Solar Winners: Energy Conversion Devices

Solar player Energy Conversion Devices is on one of its best market runs in recent history on Tuesday -- but some wonder whether the gains are justified given weak company fundamentals.
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ROCHESTER HILLS, MI. (

TheStreet

) --

Energy Conversiom Devices

(ENER)

has been one of the weaker stocks in the solar sector in recent months, but not on Tuesday. Shares of Energy Conversion Devices were up close to 7% in the early afternoon, for a gain of 75 cents, to $11.63, their highest level since early November.

Indeed, the entire solar sector spiked after German solar company SolarWorld announced that it had

surpassed the 1 billion-euro threshold in annual sales in 2009. The solar-sector flare on Tuesday was the second consecutive run-up of the new year, making solar stocks, especially the Chinese solar players, two-for-two in 2010, two days into the trading year.

However, the level of Energy Conversion Devices' spike on Tuesday, given its recent underperformance, was notable. A gain of 7% on Tuesday afternoon

allowed Energy Conversion to rival Chinese solar players like

Yingli Green Energy Holdings

(YGE)

,

JA Solar

(JASO)

and

Solarfun Power Holdings

(SOLF)

, for top solar dog on Tuesday.

Meanwhile, the true U.S. solar leaders,

First Solar

(FSLR) - Get Report

and

SunPower

(SPWRA)

, were showing solid gains from the SolarWorld-boost on Tuesday, but less than half of Energy Conversion Devices' spike.

So is there reason to believe in an Energy Conversion Devices turnaround story early in 2010? Maybe not, according to solar sector analysts, many of whom believe Energy Conversion Devices is just getting a little ahead of itself today in the solar fervor -- although trading approximately $20 below its 52-week high even after its 7% spike, not too far ahead of itself.

But Energy Conversion Devices still has significant financial hurdles to overcome in 2010, and what's more, another major competitor coming into the public market in the form of hotly anticipated solar initial public offering

Solyndra

.

Rob Brown, an analyst with institutional boutique firm Craig-Hallum, said he remains bearish on Energy Conversion and does not expect a profitable quarter in 2010. Above all, Brown continues to have concerns about the supply-demand imbalance with Energy Conversion's inventory.

Brown explained that over the past year, Energy Conversion has struggled with its sales, and that has resulted in sales running about half of capacity. In essence, the solar company has been converting cash into an inventory backlog. Brown doesn't expect a major reversal of that trend in the near-term, but what he needs to see to change his outlook on Energy Conversion is the conversion of that inventory backlog back into liquid assets.

Brown added that Energy Conversion Devices was acutely hit by the recession and credit-market meltdown, as it focused on the commercial building space. As the business environment improves, the commercial building sector should normalize, but Brown still believes investors should wait-and-see when it comes to Energy Conversion Devices.

"That inventory backlog could take a quarter or two to work through, the fundamentals have yet to improve and are weighing on the stock and we have yet to see an uptick in demand," Brown said.

Energy Conversion Devices faces these financial headwinds at the same time that privately held Solyndra is going public. Analysts view Solyndra's technology and business strategy, focused on the rooftop market, as a direct threat to Energy Conversion Devices. While Solyndra'a technology would also theoretically compete with

First Solar

(FSLR) - Get Report

, First Solar's focus on the large-scale ground-based solar market makes it less of a direct competitor for Solyndra.

Craig-Hallum's Brown thinks that Solyndra's transition to a public company doesn't change the competition it has already presented to a weak Energy Conversion Devices. "The Solyndra IPO won't change the competitive dynamic, just the investor perception," Brown said.

However, other analysts see the public debut of Solyndra at a time of financial weakness for Energy Conversion as highlighting the financial hurdles the company needs to overcome. Paul Leming, solar analyst with Soleil/Princeton Tech Research, said Energy Conversion has not been a competitive factor in the marketplace, while Solyndra has been able to bring its total installed system cost to what looks like a very competitive level.

"Energy Conversion has not been able to get their costs down to the level at which they hoped to be competitive, and the development of Solyndra is not a positive data point," Leming said.

Energy Conversion Devices was hovering around between a 6% to 7% gain in the early afternoon, on trading volume of more than 1 million shares above its daily average.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>Solar Stocks to Watch in 2010

>>SolarWorld Hits Euro $1 Billion in Sales

>>New Year, Same Old Chinese Solar Gains

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