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Because of the ongoing declines in solar stock prices, I will diverge from my current series of articles to examine some of the bigger picture numbers for our group of solar stocks.

My current position in solars is what I can only describe as a skeleton position. Normally, I would consider times like this to be a golden opportunity to buy, but the fundamentals at this time seem to deteriorate day by day. Right now it seems prudent to take a very cautious approach to solars. Having said this, it is quite possible for solars to experience a mini rally simply because they have experienced huge losses for the year.

The eleven solars discussed in this article are listed below:

  • Canadian Solar Inc. (CSIQ)
  • China Sunergy Co., Ltd. (CSUN)
  • Daqo New Energy Corp. (DQ)
  • Hanwha Solarone Co., Ltd. (HSOL)
  • JA Solar Holdings Co., Ltd.(JASO)
  • Jinko Solar Holding Company Limited (JKS)
  • LDK Solar Co. Inc. (LDK)
  • Renesola LTD (SOL)
  • Suntech Power Holdings Co., Ltd. (STP)
  • Trina Solar Limited (TSL)
  • Yingli Green Energy Holding Co. Ltd. (YGE)

The Trough Quarter

The table below summarizes the quarterly numbers from Q1 to Q3.

Stock

Q1

Q2

Q3 (EST)

CSIQ

0.13

0.16

-0.08

CSUN

0.09

-0.42

-0.60

DQ

0.99

0.73

0.44

HSOL

0.22

-0.12

-0.05

JASO

0.41

-0.22

0.10

JKS

2.10

1.82

1.21

LDK

0.95

-0.62

-0.07

SOL

0.49

0.02

-0.08

STP

0.17

-0.19

-0.25

TSL

0.63

0.17

0.41

YGE

0.35

0.36

0.11

Originally, I thought that Q3 would be a trough quarter, but with new data coming out from many sources on ASPs, it appears that Q4 may be the low point for the year. Right now my preliminary estimates for Q4 show that all eleven solars will have lower quarter over quarter earnings in Q4. As ASPs at this time are all over the board, I will wait for a few more weeks to publish the Q4 numbers.

Module ASPs for Q4

Right now it is hard to tell but it appears that the Q4 ASP for modules would be in the range of $1.10 to $1.15/watt. For now I will use $1.10. Still I am hopeful that the ASP might stabilize around $1.15.

What has been alarming are the weekly decreases in spot pricing for the four verticals. Even over the past few months, the declines have greatly decelerated but there remain an uneasy stream of declining spot price ASPs.

The Forward PE Ratios

Just a few months ago, many solar investors felt the solar sector was greatly undervalued by many metrics including PE ratios. There were many stocks sitting at a two or three times PE ratio. Today, the PE landscape looks much different. Including our preliminary Q4 estimates the PE ratios are presented in the table below.

Forward

2011 PE

Stock

Ratios

CSIQ

-11.65

CSUN

-0.76

DQ

1.91

HSOL

-18.87

JASO

7.75

JKS

1.79

LDK

32.24

SOL

8.93

STP

-7.27

TSL

7.84

YGE

6.05

Unfortunately we could be looking at four companies sustaining overall losses for the year. LDK could have a forward PE ratio of 32 with TSL, SOL and JASO close to 8 times.

DQ and JKS remain relative bargains at a forward PE of about 2.

The Demand and Capacity Numbers

Year-End Capacity For the Eleven Solars

2010

2011

2012

Year-End

Year-End

Year-End

Capacity

Capacity

Capacity

Poly (Metric Tons)

17,000

27,300

48,500

Wafers (MW)

8,080

14,450

20,500

Cell (MW)

8,780

16,260

22,440

Modules (MW)

9,655

17,000

24,400

These are year end capacity numbers. The rest of the world will have a year end capacity of around 25 to 30 GW of modules for 2011.

In stark contrast, world demand for modules for 2011 will be about 20 GW. So obviously, this imbalance is not conducive to ASP stabilization.

By 2012, the eleven solars will be able to output 20 GW of modules. Where do these numbers fit in the scheme of the rest of the world even if the rest of the world produces 30 GW for next year? At best, we might be looking at 25 to 35 GW of demand for 2012.

In defense of oversupply, we have had an oversupply situation for many years, so this is not too unusual.

The basic theory is that the top tier Chinese producers should sell out before all other producers. In general, this has been true as many of the top tier producers are close to 100% capacity utilization.

A Peek at 2012 EPS

If we assume that ASPs will stabilize at $1.10 for 2011, then we are potentially looking at a pretty good year for our solar stocks. If we have ASPs of a $1 or less, we might consider packing our bags and looking for replacements for our solar stocks. If ASPs manage to average around $1.15 to $1.20, then solar investors can celebrate.

Conclusion

From the above, short term stock price appreciation does not look promising. To be blunt, it looks bleak. Looking at 2011 in isolation should cause most solar investors to head for the exits. It is possible that some of the eleven may not survive if we continue to look at severe ASP drops.

However, if we closely examine 2012, a good case can be made for significant increases from the current share prices. We should keep in mind that even if ASPs stabilize around $1.15, 2012 could be filled with other unexpected land mines.

Over the next twelve months, small changes in ASPs will determine the difference between growth and contraction in earnings for solars.

<Disclosure: I am long JKS, DQ, YGE.

Source: A Look At Some Of The Big Picture Numbers For Solars