PVCS.L Share News (PVCS)

It's rare for a growth stock to also be a value stock so my eye was caught by PV Crystalox Solar, the maker of silicon wafers that are used in solar panels, which scores close to five out of five on Digital Look's Star Rating system for both Value and Growth.An examination of the company's interim results announced last month explains why it scores so highly on both measures. In a nutshell, the company has gone ex-growth.The end of the go-go days became evident in March at the time of the company's preliminary results when the company said 'the outlook for 2009 is uncertain with few credible forecasts of positive growth. It is generally expected that the dramatic contraction in the PV [photovoltaic] market in Spain coupled with the effects of the global economic crisis will result at best in flat market demand in 2009.'Results for 2008 were actually good, with earnings more than doubling, but that cautious outlook statement prompted the shares to fall by almost 10% on the day the results were announced. The market soon seemed to forget about the board's cautious words, however, and the share price shot up by around 50% over the next six weeks or so until the company issued an interim management statement in which it reported a further decline in demand for its products.Once again, the shares headed south and this time stayed there, trading sideways since June, while the rest of the market has been heading higher.Growth stocks often get excessively punished when the first signs of a slow-down emerge and for a value based investors these stocks can often present investment opportunities. If the company has previously demonstrated several years of solid growth and its current difficulties look likely to be only temporary, then it is definitely worth the contrarian investor taking a closer look.Four years of growthPV Crystalox certainly has a strong record of earnings growth. From 2004 through to 2008 the earnings per share (EPS) record reads: 2.53¢, 4.97¢, 8.40¢, 12.00¢ and 25.20¢ (results are declared in euros). The EPS growth record therefore is: +97%, +69%, +43%, +110%.Unfortunately, earnings in 2009 are projected to decline, though the company should still be profitable, returning to the levels of profitability seen in 2007. Market consensus for the current year is for pre-tax profit of £49.26m (€53.5m), down from €147.22m in 2008, though performance in 2008 was flattered by €37.2m of currency gains. Earnings per share are forecast to slide to 8.32p, giving a projected price/earnings ratio (PER) of 9.2, compared to a historic PER of 12.02 for the Electronic & Electrical Equipment sector and 18.55 for the FTSE 100 index. At first glance, then, the shares appear to be attractively valued but we need to find out a bit more about the business, and what sort of difficulties it has run into.Market is over suppliedPV Crystalox Solar has been around since 1982 and was one of the first to develop multi-crystalline silicon technology on an industrial scale, setting the industry standard for ingot production. Though it may appear at first glance to be a new technology, it is in fact an old technology company. According to stockbroker KBC Peel Hunt, a 'much more economic' competing technology already exists and is produced by US company First Solar, but PV Crystalox's technology is 'the incumbent technology' and will 'put up a good rearguard action'.Further new technologies are in development and are being funded by venture capital companies but as anyone who remembers the VHS versus Betamax video format wars (or, more recently, Blu-ray versus HD-DVD) will know, the better technology does not always win out in the market place.PV Crystalox is not investing in new technologies as management believes it would be unlikely to compete successfully with better funded rivals already doing so. Over the long term this may prove terminal for the company but on the positive side (from the value investor's perspective), it does mean that it won't be tying up huge piles of money investing in what may turn out to be the solar power industry's version of Betamax. The business can be run for cash, and that cash can be returned to shareholders (the shares yield 7.2% on an historic basis, or 5% on 2009's projected dividend payment).Having said that, the company has invested €100m in a polysilicon production facility which commenced production in July. The company has a medium term production target for 2011 of 1800 megatons (MT), at which point the cost of internally produced polysilicon is expected to be less than bought-in polysilicon. Half of the company's long term contracts with polysilicon suppliers are due to expire in 2011.The company has long term contracts with its customers running through to 2012 which should protect revenues though the company warned in August that 'strong price competition and the weakening PV market have necessitated some adjustment of contract wafer prices in recent months.'The competition has come about because of new production capacity coming on stream which has led to 'to oversupply in all parts of the value chain'. Low point may have been reachedKBC Peel Hunt, which is a buyer of the stock, reckons the bottom of the cycle may have been reached for the solar sector. Though price pressures remain, PV Crystalox 'should still benefit from its good customer relationships built up over many years, particularly in Japan where newly introduced subsidies should provide support.'The company's main markets are Japan, Germany, China and Spain, though the latter is starting to look like a non-runner with the cash-strapped Spanish government cutting back on subsidies on solar power. As the Japanese and German economies return to growth they should find the readies to continue subsidising solar power, and over the longer term other countries should get in on the act as they strive to reduce dependence on fossil fuels. China, of course, offers huge potential.The USA has yet to join the party in any meaningful sense but since breaking the habit of electing a president with historical ties to 'big oil' that looks set to change. At the recent G20 meting President Obama made a proposal to phase out fossil fuel subsidies as part of the 'transition to a 21st-century clean energy economy', which bodes well for the solar power industry.The management of PV Crystalox always seem to have been aware that the high returns the company was enjoying could not last forever, and have been relatively cautious, as reflected by the €77.5m in cash it had at the end of June; this is one company that won't have been worried by the credit crunch, except insofar as it affects its customers.While margins look set to tumble from high levels (return on capital employed was 48.87% in 2008), volumes should rise as the clean energy movement picks up momentum. Meanwhile the company has taken steps through its investment in a polysilicon production facility to reduce costs.The threat of new technology is a worry, but the company probably has several years of profitable life ahead of it before its technology goes the way of the windmill (which, come to think of it, has made a comeback). The danger of a double-dip recession is probably of more immediate concern.Digital Look has 10 broker recommendations in its database for the company; six of those rate the shares a 'strong buy', with one vote apiece for buy, neutral, sell and strong sell. The most recent broker update was on 20 August from Goldman Sachs, which downgraded to 'neutral' the day after PV Crystalox's interim results.