As alerted earlier this week, we believe shares in Solar3D (STLD) are significantly undervalued and that a minimum 100% gain in 6-12 month period is realistic and perhaps conservative based on an expected doubling of revenue for 2015, strength of management, peer group price-to-sales comparisons, and other factors discussed below.
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Solar3D focuses on the design, installation, and management of solar power systems for commercial, agricultural, and residential customers. Through its wholly owned subsidiaries, Solar3D is one of the fastest growing solar systems providers in California, delivering 2.5 kilowatt to multi-megawatt commercial systems. Solar3D’s technology division is developing a patent-pending 3-dimensional solar cell technology to maximize the conversion of sunlight into electricity. The Solar3D Cell collects sunlight from a wide angle and lets light bounce around in 3-dimensional microstructures on the solar cell surface. Solar3D is based in Santa Barbara, California.
Fully diluted shares: 17.7 million (includes recently completed capital raise of $12.5 million at $4.15/share).
Market cap: ~ $63 million
Insider ownership: ~ 24% with insider buying at $4.15/share in last 3 month period with no insider selling (source: Nasdaq.com)
We believe institutional ownership will dramatically increase in the weeks/months ahead due to March NASDAQ uplisting.
March 2015 Investor Presentation
Video- Solar3D CEO, James Nelson, speaks with Maria Bartiromo on Fox Business
The solar industry has a tremendous growth opportunity in front of it. Solar3D’s management believes the solar industry will be the fastest growing industry over the next 20 years as distributed solar has penetrated less than 1% of its addressable market in the residential and commercial sectors. Solar3D management, the Department of Energy and many Wall Street analysts agree the key to increasing solar’s penetration rate and growth within the sector is the cost of installations. The key metric to watch is $ per watt. Consensus believes when the cost of installation per watt reaches $1 solar penetration rates will increase to 17%.
Current installation costs at the two largest solar installation companies, SolarCity and Vivint Solar were $2.85 and $2.96, respectively. In 2014, Vivint’s installation costs declined at a rate of 8.6% per quarter.
If the rate of decline at Vivint continues, the company will reach installation costs of $1 per watt by the end of 2017.
Solar3D’s installation costs compare very favorably with SolarCity and Vivint, with the average cost of installation at $1.90 per watt during the first 9 months of 2014.
Recent Public Offering
Solar3D recently completed a public offering of 3,000,000 shares at $4.15 per unit. Each unit contains one share of common stock and one warrant to purchase an additional share at $4.15 by March 9, 2020. The gross proceeds before the exercise of any warrants are $12.5 million. The money raised will allow Solar3D to continue its strategy of consolidating the highly fragmented California and Nevada markets, which represent 60% of the US installations market.
Acquisition History and Industry Consolidation
Solar3D has a history of acquisitions proving the company can consolidate the fragmented California and Nevada Solar markets and made two acquisitions in the past 15 months.
Solar3D completed the acquisition of SunWorks, (web site) serving the northern California market, in January of 2014. During 2014, SUNworks installed over 300 systems, totaling 10 MW of capacity, a 100% increase over the approximately 150 systems installations in 2013. Sixty percent of SUNworks 2014 revenue was sales to the commercial market, including the agricultural market, and approximately 40% of its revenue was sales to the residential market.
SUNworks has gained brand popularity throughout California due to its commitment to excellent customer service and the ability to provide flexible cost savings to large commercial organizations. Recently, SUNworks was contracted to perform commercial solar design and installation programs for two large-scale California-based companies, Innovative Produce, Inc. and Heidrick & Heidrick Properties, L.P.
On March 2, 2015, Solar3D completed the acquisition of MD Energy (web site). MD Energy focuses its operations on the commercial market for Southern California. Similar to SUNworks, MD Energy designs, arranges financing, monitors and maintains solar systems, but outsources the physical construction of the systems. In 2014, MD Energy installed 14 systems totaling 3.35MW of capacity.
MD Energy already has a strong brand within Southern California with the company recently landing a $2.4 million contract from Rancho Mirage Public Library.
Solar3D acquired both companies at very inexpensive prices. Solar3D paid approximately $2.8 million for SunWorks.
In 2013, SunWorks generated revenues of $8.5 million and earnings of $685,968 representing revenue growth of 108% over 2012 and earnings growth of 234%. Solar3D acquired SunWorks for 0.33 time revenues and 4.07 times earnings both of which are ridiculously cheap for a company with SunWorks’ growth and financial position with no debt.
Solar3D paid approximately $3.5 million for MD Energy.
In the 9 months ending September 2014, MD Energy generated revenues of $4.4 million and operating profit of $447,124. On an annualized basis, Solar3D paid 0.6 times sales and 5.83 times Earnings for MD Energy. Again, Solar3D was able to add significant value to shareholders by buying MD Energy at an extremely attractive price. An acquirer paying 0.6 times sales for a profitable business with no debt, which grew its revenues by 1255% in the preceding nine months, is unheard of.
These two acquisition illustrate management’s ability to acquire complimentary assets, integrate those assets and be disciplined enough to pay a very low price for the assets.
