Energy Conversion Energized

Optimistic about Energy Conversion Devices
 
We remain optimistic about Energy Conversion Devices' (ENER - Analyst Report) long-term potential success in the high growth alternative energy industry, given increased activity in solar power projects, federal incentives, and extension of the federal ITC.

Looking forward, the story will continue with a geographically diversified sales pipeline, reducing cost per watt, declining polysilicon prices, committed supply agreements and improving material costs through expansion of its supplier base. Although in the near-term, a dilapidated market led to under-utilization of capacity and affected margins, forcing the company to suspend its expansion plans.

Note the stock's high volatility pending the sale of its Cobasys joint venture, tightening credit markets and high pre-production costs. These collectively show moderate-to-high returns -- with high risk. Accordingly, we maintain a speculative BUY recommendation on ENER common stock with a six-month target price of $18.50, representing 11.4%% upside potential.

Return-on-Equity (ROE) DuPont Decomposition Analysis:



The company recorded negative ROE in 2004, 2006 and 2007 due to negative operating profit margins, although ROE turned significantly positive in 2005 due primarily to a one-time, non-cash license fee of $79.5 million at the Ovonic Battery segment.

Meanwhile, over the three-year period from 2004 through 2006, total revenue per dollar of total assets, as represented by asset turnover, was highly volatile, while financial leverage continued to increase. Annual operating margins were frequently negative, while asset turnover declined and leverage increased while cost of debt declined. Tax retention declined over this multi-year period.

In 2008, however, the company barely managed to turn positive through higher asset turnover, leverage and cost of debt.

Looking further ahead through fiscal 2009, we expect ROE to improve to more significant positive levels in the near-double-digit percentage range on account of major improvement in operating profit margin, asset turnover and tax retention rate.

Michigan-based Energy Conversion Devices, Inc., a.k.a. ECD Ovonics, is a technology, product development and manufacturing company engaged in the invention, engineering, development and commercialization of new materials, products and production technology in the fields of alternative energy technology and information technology.