Energy Conversion Devices (NASDAQ: ENER) is a global manufacturer of thin-film flexible solar laminate products for the commercial rooftop market. It specializes in solar power, computer, and battery technology. The company operates several wholly- and partially-owned subsidiaries, though its largest is United Solar Ovonic (Uni-Solar). Two of its businesses received significant press in early 2008: Uni-Solar, because of rapid growth in the solar industry, and Ovonyx, for a phase-change computer memory technology that has the potential to revolutionize computer memory.

The company's solar power business uses amorphous silicon to make thin-film solar panels. The solar industry has suffered from a cost per watt that is significantly higher than coal and nuclear energy. Though thin-film technology is supposed to cut production costs by using less silicon, Uni-Solar's cost per watt is on par (or higher) than many of the industry's current players, while its energy efficiency is poorer than even other thin-film producers like First Solar. Additionally, falling silicon commodity prices have reduced ENER's sales because a key selling point for ENER's thin film panels is that they are low-cost alternatives to silicon-heavy panels. There is evidence that silicon prices will continue to fall, which would continue to make ENER's thin film panels less economically attractive. However, legislative support for renewable energy, stemming from concerns about climate change and rising oil prices, has encouraged investment in alternative energy. However, demand for solar panels in 2009 has plummeted due to a decline in commercial construction, deferred reroofing projects and financing constraints.

Ovonyx's phase-change memory technology has been the talk of the IT community. It has been touted as up to thirty times faster than the current memory standard, and has the added bonus of being able to store active data without energy - turn your computer off and on and everything will be exactly as you left it, without having to be written to a hard drive. The company's technology has already been licensed by a number of IT giants, like Intel and Samsung. Its long term prospects are threatened, however, by the possibility of a tellurium shortage; as one of the rarest substances on Earth, the supply of tellurium will be greatly constrained by high demand for phase-change memory. Energy Conversion Devices competes with computer hardware companies like SanDisk, as well as with solar power companies like First Solar and Suntech Power Holdings.

Company Overview

Energy Conversion Devices manufactures and sells thin-film solar laminates that convert sunlight to energy using proprietary technology. Its role in the solar power value chain is in the manufacture and distribution of solar cells, panels, and modules. ECD's UNI-SOLAR brand products are unique because of their flexibility, light weight (a third of the weight of competitors' products), ease of installation, durability, and real-world efficiency.^[1] ECD's energy generation capacity as of 2009 is 178 megawatts and, at capacity, the company can produce 18 miles of solar cells daily.^[2] ECD also pioneers other alternative technologies, including a new type of nonvolatile digital memory technology for cell phones, digital cameras, and computers that is significantly faster and less expensive than that of competitors.^[1]

Energy Conversion Devices operates a number of subsidiary alternative energy and information technology businesses, though its main business is United Solar Ovonic. United Solar Ovonic (Uni-Solar) is a wholly-owned subsidiary of ENER. It is a manufacturer of thin-film amorphous silicon photovoltaic cells, used to convert sunlight to electricity. All of United Solar's products use their triple-junction amorphous silicon (a-Si) photovoltaic technology. United Solar sells both framed and flexible photovoltaic modules. Modules are combined into larger arrays and used for residential and commercial applications.

Business and Financial Metrics

Third Quarter 2009 Summary
Energy Conversion Devices reported a third quarter loss of $11.8 million as sales fell 55% amid a continuing construction slump.^[3] Revenue tumbled to $42.9 million, well below the company's August forecast of $51.4 million.^[3] Gross margin fell to 35.2% from 36.3%.^[3] ENER stock has fallen 54% in 2009 after dropping 37% since June 2009.^[3] Demand for solar panels in 2009 has plummeted due to a decline in commercial construction, deferred reroofing projects and financing constraints.^[3] ECD's loss of $11.8 million this quarter contrasts sharply with a profit of $11.8 million in the third quarter of 2008.^[3]

