GT Solar: A Bright IPO

Many years ago when gold was found in the wild west of the United States, many would-be millionaires flocked to California to seek their fortunes.  The dream was to find the “mother lode” and become rich beyond imagination.  Ramshackle towns sprang up as communities of miners shared rumors of potential sites that surely would prove to hold tons of the shiny metal.  In the end there were few that struck it rich and many who wasted years, money, and effort with little to show for it.

But there were surefire ways to make an honest living around the gold rush and many less glamorous businesses hit the jackpot in a much different ways.  The surefire way to benefit from the speculation was simply to sell supplies to all the miners.  It was an era where selling firewood, beef jerky, and tin pans could actually lead to millions in profits.  The plan was simple - sell needed materials to a captive audience.  So while owning a general store may not have been a sexy way to make money, it certainly had much more stability and profits than the average 49er.

Fast forward to present day and there are constantly new sexy sectors offering investors chances to double or triple their money as new paradigms are discovered.  However, from time to time there is a chance to benefit from the speculation without taking a boom or bust approach.  Enter GT Solar International, Inc. (SOLR), a firm dedicated to supporting solar manufacturers across the globe.

While solar power has become one of the most exciting areas in the alternative energy camp, returns on stocks in this sector have been volatile enough to make investing look more like a black-jack casino.  Diversification and a deep understanding of each company certainly help, but even successful producers are not immune to sharp 50% declines that can devastate a concentrated portfolio.  But GT Solar may be a worthwhile investment with a much smaller dose of market volatility.

The company is coming public this week (the shares will likely begin trading Thursday or Friday) with the expected pricing between $15.50 and $17.50.  Look for this IPO to trade up sharply due to strong demand for the shares.  While the company is not receiving any of the capital from the sale (all shares are being offered by the current owners of the company), there is little need for cash at this time.  With no debt and positive cash flow the firm earned $36 million in profits last year.  That is a refreshing statistic in a market that places little premium on expected future earnings.

The majority of GT Solar’s business comes from offering services and expertise to solar manufacturers.  So whether one of its customers ends up with a profitable project or not, GT Solar still gets paid for its participation in the endeavor.  This insulates the company somewhat from gyrations in sales figures pressured by changes in subsidies from different governments (such as the negative news out of Spain this past week).   Whether customers strike it rich or not, SOLR benefits from selling the proverbial picks and shovels to the speculators.

No investment story is perfect and GT Solar does have some red flags.  The biggest issue with the company is the customer concentration.  While it’s hard to pinpoint exactly which customers make up the majority of sales each year, the prospectus filed with the SEC does state that there is a large portion of each year's revenue made up by one or two customers.  This could cause a major problem down the line if one of these key contracts is dropped.  However, management has proven its ability to manage projects well and its expertise is sought after within the industry.  So it stands to reason that as the industry gains more credibility, the services offered by GT Solar will become valuable to an ever increasing potential customer base.

Buying an IPO right out of the gate can be a dangerous move.  Many IPOs have a very volatile trading range the first few weeks as investors begin to get their head around exactly what they have purchased.  Also the companies who are involved in the underwriting effort are barred from releasing reports for several weeks.  So when purchasing shares of this company it is smart to designate just how much one is willing to lose and set strict stop limits on any long position.  But over time, this name should trade in an attractive manner as the company grows with the demand in the overall industry.  I would suggest keeping the stock on your radar if you wish to be involved in the solar industry over the next several years.

FD: Author does not have a position in SOLR.