MALBORO, Mass. ( TheStreet) -- In the past two days, two alternative energy analysts have issued hold ratings on Evergreen Solar ( ESLR). A hold rating may not typically seem like a call to action on a stock, but in the case of the JPMorgan and Wunderlich Securities' Evergreen Solar outlook, the analysts seems arguably optimistic given the headwinds that Evergreen Solar is facing. Recent market chatter concerning Evergreen Solar has been vulture-like, focused on a potential bankruptcy in 2010, based on Evergreen Solar's cash burn rate and 2009 performance. However, both JPMorgan and Wunderlich -- which initiated its coverage of Evergreen on Wednesday -- believe that at this point Evergreen has been priced as if it will go bankrupt. It's a fine line between a stock being priced as if it will go bankrupt and a stock being a bargain for investors as it is poised for a surprise recovery. Plenty of investors have been burned in the past by investing in vastly "undervalued" shares right before the bankruptcy does, in fact, unfold before their eyes. Nevertheless, Wunderlich Securities analyst Theodore O'Neill is giving Evergreen until September 2010 to prove that it is in recovery, as opposed to divestiture, mode. "It won't take long for us to see whether or not Evergreen can manage through the current environment. They functionally will run out of cash at the end of the year, for all intents and purposes. Therefore, they will have to figure out a solution before then, and that's how we get to the six-month time frame for a hold," O'Neill said. In the case of JPMorgan Chase, its alternative energy analyst issued a negative report on U.S. solar stocks on Tuesday that favored Evergreen shares over First Solar ( FSLR) shares.
Evergreen Solar shares were up more than 3% at midday on Wednesday, for one of the larger gains in the solar sector amid a broadly positive day for solar stocks. Shares of Evergreen Solar reached a recent low of $1.08 on Feb. 25. Evergreen Solar shares were at $1.25 on Wednesday at midday -- still well off a 52-week high of $2.96. Wunderlich's O'Neill is frank about the problems faced by Evergreen Solar. "They've stepped on multiple banana peels and they've mishandled the Street." The Wunderlich analyst's cautious optimism on Evergreen is predicated upon the solar company's successful transition of a large-part of its manufacturing operations to China. Wunderlich's O'Neill said that in his experience, companies that can execute on technical build-out find ways to survive even when they have botched their handling of the capital markets. Evergreen did successfully build out its U.S. plant from a laboratory environment, the Wunderlich analyst noted. The Wunderlich analyst has also been encouraged by the financial progress Evergreen has made, even though he described 2009 as a "disaster year" for the solar company. Evergreen Solar's gross margins improved from 1.9% in the second quarter of 2009 to 12% in the fourth quarter. The fourth-quarter gross margin was also up from the third quarter level of 9.7%. Evergreen Solar's operating margins were -4.2% in the fourth quarter, but that was improved from -24% in the first quarter of 2009, while its revenues also increased. "Last year was a disaster, but there was a progression for Evergreen," Wunderlich's O'Neill said. Factory utilization increased and the Wunderlich analyst believes that has positioned Evergreen to be capable of 20% gross margins if it can execute on the manufacturing transition to China and make smart financing decisions. By September 2010, investors will be able to gauge any gross margin improvement and resolution to Evergreen's financing needs. "Any improvement at all in gross margins would be a positive sign," O'Neill said.
The Wunderlich analyst cautioned investors about accepting any financing solution presented by Evergreen. He noted that there have been examples in the past of equity lines of credit in the alternative energy sector that provide special investors with the right to sell common shares of stock at a discount to the previous week's share price. An equity line of credit that disadvantages current shareholders of Evergreen Solar would not be an actual financing solution in the opinion of the analyst. The macro environment remains "terrible for solar panel makers," in the opinion of the Wunderlich analyst. However, O'Neill's model for Evergreen assumes a successful transition to China that would result in manufacturing costs dropping faster than the decline in average sales price -- a 24% decline in ASPs in 2011, versus a manufacturing cost decline of 29%. Of course, this Evergreen Solar scenario is predicated on the solar company making it to 2011. At this point, JPMorgan and Wunderlich think they know when to hold Evergreen Solar shares. However, the manufacturing transition to China could still be a slow boat to bankruptcy for solar investors with a big risk-appetite. -- Reported by Eric Rosenbaum in New York.