Hoku Disconnect: Past Earnings Versus Potential Operations (HOKU)

HOKU Scientific Inc. (NASDAQ: HOKU) reported a Q3 non-GAAP loss of -$0.01 per share, which is better than the First Call consensus of estimate of -$0.10 and revenues rose 15.0% from last year to $1.3 million versus the $1.1 million consensus estimate.  The focus seems to be on the company’s guidance for next quarter with $0.6 to $1.2 million versus $1.35 million consensus.  We frankly aren’t concerned with these small contracts from the last quarter nor over the last year as this company trying to make a major expansion into a true materials supplier.

HOKU said it expects to see some volatility in quarterly earnings as they implement polysilicon strategies.  The company is being treated as though it beat earnings and beat revenues compared to estimates; but the verdict is that the company guided Q4 revenues below consensus estimates.  This may even be partly because of the interpretation that the Associated Press published.  They are entitled to their own opinion and can publish as they see fit, but we’d note here that all of these past revenues are almost entirely irrelevant to the future business model once this Idaho polysilicon plant is up and running (assuming it will). 

There is still a disconnect between the bulls and bears in Hoku based upon what the company will look like soon versus those that are looking at Hoku’s trailing results for inference into its ability to have a bright future. This is why we have given a "both sides of the coin" to show both.

Hoku said that it will need to increase efforts in supportingpolysilicon initiative and that the increased costs would keep thecompany from being profitable for the foreseeable future including itsfourth quarter.  It has decided to increase the annual capacity ofPhase I of planned polysilicon facility from the previously announced2,500 metric tons per year to 3,500 metric tons per year.  This is saidto be primarily due to the new contract with Solarfun and will increasethe cost of the facility to $400 million from a previous estimate of$300 million.  In turn, this will increase expected revenue rate to$180 to $200 million from $120 to $140 million.  The CEO of Hoku notedthat the future revenue opportunity from four leading solar companieswill be up to $1.5 Billion in polysilicon related sales over a 7-yearto 10-year period.  It is still targeting the first half of 2009 forinitial deliveries.

From an outsider’s view, the concern here is that an increased budgetwill generate the need for more cash, and that means a secondaryoffering or increased borrowing may be more likely.  Just because thecompany said it doesn’t anticipate more borrowing doesn’t mean it can’tor won’t, and traders who look at small cap stocks understand this as apossibility.  It does have tentative credit facilities lined upfor this, but as the credit facility is with Merrill Lynch and thebrokerage industry’s financial situation is dire we won’t count that ascertain until the ink is dry and the cash is delivered.  This is stilla developing issue, and this is why we have referred to this company asmore of an embedded call option rather than a finite alternative energymaterials supplier with a solid history.

We cannot assure that their "bright future" will be as bright as the hopes are, but as far as we are concerned we aren’t even looking at the current and past small contracts that are sporadic and (somewhat being) disconnected.  In fact, we’d be more concerned over how the stock market treats emerging suppliers to alternative energy companies in an environment where risk is less accepted rather than looking at the small current business operations.   

Shares closed down 2.1% at $9.20 in normal trading and shares are downover 8% at $8.40 in after-hours trading.  The 52-week trading range is$4.00 to $14.88.  As of last look, Hoku had 4,327,964 million shareslisted in its short interest, or about 2.5 days of worth trading volume.

Jon C. Ogg
January 22, 2008