Why You Should Sell MEMC and Buy LDK or JA Solar

by: Rougemont
I'm writing this to counter some of the points made in the article written by David Alton Clark called "Why I'm Bullish on MEMC's (WFR) Future," which you can read here. While I think Mr. Clark made a good case for MEMC, I think buying MEMC over the Chinese solars just because they are Chinese is just plain wrong, and here are the many reasons why:
There is no doubt a double standard exists (for now) in how Chinese solar related stocks are valued compared to U.S. companies. Read my article about the double standard in solar valuations here.
Energy Conversion Devices, (NASDAQ:ENER), Evergreen Solar (ESLR) and other U.S. based solars are getting eaten alive by LDK Solar (NYSE:LDK) and other low-cost China based companies. ENER and ESLR both recently announced lousy financial results, which leads me to believe they won't be able to compete with the scale and low-cost labor and other benefits of manufacturing in China. By contrast many Chinese solar companies just reported outstanding profits.
Americans should be very careful to continue to view the world in such a U.S. centric way that they refuse to invest in an economy like China altogether, or if they do they view $1 in earnings per share earned by a U.S. company to be worth considerably more than one earned by a reputable Chinese company. The world is not going to be America's oyster for much longer. Consider the many economic statistics which show that China is likely to overtake the U.S. around 2020. That's not too far away! Read more about that here.
Consider that perhaps one day a dollar earned by a reputable Chinese company might be worth the same or even more than one made by a U.S. company. Chinese companies have a tremendous advantage over U.S. companies in terms of lower regulations, lower costs in general, and much cheaper labor costs. When you combine that with the population in China and the future demand coming from this much larger population, it could easily make sense in the future that a Chinese company might have a higher PE ratio vs. its U.S. counterpart. This has already started to happen. Just look at Baidu (NASDAQ:BIDU) which, just a few years ago, was not taken seriously by many, and given a low PE ratio. Now BIDU has a PE ratio many times that of Google's (NASDAQ:GOOG). People who could not invest in a Chinese company like BIDU missed a huge opportunity. If you bought BIDU at the IPO price and held until today, you would have made more than buying Google at the IPO and holding it.
Now let's discuss the case against MEMC a little further, which to me means you should not buy MEMC because the values of the Chinese solar names offer you so much more.
The fact that MEMC recently announced a joint venture with JA Solar (NASDAQ:JASO) indicates how important it is to be manufacturing solar in a low cost country like China. There is a reason why the deal wasn't JA Solar doing a joint venture with MEMC in order to open a new plant in California. If MEMC sees the future of solar in China and is investing in China, then shouldn't you be considering the same? You can buy into worldwide solar growth directly and for less through these Chinese companies.
Right now JA Solar shares trade for $6.58 per share. JASO is estimated to earn $1.39 per share in 2011 compared to an estimate of only $1.17 for MEMC in 2011. MEMC shares trade for over $12 which is almost twice the price of JASO shares and what does that buy you? About 20% less in earnings for 2011.
Let's look at another: LDK Solar is one of the largest solar companies in the world. It is based in China, and will release earnings on March 17, 2011. I believe LDK will report about the same earnings per share in a single quarter than MEMC will report for the entire year of 2011. What's more incredible is that even though LDK is earning about the same in a single quarter as MEMC earns in a good year, a share of LDK will currently cost you about $10.95, while a share of WFR will cost you about $1 more at over $12. I am sorry but that type of disparity cannot last forever. It didn't last forever between Google and Baidu and it won't last with the solar stocks.
It's been popular to bash China stocks and the China market is down substantially from its highs. But in spite of some scandals with a handful of China based stocks (just like we have in the U.S. with Enron, Worldcom, Tyco, etc.), most Chinese and U.S. companies are not scandal ridden or have bad financials. Just as a few bad apples like Enron should not stop you from investing in U.S. stocks, you should not rule out Chinese stocks because you just might miss the next Baidu.
For investors willing to look into the future and see the growth of China and Chinese solar companies, I believe the rewards will be many times greater than American investors who only want to invest in U.S. companies. Bottom line is that MEMC's investment in JA Solar is sending all of us a strong and clear message: Follow MEMC's lead and do as they do, which is invest directly in solar in China.
(The data is sourced from Yahoo Finance. The information and data is believed to be accurate, but no guarantees or representations are made.)
Disclosure: I am long LDK, JASO.