Owing to GT's position as one of only a few DSS and CVD manufacturers, return on capital is outstanding on both a traditional (82%) and MFI (240%) basis. Free cash flow margin for the first 9 months of fiscal 2009 was a stellar 25%. GT's backlog at the end of March stood at $1.18 billion, and since the company requires deposits of up to 40% (with letters of credit for the rest), we can have reasonable confidence in collection of those orders.
Given these facts, GT Solar could make an exciting choice for the MFI investor. However, there are numerous risks and unpredictabilities that prevent me from selecting the stock as a MagicDiligence Top Buy pick. Customer concentration is a major one - GT Solar generates over 80% of sales from just 4 customers. The loss of any one of them would dramatically affect sales. And losing one would not be unprecedented, as former major customer LDK Solar switched to a competitor last year. On the other side of the coin, GT relies on just a handful of small suppliers for components. If these suppliers were unable to scale with GT's growth, or were to face financial difficulties, finding replacement suppliers will be difficult.
Also, the way that ownership is structured is less than attractive for a common shareholder. The operating units are held under GT Holdings, which is owned by a couple of investment firms. They spun off about 25% to the public, solely to pay themselves - the IPO money was not used to clean up the balance sheet or provide dry powder for growth as is usually the case. The investment firms still control 75% of the company, which means that common shareholders have little say in decisions.
Finally, solar in general is just an unpredictable market, with lots of moving parts and evolving technologies. It remains significantly more expensive than both traditional energy sources and alternative "clean" energy sources like wind - demand for solar is almost solely driven by government credits which can be changed or eliminated at any time. Even inside of the solar market there are alternative technologies, such as "thin film" processes which are cheaper (currently) and more flexible than the traditional polysilicon cells serviced by GT. Demand for CVD machines is dependent on continuing shortages of polysilicon, which may or may not continue. Warren Buffett would file GT Solar under the "too difficult to predict" category and move on.
Adventurous MFI investors might want to take a look at GT Solar - if it can regain past growth the stock is clearly a bargain, and financially strong. But more conservative investors might want to take a pass as the future is quite cloudy on this stock.
Steve owns no position in any stocks discussed in this article.
