Barron's Is Wrong: Solar Offers Good Value

I love getting mail from readers. The email from “horowme” this afternoon seemed worth re-posting for all to read:

Zach,
Could you comment on this article as it relates to your most recent podcast re: positive report on the solar industry and the Chinese governments intention to subsidize installation projects. Does this reported glut of silicon change your opinion regarding the near term changes in solar stocks?
Thanks

The article referenced was a Barron’s Online piece that I can only assume will be aired Monday. The link should be active, but in case they change it, you should be able to search Barron’s for “Nightfall Comes to Solar Land”

Essentially, Barron’s is arguing that new supplies of polysilicon (the raw material used to make solar panels) is hitting the markets at the same time that end demand for solar power is waning. Three factors are listed which cause solar demand to be light, and this light demand obviously leads to reduced profits for solar panel producers. Here are the factors:

1. Faltering Government Incentives - While governments around the world have promised to increase spending on renewable energy, some programs have been shelved, while other stimulus dollars have taken longer than expected to come to market.
2. Lower Oil Prices - Traditional energy has a foothold on the market. But high prices of oil and natural gas gave energy users incentives to find cheaper alternatives. Now that those traditional prices are lower, competition is also lower meaning less is spent on solar development.
3. World Financial Freeze - Access to capital has been restricted for months now. Companies with plans to purchase solar panels (and thereby reduce their long-term energy costs) simply could not complete many transactions. So its easy to see how the credit freeze has slowed demand.

Now it appears that all three of these issues are actually quickly improving which could have a big effect on the demand side of the equation. The latest news out of China shows that the Ministry of Finance is ready to put a huge amount of money behind initiatives to help drive installation of large solar power systems.

Oil prices have lifted significantly off their lows from earlier this year. While economic news has yet to indicate huge demand for traditional energy sources, a decrease in drilling projects may be having an effect on supplies which yields stronger pricing.

And finally the financial sector is beginning to thaw as crisp newly printed currency foods the system. Rates are lower and lenders are being given every incentive to put this capital into action. I expect access to capital will continue to improve this year - but with more responsible lending standards.

Is Low Cost An Advantage?

Barron’s points out that First Solar (FSLR) and Energy Conversion Devices (ENER) operated on a different plane than most solar manufacturers. Both companies offered solutions that used less polysilicon as a raw material. While there were some drawbacks (lower energy yield rates), the actual cost per watt of electricity produced was lower.

But now with polysilicon prices lower, that cost advantage is becoming more narrow. If costs continue to drop, it could become largely immaterial how much silicon is used in production. And so the technology offered by FSLR and ENER will provide little additional cost savings to end purchasers.

While I don’t argue that lower silicon prices will help traditional solar companies compete on a more level playing field, First Solar should still have somewhat of an advantage. If demand picks up for solar energy (due to all three of the demand issues improving), we should see poly prices stabilize (or at least not decline as rapidly). The increase in demand should benefit the entire sector, but low cost producers will continue to turn an effective profit on solar production.

Investments Offer Best Value in Some Time

Even if all the arguments Barron’s points out were accurate and had the expected effect on the solar market, investments in this area could still perform quite well. This is because the stocks have already largely discounted a negative environment for solar energy.

Many traditional suppliers have dropped 80 to 90% of their value and while First Solar has held up better than most, its stock is still trading for less than half its value last year. Energy Conversion Devices is less than a fourth of its August level. Both of these stocks are trading for multiples that seem more than reasonable given their industry leadership and the expected growth over the next few years.

So in summary, I don’t dispute the facts of the Barron’s article, but I think I would come to a different conclusion based on the way the current stocks are trading and the encouraging signs in the industry.

Comments

[bigeasy8:]

How about you're both wrong - prices on both stocks might be reasonable here with not a lot of upside or downside while the polysilicon mkt sorts itself out for a while.

Mar 30 04:55 AM

[aquaculture:]

>'ENER and FSLR'
>'Offered solutions that used less polysilicon'

They don't use ANY polysilicon at all.

Mar 30 06:56 AM

[Jmichael:]

FSLR is a bloated stock right now. Businesses everywhere are struggling to stay in business and solar is no longer a project being considered. Many customers have cancelled not because they can't get a loan, but because business is getting worse while taxes are on the increase.
The residential market is just as bad right now with many cancelling their approved projects with rebate because of job loss or lack of job security. The commercial market is going to implode over the next 12 month and solar isn't going to to flourish for a few years.