Second Quarter 2009 Summary
ENER reported revenues for the quarter of $51.4 million compared to $82.4 million in the second quarter of 2008.^[4] Solar product sales for the quarter were $46.0 million compared to $77.0 million in the same quarter last year.^[4] The company reported a loss of $15.8 million compared to a net income of $9.9 million in the year-ago period.^[4] This quarterly loss was primarily due to the decline in commercial construction, building owners deferring reroofing projects, and project financing constraints.^[4]

ENER Revenue and Net Income in millions of USD from 2005 to 2008^[5]

Photovoltaic Manufacturing Capacity with Outlook

Another major ENER business is Ovonyx, of which the company owns 31% on a fully diluted basis. Ovonyx commercializes and licenses its proprietary phase-change silicon memory technology to be used in non-volatile IT memory applications. Phase-change technology could eventually replace modern NOR flash, DRAM, EEPROM, and NAND memory. Ovonyx already has licensing agreements with Intel, Samsung, STMicroelectronics N.V., Hynix, and Qimonda.

ENER owns a number of other companies, operating in fields ranging from fuel cells to hydrogen storage to high-efficiency batteries. ENER's battery business is operated through its 50% ownership of Cobasys. Cobasys is a joint venture between Chevron and Energy Conversion Devices. Cobasys is a designer and manufacturer of Nickel-Metal Hydride batteries to be used in transportation and stationary applications.

Business Segments

United Solar Ovonic (93.6% of revenue^[7], 821.2% of net income^[7])
ENER's United Solar Ovonic segment designs, manufactures and sells photovoltaic laminates that generate energy by converting sunlight into electricity.^[8] ENER sells most of its laminates to commercial roofing materials manufacturers, builders and building contractors, and solar power installers/integrators who incorporate PV laminates into their products for commercial sale.^[8] The company estimated that it will reach 1 gigawatt of production capacity by 2012.^[8]

Ovonic Materials (6.3% of revenue^[7], 23.3% of net income^[7])
ENER's Ovonic Materials segment designs and manufactures materials and products based on the company's materials science technology.^[8] Ovonic Materials is currently commercializing NiMH materials and consumer battery technology. NiMH batteries are rechargeable energy storage solutions offering high power, long cycle life and maintenance-free operation.^[8] The company sells NiMH battery technology to its licensees.^[8]

Other Ovonic Materials Emerging Technologies

• Ovonic Solid Hydrogen Storage Technologies: ENER is developing hydrogen storage solutions in a solid metal matrix at low pressures using a family of efficient metal hydrides.^[8]
• Ovonic Metal Hydride Fuel Cell Technologies: Fuel cells are environmentally-clean power generators in which hydrogen and oxygen are combined to produce electricity, with water and heat as the only byproducts.^[8] ENER's Ovonic metal hydride fuel cell technology is a proprietary approach that combines the best features of both fuel cell and battery technologies for a new, lower cost solution in comparison to expensive proton exchange membrane fuel cells.^[8]
• Ovonic Biofuel Reformation Technologies: ENER's Ovonic reformation technology produces pure hydrogen in a safe process from multiple biofuel and biomass sources at lower operating temperatures than commercial processes without the generation of carbon dioxide gas.^[8]

Growth Strategy

Energy Conversion Devices has an aggressive growth strategy that it hopes will drive sales as solar cell technology becomes more widespread. ECD plans to expand its vertical markets to include residential, government, distributed power for utilities, and landfill covers.^[2] In North America, ECD plans to extend its materials distribution channels with large, industry-leading partners such as Carlisle Companies (CSL).^[2] ECD plans to partner with CertainTeed to launch new photovoltaic products.^[2]

ECD has a strong cash position in order to implement its growth strategy. The company has $374 million in cash, cash equivalents, and short-term and long-term investments, with approximately $330 million in tax net operating loss carryforwards.^[2]

Trends and Forces

The sharp fall in energy prices in 2009 has limited demand for solar panels

Solar power often comes with high initial set up costs to install solar panels. To individual consumers, the real value proposition of solar panel technology is a reduction in electricity costs. However, a steep fall in energy demand and energy prices weakened the imperative to transition to alternative sources of energy. The price of oil dropped precipitously from a high of nearly $150 per barrel in July 2008 to just $30 per barrel in December 2008, prompted by the worldwide recession. This fall in energy prices slowed the momentum of the alternative energy movement. Crude oil prices have since recovered to about $70 per barrel as of September 2009.

