Solar Stocks Are Now Attractive Again 14 comments
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In a previous article I wrote on November 15, 2007, "Solar Stocks are Overheated," I provided an analysis of the solar sector and how valuations had become extremely expensive. I even recommended that traders short these stocks to participate in the ensuing downside risk the entire sector would face. As a result, I received a great deal of criticism after posting that article by those that felt solar stocks were heading higher. Well that article was posted no more than three weeks before the official burst of the solar bubble. Since then, the entire sector has fallen dramatically, losing an average of 70% since my bearish post.
Let it be known that I am a very big proponent of solar energy as it is a large part of our country's goal of energy independence. However, as an investor, I spotted an opportunity to profit from the market's misconception of the valuations these companies deserved. Now finally, I have my reversed my position on solar stocks as an investment, and suggest being long these stocks over the next 1-2 years. There are still hurdles to the industry as a whole, such as tightening credit and risks to future government solar subsidies around the world. However, much of this has been priced into these stocks already, presenting a clearer depiction of the industry outlook.
From a valuation perspective, some of these stocks still appear relatively expensive. However, when evaluating solely the best-of-breed names like First Solar (FSLR), Suntech Power (STP), and LDK Solar (LDK), we notice that there has been a sharp contraction in valuations that makes these stocks compelling once again. Further, each of these companies has a backlog of at least 18 months, which generates more clarity when assessing future earnings estimates.
FSLR currently has a forward P/E of 19, which is 50% lower than historic levels. Although its P/E is still higher than many others in the industry, investors feel comfortable assigning a higher premium to the company since it is the fastest growing player in the industry. For those investors looking for even cheaper valuations, STP trades at a forward P/E of 8.8, and LDK trades at a P/E of 4.00. Again, this is almost 70% lower than where they have historically traded, and 30% lower than the current industry average.
Unlike other solar companies in the sector, STP and LDK have less risk with regard to potential increases in polysilicon prices. This is largely due to these two companies making the wise decision to lock silicon prices for the next several years. First Solar, being one of the few thin film producers in the group, is not at risk from a potential rise in polysilicon prices, and there remains the most insulated.
Below, I have outlined my one-year target prices for all three stocks. If these targets are attained sooner than one year, I will reevaluate at that time to determine if valuations are still attractive.
First Solar (FSLR)
- Current Price: $126.00
- One Year Target: $220.00
Suntech Power (STP)
- Current Price: $20.50
- One Year Target: $42.00
LDK Solar (LDK)
- Current Price: $17.95
- One Year Target: $33.00
I find it highly unlikely that the solar sector will retest the highs of November 2007 anytime soon. However, now that we have seen the good companies separated from weak, the downside risk appears limited for those that have managed their businesses effectively despite this weak economic environment.
Disclosure: Long FSLR, STP, LDK.
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This article has 14 comments:
A stock screener can tell me who has a low forward P/E and other various pretty numbers. If I'm going to decide on a company's value, I better understand their business and what variables will affect it in the future. This writer doesn't help much there.
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LDK Solar provided preliminary guidance for 2009 of 2.9 BILLION revenue. Link: www.clusterstock.com/2... LDK is also completing their own polysilicon plant expansion, which will reduce costs associated with buying polysilicon, in effect, increasing margins. Let's presume margins are 30% due to self-sourcing polysilicon. 2009 EPS est = 2900 x .3 / 111.28 = $7.82!!! At a prediction of $33.00, you are stating in 2009, LDK will have a PE of 4.22! I think your projection may be off by at least a factor of 1/2 even in this market environment! They have also published preliminary revenue numbers for Q3. It appears Q3, will blow away analysts expectations as so many other quarters before. Your one year price target may just be hit in a month. With all due respect, may I suggest a little deeper digging.
Still, I like your bullish sentiment. It is good to have you aboard.
Remember, in the US we do not use oil for power generation, so solar only replaces coal, nat gas and uranium. Things we have aplenty and things that are sliding in prices as we speak.
So government policy will be the determining factor.
It is not necessary for the immediate future. Recessions have a tendency to reduce overall energy requirements. Solar's goal is to provide more energy.
In this environment, I don't think they will receive a lot of new orders. The Solar stock prices are just reflecting the new conditions.
Thank You