Solar Stocks on Sale

Warren Buffett, the Oracle of Omaha, reiterated his mantra last week in a New York Times op-ed: “Be fearful when others are greedy and greedy when others are fearful.” There is no better time for green value investors to heed that advice than right now.

But, with the market meltdown and recent solar sector downgrades by Goldman Sachs (NYSE: GS) and others, green investors might be turning green about now. Goldman downgraded both First Solar (NSDQ: FSLR) and SunPower (NSDQ: SPWRA) and Canaccord Adams continued the carnage with JA Solar (NSDQ: JASO).

So take a deep breath and repeat after me, “In Warren we trust.” Solar stocks are on sale and I like the First Solar story. And the story goes like this: thin-film solar module manufacturer wants to be first in the industry to be cost competitive with retail electricity.

Here’s more to like:

Solid Fundamentals

Revenue and Earnings Growth

• Triple digit revenue increases in 2007 and 2006 (273% and 181%)
• Triple digit revenue increases in the second and first quarters of 2008 (246% and 194% respectively)
• Earnings increase of 47% in the second quarter and 714% in the first quarter of 2008

Those revenues will continue to be strong, at least through 2012. According to its 2007 10-K, First Solar has $5.9 billion of long term supply contracts to supply European customers with 3.2GW of solar modules over the 2008 – 2012 period.

Profitability

• Year-over-year gross margin increases from 37% to 54% in the second quarter and sequential increase of 53% to 54%.

According to First Solar’s second quarter earnings call, gross margin drivers were favorable exchange rates, increased conversion efficiency, higher module run rates and lower costs.

Valuation

• Forward P/E of 20 (Yahoo! Finance consensus Dec. 09 estimate) as of 10/22 close

With a forward P/E fluctuating between the high-teens and low-twenties, First Solar is trading at a much more reasonable valuation than previously, down 57% off its 52 week high of $317.

While First Solar trades at a higher forward multiple than competitors like Suntech Power (NYSE: STP) at 8 or Sunpower at 12, its valuation may be justified by its strong growth as pointed out by cleantech evangelist Jack Uldrich in his Green Investing guide. Savvy value investors will recognize First Solar at this bargain basement price as one of Benjamin Graham’s proverbial half-smoked cigars.

Financial Strength

• Current ratio of 3; peers Evergreen Solar (NSDQ: ESLR) and Canadian Solar (NSDQ: CSIQ) had current ratios of 1.5 and 2.1 respectively

With $633 million in its cash war chest as of the end of the second quarter, First Solar is well-positioned to ride out a possible short-term credit crunch.

And don’t forget grid parity

A big part of the First Solar story is achieving grid parity by lowering its cost per watt until it is competitive with traditional electricity rates. As of the second quarter, First Solar’s cost per watt was $1.18. By comparison, cost per watt was $1.23 in 2007 and $1.42 in 2006.

According to its second quarter 10-Q its objective is to “become by 2010, the first solar module manufacturer to offer a solar electricity solution that generates electricity on a non-subsidized basis at a price equal to the price of retail electricity in key markets in North America, Europe and Asia.” That’s grid parity to you and me, the solar industry’s Holy Grail.

The tradeoff with thin-film solar modules is that while they are less expensive than their silicon cell counterparts, they are also less efficient at converting sunlight into energy. Continued cost per watt reductions with improving conversion efficiency will be important metrics to watch moving forward especially as First Solar approaches the $1.00 per watt milestone.

And while I think First Solar is an industry leader trading at an attractive valuation, you should do your own research. And remember: be green and be greedy.

Disclosure: Contributor Chris Cather owns shares in the Claymore/MAC Global Solar Energy Index ETF (TAN), which has holdings in FSLR, STP, SPWRA, JASO, ESLR, and CSIQ.

Comments

[Joe Kunkle:]

With oil falling rapidly, alternative energy is on the outs and is still inefficient...

2008 Oct 24 09:00 AM

[Bob55:]

It might take a little while, but a mentality will come about where alternative energy will have nothing to do with oil. Each will have its place in world energy policy and will co-exist. It's wonderful oil is down as low as it is, but will it stay this low? With solar stocks having fallen so much, this may well be a good time to buy.

2008 Oct 24 09:56 AM

[Ron Robins:]

As your article points out, many solar stocks are likely to do well in future years. For readers interested in the latest global green investing news, they might find my popular site quite helpful. It's at investingforthesoul.co...

Best wishes, Ron Robins

2008 Oct 24 10:23 AM

[Road Runner:]

When Obama is elected (which is looking more and more true) and the Democrats are in solid control of the Senate and the House, there is going to be a sizable government promotion of solar. Expect to see major work on improving the national eletric grid. Expect to see better legistation for homeowers to sell electircy back to the grid. Expect to see credit opened for solar projects. Etc.

