Power-One: Profitable And Cheap

By Will Ashworth | February 22, 2011 AAA

California-based Power-One (Nasdaq:PWER) is a company that has a considerable interest in the world's concern with wind power. The company manufactures wind inverters that convert direct-current harvested from wind farms into alternating current used in your home. Due to the industry being in its infancy, many think that wind energy is not a profitable business, but Power-One proves that theory wrong. Take a closer look and you'll see that not only does it make money, but its stock is also extremely cheap right now.
IN PICTURES: Top 10 Green Industries

How Power-One Makes Money
In addition to the wind inverters mentioned earlier, the company also manufactures solar photovoltaic inverters, AC/DC power supplies, DC/DC converters, DC power systems and smart motor controls. Its products are divided into two lines: embedded products and power systems. As recently as 2008, the embedded products line was responsible for the lion's share of its overall revenue. In the last two years, its renewable energy power systems have taken over resulting in the doubling of gross margins. This has obviously had a profound effect on its future. Renewable energy appears to be the path to future success.

Current Financials
The company achieved record revenue in 2010, topping $1 billion for the first time in its history. Its fourth quarter revenues jumped 157% year-over-year to $366 million with renewable energy leading the way. Inverters were responsible for 72% of fourth-quarter revenues and 68% for all of 2010. With the doubling of gross margins mentioned earlier, the company's operating income went from a $58.3 million loss in 2009 to a $265 million profit in 2010. The past year was a watershed year.

Valuation
Recently, Seeking Alpha ran a very cogent argument about why Power One's stock is cheap. Author Mark Spiegel suggests that the embedded products business is worth approximately $325 million ($2.25 a share) or one times sales. While its profits are flat, Spiegel contends that it would be a good fit for a larger company that could cut out the SG&A. The renewable energy business on the other hand, is a completely different ballgame. It should do approximately $2 in EBITDA in 2011. Using an EBITDA multiplier of eight, you get a value of $16 a share. Add-in $2.25 for the embedded products and another $2 in cash and you get $20.25 for the entire company. Currently, its stock trades around $9. There's definitely a margin for error here.

Bottom Line
Three things are at play here: The growth in renewable energy demand in the U.S. and other parts of the world; the value proposition discussed in the previous paragraph; and the potential takeover by a larger firm like General Electric (NYSE:GE), Honeywell (NYSE:HON) and Emerson Electric (NYSE:EMR). There doesn't seem to be a down side. (To learn more, see Clean Or Green Technology Investing.)

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