Shedding Some Light on Solar PV Valuations

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 |  Includes: CSUN, DQ, FSLR, JASO, LDK, SPWR, TSL
by: Iam Phree

Wall Street investors and analysts amuse me. I'm not sure they are paying attention. There seems to be a huge disconnect between the value of CdTe (Cadmium Tellurium) and cSi (Silicon) based solar stocks. Which technology is superior? Who cares! The bottom line is that all solars compete in the global market and are subject to the costs of production and the market selling price. What I want to show here is the wild bets in stock valuations in spite of cSi solar producers' similar performance metrics.

The following table is a download from finviz.com sorted by Market Cap.
Finviz Solar ValuationsClick to enlarge

There are 3 metrics that Wall Street uses to represent value when the number is less than one. I think it is important to discuss their meanings for less experienced traders, briefly defining their meaning below:

Price Earnings Growth [PEG] is the measure of PE divided by Growth. Every single silicon cSi stock has indeed had phenomenal growth, as is evident in the far right column in the above table. As a result, most of the PEG numbers are very low. Price/Earnings or PE is also low (Wikipedia states the PE typically runs 10-17), contributing to the excellent PEG score for cSi stocks. The PEG number represents value when it is less than one, since high growth and low PE are desirable traits. PEG is a historical performance metric, since PE and Growth are generally expressed over a full year.

The Price/Sales (P/S) ratio is yet another metric that determines valuation. It basically gives a measure of the cost to the investor to access the sales revenue. Say you buy a stock having a billion in sales at a cheap price. The billion in sales represents potential, and the price paid for the stock represents access to the sales revenue. It is a measure of value tied to the revenue stream that may represent increased return on increased net margin or revenue down the road. It represents current valuation.

Price/Book (P/B) indicates a stock's relationship between the price you pay versus its book value. Again, large book value drives the number lower. Think of it as a the discount ((below one) or overage (over one) you pay to own your fair share of the stock's value. It represents current valuation.

For complete information about PEG P/S and P/B ratios, Wikipedia is an excellent source, and I have included links below.

Clearly, First Solar (NASDAQ:FSLR), the only maker on this list making CdTe solar product, has the highest market cap of all the stocks on the list. China Sunergy (NASDAQ:CSUN) has the lowest. Market Cap indicates Wall Street's valuation of a particular stock without regard to shares issued. Market Cap should be a function of a company's worth and earnings prospects. For this reason, we definitely want to overlay equity and earnings on our charts side, comparing them to the market cap. Market cap is, by nature, an expression of exuberance of the investor, while increased earnings and equity marks the underlying real value. P/B, P/S and PEG are just supporting metrics that indicate a normalized ranking in value. What I am getting at is that Market cap should have high income and equity to support it, but if the normalized rankings are high, the stock may have peaked. We expect high market cap stocks to have high equity, high income and probable higher P/B, P/S and PEG ratios, unless Wall Street has not realized the deal on the table. What we are looking for are undervalued stocks that have low market cap, high equity, and high income with lower P/B, P/S and PEG ratios.

It is possible to chart Wall Street logic and indirectly, analysts sentiment, by calculating a new value for these metrics. Taking the Wikipedia normalized values of 1 and subtracting the metrics (1-PEG, 1-P/S, and 1-P/B) may result in negative numbers that represent overages in valuation. Numbers that remain positive represent bargains according to Wikipedia definitions. You could do this with the PE as well using a number of 13.5, but the scale would be different on the resulting chart. I'm not doing that, because that PE is captured in the PEG ratio and the scale for PE will not normalize to a value of one. Also, the PE metrics can be viewed in the above table so they are not completely ignored either.

I will provide 3 charts with the information discussed. Please read the disclaimer regarding data sources and methodology. The first chart shows all solars covered. The second provides just the cSi silicon based stocks and a more magnified look at the detail in the event you may be uncomfortable with paying 3.21 P/B for access to a CdTe solar company and an EPS Growth rate of just 2.02%. The first two charts are ordered left to right by Market Cap (Or indirectly, Wall Street sentiment). The last is ordered by 2011Q1 income.

CdTe+cSi Solar ValuationClick to enlarge

cSi by Market CapClick to enlarge

cSi by IncomeClick to enlarge

All data sources were derived from finviz.com or in the case of equity, Google Finance. Yahoo Market Cap Numbers were used for Trina Solar (NYSE:TSL) and DaQO New Energy (NYSE:DQ). Net margins were calculated from Google Finance Income/Revenue. All data was aggregated on July 4, 2011. In the case where equity numbers were not available for 2011Q1, equity numbers for 2010Q4 were used. The stocks where 2010Q4 equity numbers are shown are limited to JA Solar Holdings (NASDAQ:JASO) and DQ. For JASO and DQ, 2011Q1 earnings and were taken from press releases. Where equity numbers were posted on Google Finance in CNY, a conversion factor to USD of 0.1547 was used. The investor should double check information provided with actual SEC statements.

