Robert Maltbie Jr. on Why To Sell Solar City And Buy Ball Bearings

The Long: NN; 12-month target price: $37

NN manufactures precision metal bearing components, precision metal components, and industrial plastic and rubber products for a number of global markets. The company has 10 manufacturing plants in the United States, Western Europe, Eastern Europe, and China.

The recent acquisition of Autocam’s automotive division boosts revenues by almost 60% and will increase margins and growth.The transaction recently closed and will be immediately accretive to earnings and cash flow.

Autocam’s automotive segment, with projected 2014 sales of roughly $250 million, manufactures components for engines and transmissions, fuel and power steering systems, and electric motors. The acquisition contributes high-growth products – fuel injection, variable valve timing, electric power steering, and multi-speed transmissions systems – that are benefiting from worldwide market demand for fuel efficient technologies. We believe the acquisition will boost overall company margins.

Management has provided a 2015 revenue estimate of $725 million based on closure of all announced acquisitions, a continued recovery in Europe, and single-digit organic growth. Given the risks associated with the merger, higher debt levels, and increased exposure to automotive markets, I lowered my assumed P/E multiple from 20 to 15. By applying a 15 multiple to a 2015 EPS estimate of $2.50 results in a price target of $37. Risks are that many of NN’s products are sold into the highly cyclical industrial and automotive markets.

Also, a significant part of NN’s capital structure comes from debt financing that requires the company to meet certain financial and non-financial covenants.
The Short: Solar City; 12-month target price: $30

Solar City engages in the design, installation, and sale or lease of solar energy systems to residential and commercial customers, and government entities in the United States. It also provides energy efficiency products and services, including home energy evaluation, and energy efficiency upgrade products and services.

Elon Musk has assembled an impressive triumvirate with major Wall Street investment banks and government officials emboldened with the noble twin tasks of solving the counties energy and employment issues.

Growth metrics remain strong but EBITDA and operating cash flow remain negative. Although Solar City experienced a strong increase in retained value metrics, the present valuation does not appropriately discount multiple risk factors. Although Solar City continues to grow rapidly in terms of revenues, megawatts deployed and retained value, the current valuation does not look sustainable based on ongoing operating losses and low barriers to entry in this business.

The stock price also does not reflect the following risks and red flags: 1) increasing levels of debt, 2) higher levels of operating expenses to meet growth targets, 3) significant increase in share count, 4) uncertainty in Arizona regarding taxation of solar leases, 5) ongoing investigation by the U.S. government regarding Fair Market Value pricing, 6) recent M&A activity in the solar panel industry, 7) potential downward adjustment of Retained Value and 8) aslowdown in the commercial solar business.

I forecast Solar City to post a loss of more than $2 per share this year and do not forecast positive EBITDA this year or next. It will continue to rely on external or third-party financing to support its growth plans.

A lethal concoction of internet Bubble-like valuations with a high and fast- increasing debt load, in a service type business with limited barriers to enter will prove toxic at current prices for shareholders. Solar City would reach fair value after a decline to $30.
Disclosure: Maltbie is long NN, and short Solar City.


Source: Forbes, Robert Maltbie Jr. on Why To Sell Solar City And Buy Ball Bearings

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