STR Holdings, Inc. (NYSE:STRI) is a producer and developer of encapsulants to the solar industry. The encapsulant is a film layer placed above and below crystalline cells in a solar panel. STR was responsible for the development of ethylene-vinyl-acetate (EVA)-based encapsulants, for use in commercial solar module manufacturing in conjunction with the Jet Propulsion Laboratory of the California Institute of Technology, under a NASA contract for the United States government. STR is a micro-cap with a market capitalization of only $94 million and average daily volume of slightly over 300,000.
While solar stocks have been surging over the past few years, thanks to renewed interest in the sector, government sponsorship and technological advances, STR has lagged the field. Indeed, year-to-date the Guggenheim Solar ETF (NYSEARCA:TAN) is up 144% while STR has declined 10% over the same period.
Unfortunately, even though STR manufactures a critical component for the solar industry, the component is easily replicated, which leaves the market wide open to competition. Specifically, these low barriers to entry and easy replication of the technology has attracted industrial behemoths like The Dow Chemical Company (NYSE:DOW), E I Du Pont De Nemours And Co (NYSE:DD), 3M and Dow Corning.
STR Holdings’s fixed costs are stubbornly high
What’s more, these industry giants are able to undercut tiny STR and as a result, STR’s revenue has collapsed from a high of $260 million during 2010, to only $95 million for fiscal 2012. Moreover, these declines show no sign of abating as fiscal second quarter revenues for this year were down 70% year-on-year. In addition, STR’s lack of a competitive edge and pricing power in an overcrowded and highly competitive industry mean that profit margins are razor thin. It also appears that STR Holdings, Inc. (NYSE:STRI)’s fixed costs are stubbornly high, leaving no room for error. Indeed, this high level of operational gearing resulted in the company booking a near 60% year-on-year decline in profit during 2011, despite revenues only falling 10% for the same period.
However, it’s not all bad news, and for the brave STR could present an opportunity.
Firstly, while STR Holdings, Inc. (NYSE:STRI) may have reported losses for the past two years, these losses were mostly non-cash related. On a cash flow basis, the company had a free cash flow of $22 million during 2012, on EBITDA of $1 million. This figure was not a one-off and the company has been cash flow positive for three of the last four years.
Secondly, this cash generation, along with recent asset sales has left STR in a cash rich position. At the end of the fiscal second quarter, STR Holdings, Inc. (NYSE:STRI)was sitting on $72 million in cash and total current assets came to $97.2 million, $3.2 million above the company’s current market capitalization. Furthermore, the company has no debt and total liabilities only come to $19.8 million. So all in all, with the addition of non-current assets, shareholder equity is $119.6 million, or $2.86 per share, 28% away from current levels.
STR Holdings could be a good trade
Third and lastly is the company’s recent move into the Chinese solar market, which could prove to be a game-changer, although I personally remain skeptical as the Chinese market has been notoriously hard to crack for many Western companies. Still, during the second fiscal quarter STR Holdings, Inc. (NYSE:STRI) began production-scale shipments of its next-gen EVA-based encapsulants to three new Chinese solar manufactures this is a precursor to STR’s launch of a new factory in Suzhou later this year.
So, with a cash rich balance sheet and potentially game-changing move into China, STR Holdings, Inc. (NYSE:STRI) could be a good trade.