ENER's stock price generally responds to trends in energy prices. When the price of energy falls, the urgency of alternative energy falls and the drawbacks of solar seem more important. However, as oil prices recover from their December 2008 lows and energy demand from emerging markets such as India and China recovers, Energy Conversion Devices is poised to benefit because it offers a source of energy independent of the supply of scarce commodities such as oil and natural gas.

Falling silicon prices reduce demand for ENER's low-silicon panels

ENER manufactures thin film silicon panels that serve as an alternative to the silicon-heavy panels of its competitors. As silicon prices fall, silicon-heavy panels become more economically attractive and the cost advantages of ENER's thin film technology are diminished. In March 2009, there were several key indicators of the falling demand for ENER's solar panels, due in part to recessionary pressures and in part to falling silicon prices:

• ENER halted all production for two weeks, beginning on March 22^[9]
• ENER postponed orders for equipment and hiring of new employees^[9]
• ENER has consolidated operations from one of it Auburn Hills facilities to its newer facility. This move was accompanied by the relocation of 130 employees and the elimination of 70 jobs.^[9]

The price of silicon is a key determinant of the profit margins of solar panel manufacturers. In the early 2000s, a shortage of solar-grade silicon increased silicon prices along the value chain, leading to higher solar panel prices and higher margins for manufacturers. However, according to New Energy Finance, silicon spot prices have fallen in the first quarter of 2009 to one-half or one-third of their prices in the fourth quarter of 2008.^[10] Though there has been debate about the exact value of silicon spot prices, solar companies have begun to renegotiate silicon contracts with buyers in order to realign contract prices with spot prices, convincing evidence of falling silicon prices. New Energy Finance's Silicon and Wafer Price Index found the median price of polysilicon in 2009 to be 43% lower than the median price in 2008.^[10] Moreover, New Energy Finance predicts that silicon prices could plummet 67% by 2013, while silicon wafer prices could fall by 41%.^[10] Falling silicon prices have reduced ENER's sales because a key selling point for ENER's thin film panels is that they are low-cost alternatives to silicon-heavy panels. There is evidence that silicon prices will continue to fall, which would increase cost competition between silicon-heavy panels and thin film panels.

Despite the Low-Cost Possibilities of Thin-Film, Uni-Solar's Cost-per-Watt is Relatively High

Uni-Solar's amorphous silicon technology costs about $2.49 per watt to manufacture and has an efficiency of about 8.5%^[11]. First Solar, Uni-Solar's main thin-film competitor, has a cost-per-watt of $0.98 as of the fourth quarter of 2008^[12] and an efficiency of about 10.7%^[13]. Thin-film solar cells are touted to be much more cost-efficient than traditional crystalline cells because they use far less silicon, while their design allows them to generate near full capacity even on cloudy days - though "full capacity" efficiency for thin-film cells is less than half as high as crystalline cells. The cost of Uni-Solar's thin film cells, however, is on par with those crystalline producers, making it far less efficient, per watt, than most other solar panels, including that of its main competitor.

Uni-Solar's use of silicon is what has driven its cost up to a level similar to that of crystalline silicon competitors like SunPower and Suntech. Many analysts have predicted an increase in demand for tellurium, a key ingredient in First Solar's panels, and one of the rarest substances on Earth. If tellurium demand rises (and the potential of ENER's phase-change memory product, which contains tellurium, will be a factor), First Solar's costs will go through the roof and Uni-Solar will become one of the leading thin-film producers.

