Solar Stocks: Bright Or Cloudy Future?

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 |  Includes: FSLR, JASO, KWT, LDK, STP, TAN, TSL, YGE
by: David Zanoni

I want to embrace the solar industry. What is there not to like about clean, renewable energy? Why aren’t we all attaching solar panels to our roofs to produce our own electricity? We can get a Federal tax credit of 30% of the cost through December 31, 2016 to install a solar energy system. Does this mean that the solar industry is ready for a rebound or does it have some headwinds to face before a recovery begins?

It is sad that the solar industry is dependent on subsidies from various governments rather than thriving on its own accord in the free market. However, the subsidies can be viewed as a positive way of stimulating a responsible energy source.

We do have to acknowledge that solar power and other renewables cannot be viewed as a 100% replacement for fossil fuels, but it should be understood to account for a growing percentage of overall energy usage. Eventually, demand for energy will exceed the amount of available fossil fuels, so solar and other renewables do need to grow their energy footprint to be a part of an overall energy solution.

Solar stocks took a serious beating in 2011, losing about 75% of their value. These stocks can’t all be heading for bankruptcy. It is true that their rate of growth has slowed with the recent European debt and recession fears. Also, the prices of solar panels have plunged, reducing the solar companies’ profit margins. However, these are still profitable companies of which most have positive expected earnings growth for the next five years.

Take a look at the chart and you can see the actual and projected growth for solar power.

I think that investors should have a cautious view on solar stocks right now. I don’t think that the solar stocks will rocket higher in 2012, but I do think that they will be significantly higher five years from now from their current prices. The recent plunge in solar companies took their stock prices below book value per share. They are now deeply undervalued and worth reconsidering as an investment for the next five years.

First Solar (NASDAQ:FSLR) did lower its 2012 earnings per share forecast to $3.75 to $4.25 which is down from the average analyst estimate of $7.40 per share. However, this news may already be priced into the stock. The company announced that it is implementing cost cutting measures that will position it for decades of profitable growth without relying on subsidies. It has a forward PE ratio of 8.47, a PEG of 0.35 and the stock trades $11 or 31% below its book value per share. First Solar is expected to grow earnings annually at 17.04% for the next five years.

Suntech Power Holdings (NYSE:STP) had an average annual earnings growth of 5.6% for the past five years. Its stock price is $2.40, which is trading significantly below its book value per share of $8.90, presenting a deep undervaluation. Suntech is expected to grow earnings annually at 6.9% for the next five years, which should lag the market.

JA Solar Holdings (NASDAQ:JASO) is currently trading at $1.36 which is way below its book value per share of $6.39. It is expected to grow earnings annually at 10.97% for the next five years. However, it currently faces subsidy cutbacks in key markets such as Germany and Italy.

Yingli Green Energy (NYSE:YGE) has a PEG ratio of 0.66 and trades at $3.95 which is also significantly below its book value per share of $9.06. It has an upward earnings revision for 2012. Yingli is expected to grow earnings annually at 15% for the next five years which should beat the market if expectations are met. This growth may come from generous subsidies for new solar installations from the Chinese government.

LDK Solar (NYSE:LDK) is a Chinese solar company that may also benefit from Chinese government subsidies. Its stock price is currently $4.22 which is below its book value per share of $9.13. It is expected to grow earnings annually at 9.37% for the next five years.

Trina Solar (NYSE:TSL) is another Chinese solar company that is trading at a deep undervaluation. Its stock price is $7 which is significantly below its book value per share of $17.23. However its five year earnings are projected to grow at a negative 1.12% annually compared to 46.92% growth in the last five years.

Thoughts:

I don’t think that investors should jump back into solar stocks right now. I think we need to see more clarity on the amount of large scale solar projects in various global markets. We also need more clarity on how falling prices of a solar panel’s primary raw material, poly-silicon; will impact the profitability of the solar companies. The falling prices should increase sales, but we need to be assured that profit margins are not squeezed too drastically.

Some growth in solar projects will likely come from Japan as they stated that they would like to replace half of their electric energy supply with renewable resources following the Fukushima disaster.

China, a large consumer of the world’s energy, plans to spend $473.1 billion on clean energy investments in the next five years. China is planning on having an installed solar energy capacity of 10 gigawatts by the end of 2015. These investments will sustain growth in solar, but we’ll need to see how profitability plays out with the solar companies in 2012 before diving into any of these names.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.