Power-One ($PWER) Added to VSG Watch List

Power-One (PWER) showed up in my latest screen for top small cap stocks to watch and I decided to look a little deeper into the company to see if it satisfies my first level criteria to determine if the stock is worthy enough to put it on the Value Stock Guide Watch List.

This is an interesting company with a breadth of products for power conversion and power management. Essentially, the company provides products and services to convert utility grade AC to various DC voltages required for many applications, ranging from site, system and semiconductor. The company is the second largest manufacturer of solar inverters globally and has made renewable energy their priority.

Why is the Stock Interesting?

The current stock price gives the company a market valuation of $503 million. This valuation includes almost $205 million in cash. The company also has no debt. The company does almost $1 Billion in annual sales. If you assume that the company needs to maintain 2% of sales as maintenance capital, the company can afford to return $185 million in cash to the shareholders, without affecting its ongoing operations.

Therefore the market is valuing the ongoing business at 503 – 185 = $318 million or at 31% of sales. This also gives the company a trailing P/E ratio of 2.39.

Based on the balance sheet, the stock trades at 1.14 times the book value which is 85% of the P/B multiple of its peers in the industry.

In addition to the strong balance sheet, the last 2 years the company has reported a 13% Net Profit Margin and a ROIC greater then 30%. If the company keeps this up it means that it earns $1.3 for every $1 it invests in the business.

Any Causes for Concern?

The renewable energy sector is seeing some cooling down as the renewable energy incentives offered globally are being cut. In the last earnings report, Power One reduced its guidance for Q1. Additionally, the solar energy sector in the US has been affected by large solar companies going bust and there is a question of whether any change in the government after the upcoming elections will be as friendly to the renewable energy sector as the current one.

Despite these concerns, the stock appears to be attractive enough for me to add it to the Value Stock Guide Watch List. If further analysis confirms  my initial impression, it may be a good stock to buy. I will post my recommendation when it happens for the Premium members. Additionally, the buy recommendation also depends on the relative attractiveness of the stock compared to other stocks in the portfolio and the watch list.

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