ESLR Update 2

Evergreen Solar (ESLR) has been dropping since its peak of $12.30 in mid June to yesterday's close, below $9 a share. If you're following this seesaw ride, I've been down 8.7% from my purchase price, then up 18.3%, and now I'm down again, this time 11.54% as of today's close. I've had a limit order in place for the other half of my planned purchase, at $8.60 a share. This morning I lowered it to an even $8, thinking it would continue falling. I guess I missed out on the pop, as the stock traded as low as $8.45 in the morning and closed at $9.20.

The reason for the latest drop, besides the weak market generally, is shareholders' negative reaction to Evergreen's offering of $325 million in senior convertible notes due in 2013. If the notes are oversold, underwriters can purchase up to an additional $48.8 million worth. The notes will pay 4% interest, and their conversion price will be $12.11 a share. Each $1,000 note is worth 82.6 shares. This can obviously have a dilutive effect.

However, ESLR also entered into a capped call with the underwriter of the transaction, Lehman Brothers, raising the conversion price to $19 a share. If in five years Evergreen trades between $12.11 and $19, Lehman will pay for the extra shares ESLR has to issue. So, if ESLR's stock price goes up, the impact on shareholders won't be as bad as it could be.

Robert Stone, an analyst at Cowen, thinks Evergreen's plan is a good one. He says it is now more likely that the company will continue its factory expansion, which will fuel earnings and revenue growth when it's completed.

Michael Carboy, at Signal Hill, considers the note offering a good idea too. He noted that the company's plan will raise cash relatively cheaply without too much of a dilutive impact to shareholders.

Evergreen has also entered into a lending agreement with a Lehman Brothers affiliate for almost 40 million shares. The affiliate will sell 18.2 million shares at $9.50, and the rest at market price.

As I think my original reasons for buying are still good, I'll continue to hold and may pick up the other half of my planned purchase if the stock falls.

The next two events that could have a major impact on ESLR's share price are its upcoming earnings report (scheduled for July 17) and congress' (in)action on alternative energy tax credits. Congress will meet for only six more weeks (three in July and three in September) this year. The current legislation expires at the end of December.

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