Citigroup is initiating coverage of Energy Conversion (NASDAQ:ENER) with Sell and $17 target. While the stock is already well off its high, they think it can still go lower as they foresee a big margin "pothole" in mid-2009 against broad expectations of margin expansion. C2009 and C2010 EPS estimates are about 1/2 of the Street, and trading at 18x C2010 EPS estimate, if they are right, the stock still seems to have further downside. F2009 EPS $1.61 (consensus $1.65), F2010 EPS $1.35 (consensus $3.39). $17 target is based on 10x C2010 EPS of $1.71.

Thin film solar — ENER has two primary business: thin-film solar uniquely suited for rooftop installations (specifically building-integrated applications where subsidies in some regions are more favorable), and a materials segment principally focused on commercializing NiMH battery technology.

You can run, but you can’t hide — Citi acknowledges ENER's small scale and niche end market (BIPV) in regions like France + Italy may provide some near- term pricing cover, but those mkts are still not big enough to provide much headroom. Meanwhile, collapsing prices for competing x-Si modules should overtake its pricing umbrella by CQ1:09. These floodwaters should force it to get more aggressive on pricing or curtail capacity expansion. Further, unlike x- Si which may count on cheaper silicon as a margin offset or FSLR who can use scale + profitability to take share, ENER appears to have few near-term offsets.

Notablecalls: This call is going to hurt ENER.