Canaccord shorting here..whatever gave you thKeith Kalawsky, Financial Post
Published: Friday, February 03, 2006
At fair-trade coffee shops, friends of the earth insist that solar power will eventually break the miserable streak of smog alerts in southern Ontario and even spare the polar ice caps.
Investors, on the other hand, are hoping soccer moms keep driving their SUVs because exploding oil and gas prices are pushing solar stocks, including Victoria, B.C.-based Carmanah Technologies Corp., into the stratosphere and through our depleted ozone layer.
Sara Elford, an analyst at Canaccord Adams, threw up her hands after concluding that no amount of financial modelling or spreadsheet analysis could justify the valuation of Carmanah shares (CMH/TSX), up 13% in the last month. They rose 11 cents to close at $4.05 yesterday.
The stock was 31% above Ms. Elford's target price of $3 at the start of yesterday's trading. Instead of blindly follow market sentiment and raising her price target, Ms. Elford lowered her rating to "sell" from "hold."
"While there is little doubt that the share prices of most companies with solar ties have been hot, we think investors have pushed Carmanah's valuation too far, too fast," she said in a research note.
While Carmanah is capable of producing strong revenue growth going forward, "we are not nearly as optimistic as our competitors when it comes to profitability and earnings over the next two years," she added.
Carmanah is a solar-systems integrator, selling solar lighting, signs and power systems. Ms. Elford figures that if this market really takes off, new competitors will flock to this space like treehuggers to organic cotton. Carmanah may perform well over the long term, but it is dangerous to assume it will produce above-average returns over the medium term, Ms. Elford argued.
Investors should also realize that Carmanah's business hinges on product sales, with scant revenue from replacement parts and repairs. The company doesn't enjoy a backlog of orders, which would provide some stability and comfort to investors.
When it comes to margins, Carmanah is coming under pressure from the lofty Canadian dollar. And gross margins in emerging industries tend to decline over time. As the cost of producing solar products declines, the benefits will likely be passed on to consumers to make the technology more attractive to a wider audience and to stay competitive. The company's costs are likely to rise as it grows, hires more people and expands globally.
To make a long story short, Ms. Elford predicts that Carmanah's earnings before interest, taxes, depreciation and amortization will be fairly flat in fiscal 2006. She see earnings coming in at 2 cents per share for 2006, versus analysts' estimates (excluding Canaccord Adams) averaging 13 cents per share. Her target is based on an enterprise value to sales multiple of two, versus 1.4 for a much larger German solar-systems integrator called Conergy AG.
I think Ms. Elford in canna crapping her pants right now!
Ken