All data sources were derived from finviz.com or in the case of equity, Google Finance. Net margins were calculated from Google Finance Income/Revenue. All data was aggregated on July 4, 2011. In the case where equity numbers were not available for 2011Q1, equity numbers for 2010Q4 were used. The stocks where 2010Q4 equity numbers are shown are limited to JASO and DQ. For JASO and DQ, 2011Q1 earnings and were taken from press releases. Where equity numbers were posted on Google Finance in CNY, a conversion factor to USD of 0.1547 was used. The investor should double check information provided with actual SEC statements.

Clearly when viewing the data, there is incredible value built into cSi stocks. While all solar stocks are under pressure, there is a Wall Street view that only one technology will emerge a true winner. This analysis is supported by the near close tracking of Market Cap to Equity with the Premium in stock price granted to CdTe technology. Wall street's view of CdTe stocks being superior is not supported when viewing margin direction from the Q4 to Q1 earnings trend. Google Finance shows those charts. There is only one stock, LDK Solar (NYSE:LDK), that showed increasing margins for 11Q1. FSLR, however, has shown decreasing NET figures which are most likely a result of cSi production enjoying lower costs of production, as vertical integration and scale make their contributions. I suspect Wall Street presumes the lower ASP's, a result of market conditions for solar, will result in CdTe being immune from pricing of cSi product. This cannot be true, since CdTe and amorphous modules produced the same commodity – electricity. Traditionally, there is a relationship between the prices of each product. This relationship looks like this:

Pa = Ps – K

where:

Pa = Market price for amorphous solar

Ps = Market price for silicon solar

K = Cost for the extra land and additional panels to support a given output of electricity produced.

The above is basically saying, in a mathematical way, that the customer cares about ROI. They do not care about the manufacturers' cost per watt. I encourage investors to think the same way as customers, since customers control the money flow that lends itself to a companies profitability. Stock money flow is different and is based on speculation and not always market conditions.

Without significant cost reductions to support “K” the falling cost of cSi will continue to apply NET income profitability pressure on CdTe technology. This will certainly be the case in 11Q2 as cSi prices have fallen.

Silicon manufacturers are impacted also from competitors. Analysts are now stating that consolidation in the industry is likely. This may cause investors to look for equity and market cap. DQ stands out, however, as an investment waiting around for a potential cash infusion that may or may not come is not my style. DQ has serious falling margins although very high at this time. SunPower (SPWRA) has a high market cap, primarily driven upward by the Total SA buy into SPWRA.

Strong Earnings and Net Margin is what it will take to emerge the winner, in the likelihood no silver bullet from a buyer in the companies stock transpires. The overall winner in Earnings for 11Q1 was LDK. Although Net Margins fall slightly lower from FSLR, Earnings indeed were stronger, the LDK Hefei Plant is producing in Q2 and is sure to counter to a large degree the market price drop. LDK solar is the first stock to announce a buyback of $110.00 million. LDK Solar is also talking about an IPO for the Polysilicon Unit. What is not known is how much of a stake LDK will hold in the new company. Reportedly, LDK is to unlock 1 to 1.3 billion in cash through the IPO offering. No doubt this will affect equity and as we can see, Market Cap seems to follow Equity. There remains another nagging question about how many modules are going to support PV Projects and when PV Projects will transfer ownership. LDK has a lot of module capacity, yet module sales remain low. This may be suggestive of the scale of PV Parks in the works. LDK has made fleeting references to several PV Parks to be sold in the upcoming Quarters. Personally, I think the buyback is strategic and linked to the upcoming events (IPO and PV Parks)

Each stock has its story and business plan that addresses cost and revenue stream. I happen to know a lot about LDK, and the investor may have a particular bias toward one stock for their particular reasons or trading style. Certain choices are more immune to market conditions. It is known that solar prices have fallen and it would seem that stocks having strong margins and earnings are most desirable.

I'm making no recommendation to buy or sell. Rather, I am pointing out a serious valuation discrepancy in my opinion that Wall Street and Analysts are making with regard to CdTe technology and LDK. Valuation discrepancies are what investing is about. The slightest positive news, or maybe none at all, may result in a reversal here in a very big way. In the coming days, several solars will lower guidance. LDK may be included. There will be a period of churning influenced by CEO decisions past and present. I remain biased that LDK's expansion in Hefei will mitigate margin pressures and the IPO and Share Buyback will happen. That obscure blue line connecting with market cap implies the rate of equity increase is most promising with LDK. Much of the bad news expected in the solar market is now baked in for LDK. The Net Margin suggests it is capable of sustaining market pressure much longer than others. Clearly there is to be a clash of titans between FSLR and LDK for the number one spot. In many respects, LDK has already won in terms of potential upside between these two and the investors have not yet come to terms with it, based on PEG P/S and P/B coupled with Net income and Net Margin.
Links:

http://en.wikipedia.org/wiki/P/E_ratio

http://en.wikipedia.org/wiki/PEG_ratio

http://en.wikipedia.org/wiki/P/s_ratio

http://en.wikipedia.org/wiki/P/B_ratio

www.bloomberg.com/news/2011-04-25/ldk-so...
www.bloomberg.com/news/2011-06-27/ldk-so...
www.youtube.com/watch


Disclosure: I am long LDK.