Solar Energy's Potential Bottom

This week might be a great week for long term investors in the solar industry. I'm not talking about the performance of individual stocks (with a few exceptions, they were pretty bad), I'm talking about the potential occurence of a bottom.

This potential "bottom" would be a great signal for long term investors that the worst is behind us and the future might be as green as the energy they believe in.

So why do I believe that the bottom might be here now and the lows of each solar are the real lows?

- At the time of writing, which is just before LDK's Q1 earning release, the Chinese Wafer producer made an unexpected announcement : They are increasing their provision for the 2008 fiscal year. The news will probably hurt the already weak reputation of their management but aside from that (which doesn't surprise me) it is great information for our solar investor. Most, if not all, the provisions for the inventory of the industry are probably built into the 2008 fiscal year.

- Many solar companies issued some stocks to clean their balance sheet or finance their expansion or just make it through the crisis. All of them have been able to raise the cash they need. Evergreen Solar (ESLR), Suntech (STP), Q-cells, SunPower (SPWRA), and Renewable Energy (RNWEF.PK) are some of the companies that raised the cash needed to develop during the crisis. The fact that they have been able to do those offerings without too many problems (except for the dilution concerning the shareholders) is a good long term sign.

- All the solar companies saw a pickup in demand late in Q1 and early Q2. Some well respected management confirmed that the bottom for the industry probably occurred in Q1 and a real pickup will appear in the second half of 2009. Those statements have been made by SolarFun (SOLF), Q-cells, SunPower, First Solar Inc. (FSLR) etc.

- The Credit market is starting to heal, which is a great sign for the development of the new Solar Project.

- All the solar companies confirmed that there are no project cancellations, just delays, which is a great indication for the long term growth of the industry. Those delays will be converted to projects as soon as the credit market allows it.

- The industry is starting to see some demand coming out of the stimulus.

- The Volume in stocks starting to pick up a little bit, which is usually a good sign.

- The margins in Q1 were a little better then expected for most solar companies (even if they weren't great).

- Oil price is moving up again.

We still need to be careful before calling a real bottom in the industry, but it surely smells like that right now. Writedowns and liquidity problems seem to be behind us, and I think that the Renewable energy sector will be the leading sector of the next bull market and that the bottom of the sector might have been found now. The future will tell us if it is true.

I will write another article to break down again (after the earnings season is over) stock by stock, which stock seems to be good and the general industry view over the long term.

Disclosure: Long on some solar stocks.

Comments

[Sepod:]

I'm still Short (Puts) FSLR, so lets wait a few days before we call a bottom. I'll be Long (Calls) FSLR by then. ; ))

May 22 09:20 AM

[Gregory Pepin:]

Good luck with your puts. What i wanted to say through my article is mainly that the worst is probably behind for Solar industry. The low of the stock are the probable bottom. A pullback is possible still but the future should start to be better (even if i think investment should be gradual and slow over the year to come). I will anyway explain how i will play the solar pick in a few days..... But all those shares offering and earnings with a little more optimistic call from reliable management (SOLF, QCells etc...) sounds like a bottom... But as you know, Bottom is a roller coaster process:) lol

May 22 10:03 AM

[Road Runner:]

Good article with good points. Thanks.

May 22 10:28 AM

[AFL Vet:]

There are still a few hurdles for solar power to overcome before the bottom occurs. The two 800 lb gorillas in the room that nobody seems to notice is (1) coal, big oil, and other power sources have not lowered their prices significantly to protect market share. When ethanol started to make a difference in the days of $4.00/gal gasoline what happened? Big oil halved the price of their product and now the ethanol producers are in financial trouble. The same thing could happen to solar energy if the coal producers decide to protect their market. (2) The existing solar market is centered in states that are in economic turmoil. When California and Arizona go bust, what will become of the balance sheets of the solar suppliers that sell to those customers? Until these two scenarios are no longer potential threats, I do not feel the bottom in solar has been met.

May 22 05:53 PM

[PutneyHillYank:]

Golly you respond to comments. Hey what about WFR you see it recovering any in price as well?

May 22 09:01 PM

[PutneyHillYank:]

By the way I do now own solf and have been in and out of eslr stp and wfr. All made me a buck w/ possible exception of WFR which crashed last fall and I did sell the bottom just human I spose

May 22 09:03 PM

[Gregory Pepin:]

Solar story is totally different then ethanol story. You are talking about renewable energy and sooner or later renewable energy investment provides return. How long it needs to provide return depends on the pricing of the solar project.
Right now with all the stimulus and the fact that solar project are good long term investment will keep a solid growth to renewable energy product.
Aside of that, you are right that some of the market where project are build had some issue financially but they keep Solar project as it is a valuable long term strategy for the growth of the states and also if you had the stimulus of the federal government, they won't slowdown the development of Renewable energy. Include to that all the other international stimulus that offers a big place to renewable energy and start to be implement and you have the reason why i believe the industry saw their bottom in the first half of 09. Now i still believe that investing in those stocks should be done slowly because now it might be dead money for a few weeks months.... i will write my point of view on it soon after Earning session of all solar stock.


On May 22 05:53 PM AFL Vet wrote:

> There are still a few hurdles for solar power to overcome before
> the bottom occurs. The two 800 lb gorillas in the room that nobody
> seems to notice is (1) coal, big oil, and other power sources have
> not lowered their prices significantly to protect market share. When
> ethanol started to make a difference in the days of $4.00/gal gasoline
> what happened? Big oil halved the price of their product and now
> the ethanol producers are in financial trouble. The same thing could
> happen to solar energy if the coal producers decide to protect their
> market. (2) The existing solar market is centered in states that
> are in economic turmoil. When California and Arizona go bust, what
> will become of the balance sheets of the solar suppliers that sell
> to those customers? Until these two scenarios are no longer potential
> threats, I do not feel the bottom in solar has been met.

