Energy Conversion Now Profitable

We remain optimistic about Energy Conversion Devices, Inc.’s (ENER - Analyst Report) long-term potential success in the high-growth alternative energy industry. The company also achieved profitability for the first time in the reported quarter since it went public in 1969. Nevertheless, we note the stock’s high volatility, pending sale of its Cobasys joint venture, and higher preproduction costs.

A history of negative profit margins, operating income and negative historical earnings, including EPS losses until Q2 08, without meaningful valuation metrics, collectively show potential for moderate-to-high returns yet with high risk. Accordingly, we maintain a speculative Buy recommendation on ENER common stock.

The investment outlook for the alternative energy industry is bullish, in our view, with significant growth potential over the next 5-10 years. The consolidated revenue is expected to be between $73 and $78 million for the fourth quarter ending June 30 and between $246 and $251 million for fiscal 2008. For the fourth quarter, ENER expects to maintain the 30% to 31% gross margin it achieved in the reported third quarter.

The ENER stock is expected to trade at high growth-oriented price-earnings multiples throughout its current fiscal year 2008 and much lower and attractive P/E multiples in the low-to-mid double-digit range, if high EPS growth materializes as expected in 2009. Accordingly, we maintain a speculative Buy recommendation on ENER common stock with a six-month target price of $74.00, representing 13.2% near-term upside potential. Looking further ahead through fiscal 2008-09, we expect Return on Equity (ROE) to improve to more significant positive levels in the low-to-mid single digit percentage range.

Read the full analyst report on ENER

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