Is Solar Hitting the Skids?

by: Harris Roen

It has been a good news/bad news situation in the solar industry as of late. The widely watched Ardour Solar Energy Index ((SOLRX)) is up almost 20% from its low earlier in August, but is still down 26% from a year ago. News from solar market monitor Solarbuzz shows record inventories at photovoltaic factories have caused a price collapse in the photovoltaic market. Production is scheduled to be reduced so that warehouses can be cleared out. These cheaper prices, however, have been feeding an increased demand. The U.S., for example, is projected to grow from purchasing just 5% of the global market now, to purchasing 12% in 4 years.

More good news resides in China. According to IHS, the Chinese government announced plans for new feed-in-tariffs (FIT) in order to boost demand for photovoltaic panels in a big way. These tariffs create a mechanism to guarantee that utilities will buy excess solar capacity at a certain price. This is a proven method that has been used successfully to promote the build-out of solar in Germany and other places. It could increase Chinese solar installations by 50% or more, raising the amount of installed solar in China to a substantial 2.4 gigawatts. This is good news for Chinese solar companies like LDK Solar (NYSE:LDK), Trina Solar Limited (NYSE:TSL) and ReneSola (NYSE:SOL). It should also help Arizona based First Solar (NASDAQ:FSLR), which has broken into the Chinese market (see Roen Financial Report Vol. 3 Iss. 6).

Given this mixed news, how are solar stocks priced compared to where they should be valued? Several solar companies tracked by the Roen Financial Report are listed below, sorted by annual sales. I have calculated each stock's fair price range on the high end and the low end. This estimate of fair price is based on the combined average of both past earnings and projected earnings.

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A wide range of price points are apparent, with 4 out of the 9 companies overvalued and the rest are below fair value or undervalued. The high quality companies that are in the low range of their fair value, such as TSL, FLSR and Suntech Power (NYSE:STP) are where I would be looking for great buy opportunities.

Disclosure: I am long TSL.