This alert was originally sent to subscribers of TheStreet.com's Stocks Under $10 on Oct. 17 at 11:14 a.m. EDT and is being reprinted here as a special bonus for TheStreet.com readers.We are adding 400 shares of Evergreen Solar ( ESLR) to the model portfolio. This Game Breaker is trading around the level where we last closed our position in September for a 63% gain, but further research since our sale has convinced us that we may have closed our position prematurely. The stock was recently trading at $8.60. Evergreen Solar is a leader in creating solar cells to generate power in the U.S. and Germany. The company's patented String Ribbon process requires about 30% less silicon than other systems used by other solar companies. String Ribbon is a valuable competitive cost advantage given the recent supply/demand imbalance in the silicon industry that has pushed raw material costs higher. Evergreen Solar is not profitable right now. The company lost 81 cents a share in 2004 and is forecast by analysts to lose another 35 cents a share in 2005. However, Evergreen Solar has a joint venture with Germany's leading solar power company, Q-Cells, which should lead to a meaningful increase in both revenue and earnings in the back half of 2006 and beyond. The EverQ venture, as it is called, is being subsidized by the German government, and the first plant should be up and running by the end of 2006. Evergreen has a 70% stake in EverQ, so it stands to benefit disproportionately from its success. Analysts expect the EverQ plant to drive Evergreen Solar to profitability in the back end of next year as revenue should triple on a year-over-year basis. In addition to the expected ramp higher in revenue, Evergreen Solar is working to improve its silicon efficiency, which is already among the best in the industry, based on our research. The company is expanding its String Ribbon process to produce even thinner, and therefore less expensive, solar cells through a process called Thin Ribbon. If successful, Thin Ribbon could reduce the company's total silicon requirement by another 50% and lead to improved gross margins.
Evergreen should have the Thin Ribbon process perfected in time to be implemented by the end of 2006 or early 2007 in the EverQ plant. With that in mind, we believe Wall Street's earnings estimates for 2007 and 2008 for 3 cents a share and about 50 cents a share (First Albany Capital's fully taxed EPS estimate), respectively, may prove a bit conservative. After carefully evaluating what the Street expects the company to earn in 2007 and 2008 and applying a P/E-to-growth ratio to develop a rough target earnings multiple and potential stock price, we believe Evergreen Solar can trade into the double-digits in the coming three to 12 months. Not specific to Evergreen but supportive of our bullish thesis for a double-digit stock, the solar industry is gaining traction with energy observers and investors, which should bode well for valuations in the group. Q-Cells recently completed a $300 million public offering in Germany. And Cypress Semiconductor ( CY) subsidiary Sun Power has filed an IPO offering for later this year. These two events should drive additional research coverage of Evergreen Solar on the Street. An investment in Evergreen does carry a few risks. The solar industry is subject to enormous volatility because it is still early in its life cycle. Also, unfavorable regulatory actions could hamper solar power's ability to prove cost effective. Last, a sharp decline in energy prices could decrease investors' current attention to alternative energy stocks. Because of these risks, we are initiating only a 400-share position here. We will look to use weakness to add to our position, though, as our expectation remains very bullish for the company.