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This article is a continuation of two previous articles dealing with an inflection point for a solar bull market. Solar investors have enjoyed a fine mini bull run lately. Will this continue? The practical answer is probably not. It would be hard to continue this bull market considering the bad news coming out for Q3 and Q4.

However, the strength of this resurgence in stock pricing seems to point to longer term reasons for a continuing bull market. Perhaps investors are looking beyond the current year to EPS numbers for 2012.

Today we will examine some of our in-house developed price targets for 2012. Over the next few weeks, we will go over EPS estimates (the basis for our price targets) for all eleven solars but for today, we will look at a few of the potential winners for 2012.

An important catalyst for the current mini bull market is the dramatic change in poly pricing. The current spot price declines for poly have been somewhat unexpected. Spot prices were expected to decline significantly next year due to substantial capacity increases for 2012. It was not long ago that solar companies were looking at poly prices of $90/KG at the start of this year.

Today we are looking at $35 to $40 for poly. For 2012, it is possible that we could be looking at $30 for poly. This represents a roughly $60 drop in spot price. A $60 savings translates to a roughly 33 to 36 cent savings in the overall value chain of poly to module production.

Although there are many moving parts to consider in the determination of solar EPS, right now, two important determinants of profitability are module ASPs and poly spot pricing.

The six solars discussed in this article are listed below:

  • Canadian Solar Inc. (CSIQ)
  • Daqo New Energy Corp. (DQ)
  • Jinko Solar Holding Company Limited (JKS)
  • LDK Solar Co. Inc. (LDK)
  • Trina Solar Limited (TSL)
  • Yingli Green Energy Holding Co. Ltd. (YGE)

The table below compares the current stock price (as of October 24th) to our 2012 stock price target. The target price is a theoretical price based on the following assumptions:

  1. Module ASP of $1.05/watt
  2. Poly price of $30/KG
  3. PE ratio of six times

Our 2012 Target Prices Compared to Current Stock Prices

Stock

Current SP

2012 Target Price

% Gain

CSIQ

3.30

13.39

306

DQ

3.45

8.64

150

JKS

8.41

65.50

679

LDK

3.26

10.12

210

So even at a pretty low module ASP of $1.05, we are looking at four potential winners for 2012. Theoretical gains of 150 to 679% would be considered excellent by any investment standard for an 18 month period. Of course, these are "lab" estimates based on many limiting assumptions. A second table below will illustrate the pitfalls facing solar investors.

Other solars, such as YGE and TSL, might be solid choices but their potential stock price gains in the 10 to 20% range cannot be compared to the above four companies (assuming these companies can perform under our most likely ASP assumptions).

CSIQ: The plus 300% potential gain is impressive. However, this company has had a history of performance failures. Just a week ago, CSIQ revised guidance for Q3 and negatively blew up Street estimates for Q3. Still, if they could execute, investors could be looking at pretty good gains for 2012. Although the author now has a position in this company, I will be quick to pull the sell trigger should module ASPs continue to fall to $1.

DQ: Although DQ could be looking at a 150% gain, it is essentially a single vertical company (poly). It has been, to date, excellent at execution.

JKS: JKS remains the favored stock. Unlike CSIQ and LDK, this company has posted stellar results even during this very trying year. Assuming the wheels do not fall off the wagon, this could be the premier solar investment for 2012. Even with a module ASP assumption of $1.00, JKS should continue to do well for 2012 (refer to the table below).

LDK: This is a tough choice. Just by the numbers, LDK makes sense as an investment. The key for LDK for 2012 will be in its ability to transform themselves from a wafer company to a full end to end module production company. This was supposed to happen this year but so far they have failed miserably in its ability to sell modules.

The Five Cent Difference

Although on paper, each of the above stocks look very inviting, investors should keep in mind the extreme volatility of solar stocks. For the above four companies, the potential gains look pretty good, but just to demonstrate how fragile our solars are treading with module ASPs, the table below shows what might happen if module ASPs fall to $1.00. With just a five cent difference, the fortunes of these solars could change dramatically.

2012 Stock Price Targets Based on Module ASPs of $1.00

Stock

Current SP

2012 Target Price

% Gain

CSIQ

3.30

0.64

-81

DQ

3.45

5.73

66

JKS

8.41

43.82

421

LDK

3.26

3.09

-5

Next week, I will present a series of sensitivity analysis tables for EPS based on three module ASP assumptions. It will become pretty clear that ASPs below 1.05 will not be positive for solar investors.

Source: Solar Winners For 2012