2008 Oct 24 12:42 PM

[Road Runner:]

Oil. Don't forget that oil has been above $50/barrel for only the last 4 years, and oil analyssts think it can't go below $50 (for any stretch of time) because $50+ is the prodcution cost for a sizable portion of the oil supply. As long as it stays above that price, there will still be plenty of incentive to build solar projects.

2008 Oct 24 01:02 PM

[tessant:]

great article. chris, can u email me i had a question for you...sweitzman at gmail. thanks!

scott

2008 Oct 24 01:03 PM

[gebby:]

global warming is real and will drive investment in clean energy, not the price of oil. laws will change mandating investment in solar. read al gore. his party is back in power. they will get what they want. the market will not dictate despite the competitive aspects of solar. also after the election you will learn clean coal technology does not exist. all swing states are coal states. buy solar names now if you can. ldk, ciq, stp, ener, spwr

2008 Oct 24 02:52 PM

[Greg Weston:]

Thank you for the great article! At this point, I don't think you have to be very good to invest in solar companies. They all strike me as undervalued.

Trading almost perfectly in tandem with oil does not make much sense since power companies have to buy solar, and retail sales will only increase because buyers care about the environment, get tax breaks, and increase the value of their homes and businesses.

2008 Oct 24 03:47 PM

[wsigler:]

DUH?! Just reading the title of this piece makes me puke. Have you not noticed?: EVERYTHING IS ON SALE!

2008 Oct 24 07:10 PM

[frflyer:]

Yes everything is on sale, but how many industries have the future potential of solar energy? And how many are trading at these unbelievably low forward PEs?

I think people will find that clean coal will be an expensive proposition.
I have posted my take on renewable energy at my new blog, listed here.

2008 Oct 24 10:09 PM

[TSteelman:]

Correct me if I'm wrong, but isn't the price of electricity like 8 cents per kilowatt hour? At a dollar a watt, aren't we talking about $1000 for a kilowatt? How many months would it take to break even with electricity if you include the cost of equipment, installation, and routine maintinence? The problem I keep running up against is that the payback period is too long for residential use.

2008 Oct 25 12:32 AM

[bill d:]

DUH - wsigler - sure why buy solar when you buy Ford for 2 BUCKS - wow what a deal and GM too.

2008 Oct 25 12:49 AM

[yumin:]

The energy demand will be greater day by day, while oil on Earth is limited. Solar is the One that will give the modern industry alternative energy to meets the oil shortage. Solar energy has different applications as gas. It will not replace gas. Solar is the world future for the cheapest energy resource.
You can see solar energy products on the streets everyway!

2008 Oct 25 06:31 AM

[couldashoulda:]

Much of your articles points were true when the stock was at 25. May be a great VALUE but nobody wants to buy it now so its dead money. If it aint going up, dont buy it

2008 Oct 25 09:39 AM

[Evan Grey Owl:]

One effect of this crisis, for the less mercenary among us, will be a certain resurgence of nationalism. That may be part of the reason FSLR has lost less than some of the Chinese solar stocks that were so highly touted before August 2008. Also, one factor I don't see much of in any articles, but that does weigh on purchasing decisions, is what risk model is applied to individual stocks. I believe that FSLR and POT, for example, are treated more leniently by some brokerages. However, this kills you if a margin call happens, as you have to sell much more than a stock that was treated as riskier in the first place by the brokerage's byzantine rules. Previously, the best solars' share prices seemed to travel in packs. Now, those with the best political connections and best financial relationships to U.S. banks, utilities, and government will do best in U.S. exchanges. Sadly, this may not include some of the best Chinese solars, despite their previous leadership and initiative. Also, Chinese policy reversal on allowing short selling in their markets co-incided with significant share value losses, as far as I can see. But I am no expert.

2008 Oct 25 07:46 PM

[Bob55:]

I'm sure short selling is playing a big part in the market's decline, not just in solar. Still, some analyst think the market is so oversold and have a recession priced in already at this point that the slightest spark can set off a rally. What goes down (and it has been very down for solar investors), must eventually go up, right? I'm just hoping the election can be one such spark. I guess we'll see.

2008 Oct 26 09:32 AM

[James Shaw:]

No matter how low/high oil price will go, the wider use of solar energy will be the great future development. No one can change the trend.

The reason is simple: the technology is becoming mature, cost is going down, it is time for large scale applications. Sunlight is free, clean.

California has a bill for voting in election day:

"Solar energy will count at least 20% of total energy generation before 2010 and 40% - 50% by the year of 2020 - 2050."

Long all solar stocks, specially deep discounted solar stocks such as JASO at 3.7, YGE at 3.59, SOL at 4.96, TSL at 10.50.

Unthinkable.

2008 Oct 26 07:01 PM