May 23 04:54 AM

[Gregory Pepin:]

I will discuss about individual stocks and give my point of view on them after all the major solar stock announce their earning (there is still TSL for example that will announce their earning next week). But WFR is a solid player in the industry, they have a good customer base and more important they have a solid balance sheet (thanks to their other businesses) but we shouldn't forget that their others businesses are low margin business and when the solar industry will recover the "solid margin" solar business might be a little offset by the margin of the rest of their units. But right now they have such a solid balance sheet (compare to LDK for example) that their diversification is a great help right now.



On May 22 09:01 PM Putney Hill Yank wrote:

> Golly you respond to comments. Hey what about WFR you see it recovering
> any in price as well?

May 23 04:57 AM

[Gregory Pepin:]

Well right now it is still a dream for day traders.... and i do believe that only day traders are on those stocks now even if the bottom might have been reach.


On May 22 09:03 PM Putney Hill Yank wrote:

> By the way I do now own solf and have been in and out of eslr stp
> and wfr. All made me a buck w/ possible exception of WFR which crashed
> last fall and I did sell the bottom just human I spose

May 23 04:57 AM

[mr clark:]

forget stimulus, direct govt investment needed or forget about solar stocks... the public is broke... of course oil back over $100/brl could provide some incentive...

May 23 10:07 AM

[PeteK:]

mr clark;
Oil is moving that way as you said.
Don't know about coal.

May 23 11:41 AM

[HerrHansa:]

I have to wonder about long term a bit with Evergreen Solar's (ESLR) latest offering priced at $1.80 a share. In some ways it almost reminded me of Dry Ships (DRYS). On the one hand, I am glad they got additional funding, though I am not so happy about share dilution. I got into Evergreen a short time ago with a small position, mostly on a very long term. I debated Friday on building more of a position, though I decided not to do so. The reason is that I still think this sector is slow moving.

I like the moves into China to help control production costs, though it is only one factor for any of these companies. Once shipping rates increase, then the main reason to be producing in China will be meeting the demands of new solar installations in Asia. Of course, greater production can also lead to increased efficiency, and indicate areas to reduce production expenses across all locations. Companies with patents or more proprietary processes might benefit more, but only if they can take advantage of improvements.

A bigger unknown is the impact of new construction, especially commercial properties. It might make sense to incorporate solar into new commercial buildings, and that could increase demand in the sector. Obviously, commercial property construction is way down, without much of a sign of change. There may also be some demand for retrofitting existing commercial properties, though I think this is an area where regulatory or tax incentives might drive demand. Overall, I think these factors indicate slow movements, meaning long term investments.

May 23 05:12 PM

[drewriders:]

Calling a bottom in Solar is like calling a bottom in the market overall.
No one really knows so why bother. I own LDK but I am waiting for a better entry point this summer to buy more since MOST stocks had a hugh run up these last 2 months.

May 23 05:43 PM

[PeteK:]

Some of these American Solar companies should have more new ideas to encourage home owners to buy their products.
For example, a smaller cost unit around $2000 and yet can save
20% to 25% energy cost. That way, more owners can afford and may want to buy it. But when the cost is equal to buying a small car, then forget it. Solar companies must be more on the inovative and choices for customers. Shouldn't be that hard to do.

May 24 12:35 AM

[Windsun33:]

Your numbers are WAY off. For the average household to save 20% on their power bill, you will need around a $15,000 to $20,000 solar panel system. A $2000 solar system will save you around 20 cents a day.


On May 24 12:35 AM PeteK wrote:

> For example, a smaller cost unit around $2000 and yet can save<br/>20%
> to 25% energy cost. That way, more owners can afford and may want
> to buy it.

May 25 01:36 PM

[bachsong:]

This weeks issue of Barron's strongly repudiates your position...this looks like a free-fall in price and a slaughter for FSLR...we will see...but Solar is still very expensive, even with recouping up to 50% in rebates and tax incentives...to motivate homeowner...and in these difficult times such a capital investment will be left for future years, unless heating oil and gas skyrocket beyond the their former highs....

Solar stocks are just nice hype driven trading vehicles for now...and the distant future

May 26 05:20 AM

[Windsun33:]

CSIQ earnings out today, one of the last solar stocks to report for this quarter. Whichever way it goes could signal the whole sector.

May 26 05:32 AM

[velvet:]

what about SPRW's newest invention, increasing capacity 50%?
Any thoughts about that?

May 26 09:40 AM

[Windsun33:]

Not really a dramatic improvement. 95% of the increase was just in making a bigger panel physically. A slight boost due to better cell efficiency. Personally I think it's a wash - for now. If the grid tie market ever picks up again (mainly dependent on credit), then it could be a nice boost.


On May 26 09:40 AM velvet wrote:

> what about SPRW's newest invention, increasing capacity 50%?
> Any thoughts about that?

May 26 10:30 AM

[Cali-arch:]

I am a residential architect in CA and don't see ANY interest in solar for these projects...I also have ties in the commercial real estate market which will be on its knees for the next 2-5 years. The only growth story I see for solar (which I am rooting for!) is for large scale municipal power systems...

May 27 07:34 PM

[PeteK:]

Cali-arch;
The failed proposition last year at the ballotbox really put the solar back many years for California.
What do you think if there's an economic solar package that cost under $5,000 and yet save 10% - 15% energy, would it sell ?
Someone like you may have a better idea for this.
Heard that SOPW is working on something like this.
You may want to check it out.

May 29 08:13 AM