Mar 30 08:01 AM

[Douglas Hvi...:]

ENER is thin film, but still uses silicon - just a lot less. I'm invested there. One point that is often neglected with all the fuss over PV is that solar heat pays off now if well designed. Search on "annualized geo solar," "evacuated tube collector," and Solarwall (tm). There isn't as much stock opportunity here as would be preferred, but it is possible to "reality invest" in your own installation if the figures work out right for you! Conserval Engineering (Solarwall) has a PV variation the collects both electricity and heat for about 70% efficiency.

Mar 30 08:07 AM

[dan-d:]

The problem for thin film producers of solar panels, especially FSLR, is the lower price of silicon will greatly erode the price advantage of thin film which has propelled their sales. Add to that the lower efficiency (about half) compared to si based panels and the distinct possibility of the cost of telluride going up in the case of First Solar and it's going to be rough sleighing to maintain impressive profit margins in the future. The scenario will probably be thin film producers share prices will fall and silicon panel producers will rise somewhat. Of course while they still have great share prices, again in the case of First Solar, partnerships may occur between both entities with mutual benefits. As to Barron's article, Barrons is nothing more than a schill for fossil fuel producers and have not yet, like Exxon that is still the biggest user of single hulled oil tankers, understood the crucial nature of the for alternative energy sources. Oil is finite, human kinds need for energy is infinite and insatiable.

Mar 30 08:28 AM

[aquaculture:]

They are not crystalline silicon technologies.

Frankly, lack of differentiation in research on a fast tech sector -such as solar- points to a 'reactive' state of mind, to put it politely.
You are obviously one of those 'true solar believers'.
Fine.
But you need to know 'what's cookin' in the solar kitchen.

Take First Solar inc. (FSLR)
In addition to the Polyspot DLR (That's Chinese for drop-like-rock)
see: seekingalpha.com/artic...
It faces several other 'growing pains'. (see comment stream if you're interested.)

Philip Davis -top 5 watchlist- here, is short FSLR, "a trainwreck of a company". Phil is often early in these things, but sooner or later the hedgies will smell weakness in the business model.

Besides if you like solar, the extreme relative overvaluation of FSLR only hurts the undercapitalized c-si sector.

Mar 30 08:35 AM

[Alphameister:]

Excellent analysis. Unfortunately, the point made by aquaculture likewise seems valid. FSLR (which I wouldn't touch) seems to drive investment psychology in this sector, posing a problem short-term.

Mar 30 09:30 AM

[Ferdinand E...:]

So Barrons is a "shill" for fossil fuel, someone said. Interesting, because I have been called a shill for nuclear energy - which I am not. But I know a few things about energy economics, and one of them is that in the short run solar and wind are overrated - although in the long run they are going to be essential. The important thing here is not believing that in the short run solar (and wind) can substitute for nuclear.

Mar 30 09:32 AM

[tginomorebush:]

barrons is a wind and solar "basher" to the extreme ...... and definitely a "shill" for foxxil fuel! they never print anything positive ...... NEVER .... about alternative energy. when they do find that they have to print something that is positive news they take the negative (devils advocate) side .......... they give advice or quote a blog ..... only in the behalf of their "short position" ..... they are the worst

Mar 30 10:06 AM

[tginomorebush:]

"fossil" ..... typo............lol

Mar 30 10:07 AM

[Redwood_1:]

ENER makes panels? I did not know that. I thought they made a Building Integrated PV that could be rolled out over the roof, taking the place of conventional roofing material, thus offering a host of other cost advantages over conventional crystaline PV. They must have given that up so that they could offer instead a product that makes it easier for idiot analysts to plug them into the same box as all the other PV producers.

Mar 30 10:30 AM

[tc1:]

Dear Jmichael: i'll repeat here a post i made at the SA synopsis of the Barron's article in question....

Where i live (Santa Barbara, CA), the private company SolarCity arranges leases with residents. Here's how it works (and maybe you have SolarCity or a similar leasing company operating in your vicinity):

SolarCity installs FirstSolar's panels on your roof or somewhere on your property. You pay Solar City a lease, which, COMBINED WITH whatever electricity you may still be pay-ing for from your electric power utility, is still usually about 20% LESS THAN YOUR MONTHLY ELECTRIC BILL. You have various lease options-- you can pay zero upfront, or $1k upfront, or $9k upfront to get even better terms on the lease. After 15 years, SolarCity offers you the option of re-negotiating the lease, getting upgraded solar panels, etc.

In other words, you can very quickly be getting solar power for 60%-90% of your electricity needs, pay LESS each month on your utility bill, and live with a clear conscience that you've just radically reduced your carbon footprint on this precious planet.

It's a win-win-win situation all the way around --for you, for your local utility (which likely has a mandate to utilize more green energy), for the leasing company, and for companies like FirstSolar.

Incidentally, SolarCity offers a lucrative incentive program: for every customer you bring to them, you get $300 in your pocket.