There is further risk that the EU may extend a law prohibiting the use of cadmium in electronics to include solar panels. First Solar, whose panels use Cadmium, has lobbied for an exemption to the law for solar panels. ^[14]

Legislative Support for Solar is Driving its Growth in Key Markets

Governments worldwide have implemented legislation to encourage alternative energy production, due to political pressure from public concerns about climate change and energy independence. Examples include:

• California's mandate that 25% of electricity comes from clean sources by 2020 and 75% by 2050
• California's One Million Solar Homes initiative that gives subsidies to developers to build fully solar powered homes
• The European Union's July 2007 resolution requiring 20% of all energy to come from renewable sources by 2020^[15]
• China's Renewable Energy Law aiming to raise the total percentage of renewable energy used in the country to 10% by 2020

Emissions caps and clean energy mandates that are supported by subsidies and tax cuts make solar energy relatively cheaper. This means that corporations and utilities companies may turn to clean energy sources to generate electricity for manufacturing facilities and power plants, directly benefiting solar power companies like Uni-Solar. Without government support, however, solar companies would have difficulty vending their products, as solar energy is currently much less cost effective than coal or natural gas; while the average natural gas plant costs $1,200 - $1,600 per kilowatt installed^[16], Uni-Solar's panels, when fully installed, cost around $6 per watt, or $6,000 per kilowatt installed^[17], aggravating the need for legislative support.

Phase-Change is the Next Big Advance in Computer Memory - and ENER's Ovonyx is at the Head of the Industry

Ovonyx, ENER's semiconductor wing, has designed a commercially viable way to produce phase-change computer memory, a method of information storage that is even better (read: faster with higher total capacity) than the previous hot memory technology, flash. Phase change uses some complex physics to store data by turning the surface of a semiconductor from crystalline to random. In 2005, consumers spent $12 billion on flash memory products (drives, cards, etc.)^[18], so the potential for phase change (an even better technology) is tremendous, especially given growing file sizes associated with increasing network speeds and the advent of digital natives who will be demanding more interactive computer technologies. Ovonyx has already leased its technology to a number of international information technology majors: Intel (a partial owner of Ovonyx), Samsung, Elpida, Hynix, Qimonda, and ST Microelectronics. Currently, these companies are developing small memory parts for 2008 release, but the potential for phase-change is enormous: it can be up to 30 times faster than flash memory and, if incorporated into personal computers' internal boards and drives, can enable a user to turn the computer off and on - for any period of time - and start right where he left off without needing to re-boot.^[19]

Tellurium is the Catch for Ovonyx's Phase Change Technology

Despite the tremendous potential of ENER's phase change product, there is a major risk involved. Ovonyx's technology uses a substance called chalcogenide, developed by Energy Conversion Devices co-founder Stanford Ovshinsky. This substance, while allowing the complex phase changes necessary for memory storage, is made with tellurium; one of the rarest substances on Earth, tellurium is a minor industrial byproduct in the production of copper. Since 2004, the price of tellurium has fluctuated substantially, between a low of $10/lb and a high of $155. Demand for tellurium has been driven in recent years by the growth of Uni-Solar's competitor, First Solar, who uses the substance in its thin-film panels, consuming 8 tons in 2006 and more in 2007. Furthermore, common consumer goods like CD-RWs, DVD-RWs, and the newly developed Blu-Ray-RW use tellurium. The problem is, it's only possible to get about 400 tons of tellurium annually - and if phase change memory catches on while blu-ray and CdTe solar cells continue to grow, there just isn't going to be enough of it to go around. Rapidly rising future tellurium prices could make phase change just too expensive for normal consumers - a major part of flash memory's sales in past years.

It should be noted however that if tellurium were an issue in the small quantities that are required for electronic devices such as phase change memories, then it should be noted that it is used in significant quantities in unisolars competitors First solars solar panels

Competition

On the phase-change memory front, Energy Conversion Devices has few competitors, since it invented the technology and is now leasing it out to other IT companies. Its technology, however, will compete with the current standard, flash memory. Companies that produce flash media include SanDisk, Silicon Motion Technology, and Lexar Media.

