STR Holdings (NYSE:STRI)

short squeeze ahoy

STR Holdings’ (STRI) business is currently 70% photovoltaic panel encapsulant manufacturing and 30% consumer product quality assurance. The encapsulant business, which is specialty extruded sheets and film that hold a solar module together and protect the embedded semiconductor circuit, is where they have been seeing their growth. They are the primary supplier to companies such as BP Solar, First Solar, Inc., Solarwatt AG, SunPower Corporation and United Solar Ovonic LLC. They have five manufacturing facilities, including a relatively new one in Malaysia from which they are attempting to participate in the recent surge of Chinese solar panel manufacturing.
STRI traces its roots back to the founding of DeBell & Richardson in 1944, the first US company purely devoted to plastics R&D. They have gone through quite a few different owners, reorganizations and name changes in the ensuing decades. Credit Suisse, together with company insiders, executed a leveraged buyout (LBO) in 2007 for $406M, including all expenses and debt repayment. Helping to finance the buyout was about $239M of new company debt. On November 6, 2009 STRI went public with an enterprise value of about $610M. Standard & Poor announced last month that STRI would be added to the S&P Small Cap 600 Index to replace Keithley Instruments Inc.
STRI has been steadily increasing the number of formal contracts that they have with their top ten customers. The number has gone from three a couple of years ago to now seven as of Sept 2010, which would seem to indicate a high level of customer satisfaction. Nine-month solar-sector sales have increased from $99M to $190M year-over-year, with gross margins increasing from 63% to 68%. They have recently seen strong user demand in Europe and are making in-roads with the Asian module manufacturers. However, the volume increases have recently been partially offset by serious declines in average sales prices.
As a rule, solar power is nowhere near competitive with other normally available energy sources, especially as you go out on the power requirement curve. It does a superb job with a handheld calculator, but is not currently cost effective for powering a house. As a non-polluting, near-infinitely-renewable power source, it may be our future, but today it is mostly a government-sponsored R&D project. And many government budgets are hurting. Spain and Germany have already announced scheduled cutbacks of their solar support. On the other hand, China has just announced a five-year plan that includes massive investment in alternative energy in general and includes solar panel manufacturing in particular. It is not clear to me yet whether China’s investment will be geared toward internal installations or production for export. Overall, it doesn’t appear that the industry will see much further growth in the short term, although STRI seems to be bettering its position by gaining market share. Profit margins in the sector are expected to be under pressure in the immediate future as end-product sales prices fall and government subsidies are reduced.
The original LBO participants still hold about 40% of the company shares and I would consider their position rather weak. It would be a better case if those shares were transferred to mutual funds or asset management firms. Short position is over 22% of float, which I considered very high until I looked at the short positions on some of the solar panel manufacturers. Clearly this industry is currently in a contentious position and some rather volatile price swings may be expected.
My current pick was triggered by a CAPS limit order, which I thought I had placed a little low. In actuality, when the news broke from the company about expected future margin pressures, the market price blew right through it like an Oklahoma twister and didn’t stop until support was found at $18 a share. A week after that, I established my real position and I stand before you today watching the situation carefully, with one foot toward the door.