Despite the inexpensive prices, these two companies fit Solar3D’s ethos of a strong focus on customer service…a key differentiating factor within the industry which allows companies focused on customer service to demand a premium for their work. The focus on customer service has resulted with both companies having a strong brand which is crucial for the solar installation industry, as the quality of the product is not known until the product is used. This is a particularly important characteristic as the customer is making a 25-30 year commitment. If the company installing the panels does not have a reputation for high quality customer service and a good product, the customer will go to a competitor and pay more for the assurance of a quality job.
Going forward the typical target for Solar3D is a solar installation company with revenues between 10-30 million and is profitable. Any target will initially be located in California or Nevada with a focus on Residential and/or Commercial sector and strong customer service orientation.
Strong, World-Class Management Experienced in M&A
James Nelson, President and CEO began his career 30 years ago at Bain and Company, the premier business strategy consulting firm in the world, where he managed teams of consultants on four continents solving CEO-level programs for global companies. Prior to joining Solar3D, he spent 20 years working in the private equity industry as both a capital partner and operating CEO to portfolio companies. Mr. Nelson was a General Partner at Peterson Partners from 2007 to 2009, and at Millennial Capital Partners from 1991-2010. In addition to his responsibilities in acquisition and divestiture, Mr. Nelson worked as an executive in a number of portfolio companies. He served as CEO of Euro-Tek Store Fixture, LLC, Chairman of the Board of American Retail Interiors, Chairman of the Board and CEO of Panelview Inc. and Chairman of the Board of Critical Power Exchange, as well as serving on numerous boards of companies. The companies led by Mr. Nelson have created exceptional returns for investors – sometimes over 20 times the original investment.
Prior to his years in private equity, Mr. Nelson served as Vice President of Marketing at Banana Republic/The Gap, where he managed company-wide marketing, as well as the initial international expansion of Banana Republic. He was also General Manager for the highly profitable catalog division. He also served as Vice President of Marketing and Corporate Development at Saga Corporation, a multi-billion dollar food service company.
Mr. Nelson received his Masters of Business Administration degree from Brigham Young University, where he graduated Summa Cum Laude and was named the Outstanding MBA Graduate. Mr. Nelson’s expansive experience in global companies, worldview strategic thinking, and hands-on entrepreneurial and operating execution is ideally suited to help exploit Solar3D’s breakthrough solar cell technology in a multi-trillion dollar global market opportunity.
Tracey Welch, Chief Financial Officer was recently hired by Solar3D. Welch joins Solar3D after holding CFO and Treasurer roles at several large private and publicly held companies, including multi-billion dollar energy companies KN Energy and Smith International, and food giant, Schwan’s. Welch’s responsibilities while leading publicly traded companies include, among others, financing acquisitions, developing financial departments, post acquisition integration, safety and risk management, and ultimately driving revenue and profit optimization. During his career, Welch has overseen the successful raise of billions in capital through private and public debt offerings.
Welch is an ideal fit for Solar3D due in large part to his extensive energy industry experience, and his reputation for successfully evaluating, financing, and integrating acquisitions. During his career, Welch has completed 36 transactions ranging in size from $10 million to $500 million, and has been largely responsible for the financial assimilation and integration of those companies into the parent organization.
Despite the company’s growth rate, ability to acquire companies cheaply, its profitability and its strong competitive position due to its low customer acquisition costs, low installation costs and commitment to customer service; Solar3D valuation is still significantly below peers.
- Solar3D is trading on a trailing twelve month (ttm) price to sales of 3.8 times compared to SolarCity on 19.5 times and Vivint Solar on 52.2 times. This is despite Solar3D expectations for profitability in 2015 while SolarCity and Vivint is expected to remain reporting losses for some time. If we are conservative and say Solar3D should trade at a 20% discount to SolarCity, there is 400% upside based on the ttm sales.
- Solar3D’s potential upside is even more drastic when you take into account the expectation for the company to more than double revenues in 2015 reaching $40-45 million. Using the bottom end of the guidance range ($40 million) and the same price to sales multiple of 16 times, Solar3D’s market cap should be roughly $600 million, representing 750% upside from current prices.
These valuation scenarios do not take into account Solar3D’s revolutionary solar panel technology. Solar3D has a 3D solar panel that is 90% more efficient than current 2D solar panels as it captures significantly more sunlight and allows for more electron reabsorption. The technology is still in development but could add significant upside to the stock.
The Bottom Line
Solar3D is a rapidly growing solar installation company with a very strong competitive position due to its low installation costs, superior customer service, and ability to consolidate a fragmented market. All these factors and significant undervaluation relative to peers points to tremendous potential for shareholders. Shares have begun to appreciate since our alert four days ago, despite a volatile overall market. We believe patient investors who buy now or add on pullbacks will be well rewarded over the next 6-12 months.
Disclosure: The publishers of MicrocapResearch.com are long shares of SLTD purchased in the open market.
Receipt of $20,000 from a third party for our coverage above.
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