Energy Conversion Devices is a growing member of the solar market, though it isn't yet a major player. It's hoping that its costs will fall enough that, once the silicon shortage has been solved, it will out-compete other manufacturers on a cost-per-watt basis. Some of its major solar competitors, with 2005 market share^[20], include:

• SunPower (SPWR) - One of the fastest growing solar companies, with one of the most efficient cells around
• Sharp Electronics (24%) - The largest photovoltaic cell manufacturer in the world.
• Suntech Power Holdings (4%) - A Chinese photovoltaic cell company that is muscling its way into world solar markets.
• JA Solar Holdings, - A Chinese PV company that only sells monocrystalline solar cells; it lets its customers take care of building the modules and systems.
• Solarfun Power Holdings - Another Chinese PV company that operates 90% in Europe and makes most of its money by selling modules, rather than individual cells.
• Kyocera (8%) - A Japanese electronics company that is also a major manufacturer of solar cells
• Q-Cells (9%) - A privately owned, German solar manufacturer
• First Solar - A thin cell solar panel manufacturer that uses cadmium telluride instead of silicon for its cells.
• BP (5%), Mitsubishi (6%), and Sanyo (7%) - Not primarily photovoltaic cell manufacturers, but heavy market competitors nonetheless.
• Evergreen Solar - A solar company that produces string ribbon PV cells and operates at all production levels from silicon wafer to power system.
• EMCORE - A Concentrated Photovoltaic System manufacturer that uses Gallium arsenide PV cells and got its start in the solar business making power cells for satellites.
• Energy Conversion Devices - This company uses amorphous thin-film silicon in its ultra-thin, albeit low-efficiency solar cells.

References/Links

1. ↑ ^{1.0 1.1} Energy Conversion Devices Inc. F3Q09 (Qtr End 31/03/09) Earnings Call Transcript
2. ↑ ^{2.0 2.1 2.2 2.3 2.4} DB Presentation FINAL CleanV2.pdf Presentation: Deutsche Bank 2009 Alternative Energy/Clean Tech Conference
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5} Energy Conversion Swings To Loss As Sales Plunge; Misses Views, Wall Street Journal, November 9, 2009
4. ↑ ^{4.0 4.1 4.2 4.3} Energy Conversion Devices Reports Revenues of $316 Million and Earnings per Share of $0.29 for Fiscal Year 2009
5. ↑ Google Finance: ENER Income Statement
6. ↑ ENER 10-k 2009, Item 6, "Selected Financial Data" p. 29
7. ↑ ^{7.0 7.1 7.2 7.3} ENER 10-k 2009 "Results of Operations" p. 33
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9} ENER 10-k 2009, Item 1 "Our Business Segments" p. 1
9. ↑ ^{9.0 9.1 9.2} Barron's: "Energy Conversion Devices Warns On Q3; Stock Swoons"
10. ↑ ^{10.0 10.1 10.2} Earth2Tech: "Solar Silicon Prices Dropping, New Energy Finance Says"
11. ↑ ENER F1Q08 Earnings Call Transcript, Page 7
12. ↑ First Solar: Company Overview
13. ↑ First Solar, Inc. Q2 2008 Earnings Call
14. ↑ [1]
15. ↑ BBJ: "Renewable-energy mandate could save $96 bln a year"
16. ↑ Mechanical Engineering Power 2003: "Bubble Buster"
17. ↑ ENER F1Q08 Earnings Call Transcript, Page 5
18. ↑ ComputerWorld: QuickStudy: Phase-Change Memory
19. ↑ ComputerWorld: QuickStudy: Phase-Change Memory, Page 2
20. ↑ CIBC Initiating Coverage, SOLF, January 29th, 2007
21. ↑ ^{21.0 21.1} [http://www.renewableenergyaccess.com/rea/news/story?id=46286
22. ↑ Forbes - Sun King; SunPower's New Solar Panel Is 22% Efficient
23. ↑ SharpUSA Product Brochure
24. ↑ Kyocera - Solar Timeline
25. ↑ Solarfun Website
26. ↑ http://jasolar.com/Web/products-en.asp
27. ↑ TSL 20-F 2007 Pg. 7
28. ↑ ESLR 2007 Earnings Call Transcript, Page 1
29. ↑ EMCORE.com: Terrestrial Solar Cells and Receivers"
30. ↑ ENER F1Q08 Earnings Call Transcript, Page 5
31. ↑ DSTI 10-k 2007 Pg 1
32. ↑ Ascent First Quarter 2008 10-Q Pg 23

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