The Solar Shuffle: Only the Best Will Do - JPM

If you are going to buy solar stocks, stick to the best.

That advice comes Tuesday from J.P. Morgan analyst Christopher Blansett, who suggests solar investors embark on a “flight to safety.” Blansett said he expects pricing for solar systems and components to drop by more than 25% in 2009, and remains “concerned about margin compression at all levels of the solar energy food chain.” He thinks investors need to focus on companies that can absorb margin compression, cut cap ex to remain cash flow positive and remain solvent “in light of the possibility of further subsidy reductions in Europe in 2010.”

Citing “reduced solar subsidies next year, higher solar system borrowing costs and increasing competition at all levels of the solar PV food chain,” Blansett cut his ratings on both Evergreen Solar (ESLR) and Ascent Solar (ASTI) to Underweight from Neutral. He notes that “neither have yet to ramp volume production and appear unlikely to generate positive free cash flow until 2010 at the earliest.”

Blansett is more optimistic on First Solar (FSLR): he picked up coverage of the stock today with an Overweight rating. He repeated his Overweight rating on SunPower (SPWRA). He says that “companies with strong balance sheets and are free cash flow positive appear more prudent investments at this time,” as they can cut spending and stay cash flow positive in the face of “a tough market ahead.” He adds that First Solar “is easily the solar PV module cost/watt leader,” while SunPower “has compelling products for area-constrained applications and the ability to source its own business through its system integration division.”

One slightly odd aspect to Blansett’s call is that he has price targets on the stocks he likes that are near or below current levels: for FSLR, his target is $102, while for SPWRA, his target is $28.50. By way of explanation, he writes in his research note that “we do not see First Solar shares as completely immune” from the issues facing the industry, and that he remains cautious on overall sector fundamentals, but that FSLR should be a relative outperformer.

In today’s trading [as of 1:35pm ET]:

• Evergreen Solar is down 44 cents, or 13.7%, to $2.77.
• Ascent Solar is down 25 cents, or 6.5%, to $3.59.
• First Solar is down $7.12, or 6.2%, to $108.43.
• SunPower Class A is down $2.39, or 8.6%, to $25.52.

Comments

[bosun.j:]

Yet more from the pump and dump crowd.

2008 Nov 18 03:21 PM

[John Cordes:]

So if there is over production of Poly and price presuure will come to bare then presumably product costs will come down substantially. The sales/cost advantage FSLR currently has is strictly related to the fact that their primary PV component is not Polly, ergo the wafer companies price competiveness should weigh directly against this situation. Meanwhile FSLR's electric PV conversion is poorer by a measure than the wafer's. Once again it's abandon all and pump FSLR. It's tired.

2008 Nov 19 08:17 AM

[gebby:]

now they are worried about reduced subsidies in 2010? the subsidies have only increased. see barack obama,s short video on climate change. this is the story and i ask you what will the subsidies be in the united states in 2010. www.youtube.com/watch?...

2008 Nov 19 08:40 AM

[Road Runner:]

I wish analysts would give a target price based on what they think the price should be in an average market, and not adjust it for the prevailing sentiment, bearish or bullish. That way I could get a better fundamental picture of the value of the stock instead of their "guess" as to where the economy and investor sentiment is going. But, if they did that, they would appear dumb sometimes, like now, for giving a target that is far from the actual price. Oversold and undersold conditions can last for years, which may be longer than an analyst’s career if he/she gives a price target based on average market conditions.

2008 Nov 19 10:26 AM

[Road Runner:]

bosun.j, How is this a "pump and dump" article?! I see low price targets and a gloomy 25% solar system price drop.

2008 Nov 19 10:34 AM

[searcher:]

R R, you'll often see the same tired kneejerk 'cynical' comments from those unable or unwilling to read the article they presume to critique. They're all about registering an 'attitude', not pursuing the points directly addressed. That is the result of bumper-sticker mentality, wherein predigested catch phrases are regurgitated on cue.

2008 Nov 19 11:27 AM

[NOWHEREMAN:]

Investors are scared. The Economy that Obama expected will not be there when he becomes President.

He won't be able to jumpstart many programs until some sort of stability/growth/recov... is visible.

It looks like many of the Green plays may be on the backburner for a "while". And with the talk of a mucher deeper recession, no one knows how long the while will be.

2008 Nov 20 04:09 AM

[NOWHEREMAN:]

script errors, anyone know how to get rid of them?

2008 Nov 20 04:11 AM

[aquaculture:]

If you get free advise from 'analists' from one these banks do the opposite and you'll do well.
FSLR shareholders face increasing sales costs due to a shady recycling and reclamation program.

Silicon PV solar at current valuation is the best investment opportunity at the start of this century.

2008 Nov 20 05:26 AM