Solar Stocks Come Back to Earth

Solar stocks have been fallen anywhere between 30-90% this year as the economy worsened, oil prices collapsed and the credit crisis spread. Solar capacity has gone up by almost 50% in the last year, and the capacity is still expected to grow in good double digits next year; however, the last six months have seen spot polysilicon prices fall by almost 40%.

While solar companies have developed proven capacity in the last two years, the pace of capacity expansion may face headwinds next year onwards as European countries are reducing feed-in tariff and other subsidies. US extension of ITC for next 8 years (tucked in with Emergency Economic Stabilization Act of 2008) is definitely a sigh of relief for the solar industry; however, solar stocks face some key issues in the next 12-18 months.

Overall, I believe that the risk/ reward is very attractive for stocks such as SunTech (STP) as the outlook for the solar industry still seems positive in the next five years.

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Operating margins for solar panel makers increased to 15-20% in 2008 as companies installed capacity last year; however, the steep decline in solar panel ASPs could continue well into the next year. While declining silicon feedstock costs could help operating margins stabilize in the low teens next year, the solar demand may fall short of the 30% growth expectation in the next couple of years without new growth from outside of Europe.

Companies with installed capacity and scale, long-term contracts and good conversion efficiencies, such as First Solar (FSLR) and SunTech, have a better shot at 30%+ growth. First Solar stock is pricing in the growth expectation and superior margins but STP stock is pricing almost no growth. I believe that silicon based companies will benefit more in the next 12-18 months from the price decline and margins for non-Si based companies, such as FSLR, will get squeezed from resulting lower ASPs

As the credit crisis has frozen access to capital markets for new entrants, cash-rich solar companies will survive the next couple of years and remain good growth stories as they capitalize from expanding in new markets. At 8x 2009 EPS, STP is a really cheap growth stock, pricing in 30%+ cuts in the panel prices next year and benefiting from growth in the US, and could easily be a 2-3 bagger in the next 12-18 months.

Disclosure: Author holds a long position in STP, no positions in the other stocks mentioned.

Comments

[James Wilson:]

How can the Compnay who sell and install the Solar Panels stock go up but not YGE who makes most of the Solar Panels they sell and install.

YGE even bought a Silicon manufacturing company so they can control the supply of their most expensive raw materail.

2008 Dec 10 03:48 AM

[John Cordes:]

Lower polysilicon prices are counterintuitive for FSLR. Obviously this makes the panel makers more price competitive. You state; good conversion efficiencies, such as First Solar (FSLR). FSLR's conversion efficiency is among the worst in the market place. FSLR's only advantage is priceing to polysilicon, which is being eroded by the drop in poly prices.

Your article is full of erroneous comments and conclusions.

2008 Dec 10 09:01 AM

[Amit Kumar:]

sorry for the typo, I meant companies with installed capacity and scale, long-term contracts such as FSLR and good conversion efficiencies, such as and SunTech,

CD Te efficiencies for FSLR are much lower than Si based panels, and I mentioned in my article "I believe that silicon based companies will benefit more in the next 12-18 months from the price decline and margins for non-Si based companies, such as FSLR, will get squeezed from resulting lower ASPs"

On Dec 10 09:01 AM jcordes wrote:

> Lower polysilicon prices are counterintuitive for FSLR. Obviously
> this makes the panel makers more price competitive. You state;
> good conversion efficiencies, such as First Solar (FSLR). FSLR's
> conversion efficiency is among the worst in the market place. FSLR's
> only advantage is priceing to polysilicon, which is being eroded
> by the drop in poly prices.
>
> Your article is full of erroneous comments and conclusions.

2008 Dec 10 09:13 AM

[Amit Kumar:]

Market is concerned that YGE paid too much for CyberPower and may face problems with financing the expansion of poly facilities especially as YGE has not disclosed the Capex requirements.
In the longer run, securing the Silicon supply is positive for YGE, but the falling silicon prices, and YGE's reliance on bank facilities to finance the capex poses a big headwind. Solar companies that rely on the their cash flow for any capex and have good cash reserves have a lower down side risk at this point, I would say.

2008 Dec 10 09:35 AM

[User 316915:]

What is your opinion on LDK which supplies Polysilicon to Suntech. Do you think LDK will be a winner too in next 12- 18 months.

Thanks for the article.

2008 Dec 10 02:00 PM

[Philip Obal:]

I also would like to hear your opinion of LDK.

Thanks in advance.

2008 Dec 13 10:28 AM

[annyone:]

LDK....

2008 Dec 13 11:07 AM