So why exactly was this a great quarter? Well, obviously because sales and profits went up, but two issues that I honed in on here are 1) the conference call and 2) margins. Listening to a company’s conference call is really crucial because this is where they not only lay out how the business has been doing, but they also give their strategy going forward and they get (ideally) pressure tested by the Wall Street analyst community.
Often, I find that the conference calls can be more revealing in how management says what they have to say rather than what they actually say. In the case of STP, what I heard were very clear, straightforward answers – no dancing around issues or making excuses. Obviously, this is a non-analytical and non-quantifiable data point, but a company that is this straight forward on their call is likely simply doing good business.
On the margin side, for the quarter, STP had gross margins of 30% and operating margins of 22%, up from 27% and 14%, respectively, last quarter. These margins are important because a) there is a lot of concern in the solar industry around the cost of the silicon used to make solar PV cells and so investors are (rightly) very concerned about controlling the cost of making the solar cells and b) in an emerging industry like solar power you want to make sure that the businesses are scalable and can become more profitable as they grow.
Comparing STP across the solar landscape, they’re on par, or at least catching up with, the two high quality solar companies in Germany, Q-Cells and Solarworld, while they’re clearly outperforming the two US based solar companies, Evergreen Solar (ESLR) and SunPower (SPWR). Solarworld (as of Q1 ’06) sports a whopping 53% gross margin and a 29% operating margin, while Q-Cells has 38% and 22%, respectively. Evergreen Solar currently has negative gross and operating margins, but is expected to get to around 27% and 1.5%, respectively, by year end 2007. Last, but certainly not least, Sunpower is at a 13% gross margin with a negative operating margin, but expected to get that to 24% and 12% by year end 2007.
So is STP the best solar company out there? I would probably give that nod to Solarworld. Is it the best solar company trading on the US markets? Quite possibly. Even before the big sell-off on the US markets STP saw significant weakness in their stock price, but there’s a good chance that the momentum from their quarter, and the upward earnings revisions by analysts that are likely to follow, will propel the stock higher.
Though both Solarworld and Q-Cells are trading at just around 25x their 2007 estimates, I think that the US market will give more of a growth premium to STP and so I expect that, based on current estimates of $1.14 in 2007, the stock should easily get back to $34 (a 30x forward PE multiple). But that would probably be my conservative scenario. The upside, on the other hand, could be pretty impressive: if analysts raise their 2007 projections by as little as 5% and investors get a little excited and decide it’s worth a 35x multiple, we’re looking at a near term price around $42, a nice 32% above where it’s trading right now (and that’s after a 16% jump today). I think that $31.80 is still a hot price for this solar stock and it represents a great short term or longer term play at this level.
My disclosure here is that I am a holder of STP stock, and have been since the IPO.