Mar 30 10:33 AM

[frflyer:]

Ferdinand
I agree with you that the real story for solar is long term.

However I believe there is probably some truth in the comment that called Barrons a shill for the fossil fuel industry. They are part of the same Murdock conglomerate as the WSJ, which is a blatant platform for dispensing quack science articles trying to question the science of climate change. We are talking extreme quackery, with absolutely no credible scientific foundation.

www.reall.org/newslett...

By the way, most of the media does a horrible job of covering the global warming issue, but some do it intentionally, like the WSJ.
The NYT has been widely criticized recently for printing rubbish as bad as that at WSJ.

climateprogress.org/20.../

climateprogress.org/20.../

climateprogress.org/20.../

By the way it is not just Climate Progress that criticizes the media on this issue, so does every credible climate science website.
for example:

"On the issue of climate change, journalists have consistently reported the updates from the best climate scientists in the world juxtaposed against the unsubstantiated raving of an industry-funded climate change denier - as if both are equally valid. This is not balanced journalism. It is a critical abdication of journalistic responsibility."

"The media, which in a lazy and facile attempt to provide "balance" is willing to give any opinion equal time as long as it is firmly in contradiction with another."

www.desmogblog.com/sla...

Unfortunately Congress is often as guilty of this as the media, especially when committees are headed by the likes of Sen Inhofe (R Oklahoma). He prefers the opinions of science fiction writers like Michael Crichton over actual climate scientists.


You said:
"The important thing here is not believing that in the short run solar (and wind) can substitute for nuclear"

NO! the opposite is true.

Nuclear power will play a small part in the future of energy (like 10-20%) as many studies have shown.
It is precisely in the short term that it can't help us, because it takes ten years to build, minimum.
It will not be cheap, in fact it is doubtful it will be able to compete with solar or wind in ten years. I understand that there are potential new technologies like thorium reactors, but again, they are far off in the future, if they become realities and are cost effective.

The recent study at MIT had similar conslusions.

www.sciam.com/article....

www.energyeconomyonlin.../

"The actual costs of new nuclear power, however, bring us face to face with a new "inconvenient truth" -- building new nuclear power plants will actually make global warming worse, because hundreds of billions (indeed, trillions) would be needed to build any substantial fleet of new reactors. If even a fraction of this money were instead spent on other low-carbon choices such as energy efficiency, wind, geothermal, and solar, vastly greater amounts of low-carbon kWh's and greenhouse gas reductions could be achieved."

climateprogress.org/wp...

climateprogress.org/20.../

climateprogress.org/20.../

The renewables sector should get a big boost when the U.S. establishes a national renewable energy standard.
Cap and trade will do the same, finally acknowledging the real costs of fossil fuels.

Mar 30 03:25 PM

[ripskii:]

The problem with nuclear energy for solving our future energy problems is that we are still only considering old light water reactors. Much better solutions are available using advanced fast reactors which are much more efficient and solve the long half life waste problem. These will play a much bigger role for base load power generation than other alternatives and will be required to support solar and wind which cannot supply our base load needs. All the most efficient solutions are required to reach a sustainable model and the sooner we move forward the less painful (and expensive) it will be for the long term.

www.sustainablenuclear...

Mar 30 04:17 PM

[aquaculture:]

Pluvia: you can read can you?
jlmpacificepoch.com/ne...

So unless you know better than China industry insiders: a drop in polysilicon spot from $500 to $25 is already a 95% drop and rsi-silicon has started production in march (1000 mt ton from two 2MW carbothermic ovens) and will ramp up to 30000 mt. according to Ed Gunther.

Mar 30 06:09 PM

[Zachary Sch...:]

Good comments guys - there is obviously a heated (no pun intended) debate in this are that can only be solved over time.

My opinion is that there is value in some stocks here and that many prices fully incorporate the weak market up to this point. The stock market is a forward discounting mechanism so we should expect to see solar stocks turn before the fundamentals fully justify the rebound.

FSLR has certainly been overpriced in the past. You can see my 2008 article urging caution in this name here: zachstocks.com/2008/02.../ But now the name is a leader, at a lower price, with a tide that appears to be turning.

I've been wrong before - and it will happen again too. Trading is all about adjusting to the environment, managing risk, and seeking out opportunities. I look forward to revisiting this debate over the coming months as the picture becomes clearer.

Thanks guys for the lively discussion!
Zach
zachstocks.com

Mar 30 06:28 PM

[j_remington:]

Encouraging signs are not enough to sustain any meaningful upside.

In the US there is no money in state governments to subsidize solar energy programs. Just read about CA.

Plus, I would put very little trust with China's Ministry of Finance. Who knows how much actual money which will be doled out?

Mar 31 09:51 AM