Sliding markets are leaving value opportunities exposed.
The dodgy market is throwing up opportunities here and there -- but being selective is the important thing.
PV Crystalox Solar
One share that has caught my eye again is recently is what is beginning to feel like something of a perma-value candidate PV Crystalox Solar (LSE: PVCS).
This company presents a number of value credentials, as I've pointed out before, but weakness in the demand for, and too much strength in the supply of, the silicon ingots and wafers that are then used by solar power manufacturers -- and fears over further weakness -- continually hold back the share price.
This may or may not be justified -- this is what makes a market. The shares have traded in the 45p-67p range over the last 18 months or so and the recent doldrums have taken them back down to just above 45p as I write -- valuing the manufacturer at £188m.
The company did see a reduction in full-year profits as prices fell, but has since made efforts to cut production costs and the overall market is still growing.
In return for an investment at today's price, the bulls are buying around 57 pence worth of net tangible asset value per share, and net cash per share of 11.6p per share, in a company which is expected to bring in earnings per share for the year of 6.24p, placing the shares on a price-to-earnings ratio of a little over 7.
Meanwhile, the prospective yield of over 6% certainly isn't to be sniffed at.
There's clearly something wrong with these figures. Either the brokers are being needlessly optimistic and simply aren't seeing the wider picture as governments with tight purse strings around the world cut subsidies for clean energy -- or the shares are undervalued. I prefer to believe the latter.
Germany has been the largest market for PVCS over the last decade and had been expected to cut its feed-in tariff (FIT) incentive to solar power buyers from 1 July by between 3% and 15% depending on the level of installations during March, April and May. But the cut didn't materialise as demand has remained so weak through the second quarter. Clearly, this is something of a double-edged sword for PVCS.
On the other hand, the country's ruling coalition's decision to shutdown of all of its nuclear power plants by 2022 in the wake of the Fukushima crisis will mean it will need to accelerate the search for alternatives.
On a long-term view, the shares look good value by my slide rule.
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Last November, I thought fast-growing fabless semiconductor company, CSR (LSE: CSR), presented good value at 324p on a combination of its huge cash pile which accounted for 50% of the market cap, and which made the price-to-earnings unfeasibly low against enterprise value -- with some excitement by virtue of the fact that the company is growing quickly.
A litigation settlement reached in January by CSR and California-based Broadcom Corp. ended a long-running battle between the two chip makers and helped send the share price up to 447p in February.
But news of a proposed merger with Zoran Corporation -- also California-based -- and poor first quarter trading figures, along with the market's slump, sent the shares all the way back down to 307p this week.
Then Friday's news that CSR has amended the figures on its proposed merger downwards to $6.26 in cash and 0.589 ordinary shares of CSR for Zoran shareholders, due to a worse than expected trading performance by Zoran in the second quarter, has given the shares a fillip back up to 323p at the time of writing – helped by cancellation of CSR's proposed share buyback programme.
CSR says the $313m (£194m) cash needed to buy Zoran will be met from its cash pile. Takeovers (for that's what this really looks like) are so often the enemy of value -- and CSR's shareholders clearly haven't welcomed the whole possibility. Nevertheless, CSR remain convinced it's the right strategic decision and is spending around 80% of its cash pile, so must be reasonably confident of success.
It will be very interesting to see where the (silicon...) chips fall here and is one to keep a close eye on. Personally, I'll be content to watch from the sidelines until the trading situation becomes clearer.
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David owns shares in PVCS.