Knobias ClipReport (7-25-2007)

Submitted from Knobias ClipReport

Tuesday’s session saw significant pullbacks in the major indices as well as increased fear of subprime spillover. Disappointing earnings from DuPont, American Express, Texas Instruments and Countrywide Financial Corp also fueled the selling. AT&T reported earnings above expectations but the company noted that they sold fewer iPhones than was originally expected causing shares to slip as well as Apple shares to pullback.

Small cap traders are expecting another name to report though their numbers may not have that big of an impact on the shares. Hoku Scientific Incorporated (HOKU) is a company that historically developed and manufactured fuel cell membranes and membrane electrode assemblies for stationary and automotive proton exchange membrane fuel cells. The Company is currently focusing its business on the manufacturing of polysilicon and the installation of solar modules for the solar market.

The Company recently announced that their focus would be put on the manufacturing of polysilicon and that the Company would divest their other businesses, some at a loss to free up working capital to fund the construction of their $250 million plus plant in Idaho for the manufacturing of polysilicon.

With the divesture of their operating businesses, many traders are expecting some very lackluster numbers as well as extraordinary charges for the other facility’s closure and divesture. The three analyst estimates were looking for losses of 7c from revenue of $1 million.

The estimates may not matter one bit as the majority of investors are wondering about the construction of the facility and the progress that has been made since much of the Company’s $1 billion in contracts are ‘take or pay’ with early payment contingent on milestones in the construction progresses of the facility.

With that in mind, Tuesday’s action in the name seemed to display many shorts becoming wary of the situation and close out their positions for fear of upbeat news in the construction of the plant or possibly another contract announcement.

With little to no news regarding the plant construction and no new contract announcements along with little in the name of guidance, the name could see a continuation of the downward trend established on July 13th.

With upbeat news regarding its construction, the achievement of milestones and the payment of the contingency payments associated with them, or more contract announcements, shares could see large gains over the coming days.

In any event, the large contracts that the Company has accrued along with the speed in which they were accrued have made many that know the name to become very pessimistic about the future earnings of the Company. It’s very rare a Company can accumulate over a billion dollars worth of contracts in less than 9 months with little to no experience in the specific field of interest. Add to the fact that the Company hasn’t even completed the facility where the product is to be made and the Company’s lack of funding and one can easily see how many traders could bet against their future.

Hypothetically, if the Company did complete construction, meet milestones and begin the monetization of their product, margins may have been eroded by the ‘take or pay’ contracts and the ‘locking in of prices’ that the Company could be hamstringed with unprofitable operations for years to come until the contracts expire or are bought out.

With these aspects in mind, the earnings to be released are very insignificant towards their future operations. The majority of the investors following will be more concerned with the plant’s progression. Investor’s would be wise to watch.



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