Evergreen Solar – ROE & FCFE Analysis
 
The growth potential of the solar industry as a whole — and Evergreen Solar (ESLR) in particular, with a geographically diversified contractual backlog — remains a compelling story. Positive factors include ongoing expansion programs over the next few years, improving operating efficiencies and technological upgrades.

However, continuing near-term earnings losses due to high start-up costs, significant capital expenditures, oversupply of solar modules, absence of deep pockets unlike its peers and earnings-dilutive stock issuances may present risks to the near-term share price upside potential.

From 2003 through 2008, as the company recorded net earnings losses since inception, stockholders suffered from negative annual returns-on-equity (ROE).

Historically, year-over-year, operating profit margins remained volatile and negative, while sales per dollar of assets and financial leverage exhibited relatively high volatility from one year to the next, where the company’s cost of debt remained within a relatively narrow range of 8.9% to 10.1% over this multi-year period.

However, despite impressive annual improvements in operating profit margins, due primarily to capacity increases, increasing market share and gradual improvements in operating performance and price increases, the performance ratio remains negative.

Note 2007 witnessed higher earnings from Sovello, classification of R&D expenses and increasing manufacturing facility at Sovello, although net income improvements were more than offset by losses at other parts of the business. Lower ASPs and slower ramp time for cells and modules affected ROE in 2008.

ROE is expected to improve partially in 2009 with an all-around development precipitating through by higher online capacity.

Historically, relatively volatile and negative cash flow from operations (CFO), significantly increasing capital expenditures, and frequent significant debt service obligations resulted in volatile free cash flow to equity (FCFE).

FCFE improved significantly from 2004 to 2005, shifting from approximately negative $53 million to positive $43 million. However, the improvement was solely due to $110 million in new debt issuance during 2005. For instance, during June of 2005, the company issued convertible subordinated notes in exchange for proceeds of $86.9 million. But also in 2005, CFO improved year-over-year, as revenue, EBITDA and net income all improved moderately, primarily due to a 132% increase in research and development expenses in 2004.

On the downside, however, there was a 41% increase in labor costs in 2004, due to improvements of manufacturing technologies. In 2006, free cash flow to equity once again returned to negative $138 million on account of a near twofold increase in capital expenditures related to capacity expansion at Sovello.

In 2007, free cash flow to equity returned very nearly to a positive value on account of significantly increased and positive CFO due to the company’s large order booking, order backlog and some additional new debt issuance.

In 2008, additional debt issuance fueled the majority of the $345 million in capital expenditures.

Going forward, we project the trend to continue on account of absence of outside debt during fiscal 2009.
 
Massachusetts-based Evergreen Solar, Inc. engages in the development, manufacturing, and marketing of solar power products worldwide, including solar cells, panels and photovoltaic systems. The company, through its crystalline silicon technology known as String Ribbon, offers solar modules which are used to generate electricity for on-grid and off-grid applications. These modules are designed for a range of solar electric power applications, including water pumping, communications, outdoor lighting, rural electrification, recreational vehicles, and stand-alone or grid-connected AC applications. The company sells its products through distributors, system integrators and other value-added resellers.

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