Half Position: Worldwide Energy and Manufacturing (WEMU)

Worldwide Energy and Manufacturing USA is a U.S.-based solar module technology and China manufacturing company specializing in products for customers in the industries of solar energy, aerospace, wireless telecommunications, medical equipment and automotive industries. The company has two main business segments which are both profitable: Contract Manufacturing and Solar Modules. As Amerisolar, the Solar Divison, was responsible for 83% of sales in the most recent quarter, there is no reason not to consider WEMU a 'solar company', despite its clumsy name.

Last week, WEMU held a presentation at the RedChip Shanghai Conference which included 2010 guidance that was more detailed than just "we expect 2010 to be a year of double-digit earnings and revenue growth," in the Q3 earnings press release. WEMU guided for 2010 expected revenue of $100 million and net income of $5.75 million.

I've put these numbers in a spreadsheet to compare them to the company's peers in the solar industry:



WEMU is priced with a 2010e multiple of 3.45, the next cheapest on the list is priced with a multiple of 12.31. The screen turned out to be very clear: the market leaders (YGE, STP, FSLR) are all priced with a higher multiple in the 20xEPS range. That's normal and probably well-deserved although I do not see much upside from here in the short term. All the smaller players in the industry are priced with multiples between 12 and 14, and there is room for further appreciation as the outlook will probably further improve from here given the analyst action in the past few weeks.

WEMU is totally disconnected from its peers' valuation. This might be related to WEMU missing estimates for Q2 this year. But given the very positive news released on Dec 1 and Dec 3, and the CEO's promise to avoid earlier mistakes and guide more conservatively to surely meet estimates in the future, there is a good chance the company will deliver for the current quarter.

Investment Thesis:

I am adding a half position of WEMU to the China Portfolio. Unless there are problems I am not aware of now, I don't see any reason why WEMU should not play catch up to its peers' multiples in the 12xEPS10 range which would make this a $15-20 stock. And this should happen near term, triggered by further positive news - as more details about the company's uplisting plans - or at the latest with meeting Q4 estimates. My initial target for this position is $15.00.