Trina Solar: Best Value in the Solar Space 39 comments
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Just about three months ago—while the solar stocks were being taken to the backyard and shot—I wrote an article in which I evaluated 11 solar stocks in an effort to determine which one or two I thought offered the best risk-reward ratio. I ended up recommending one stock—Canadian Solar (CSIQ)—which stood out due to a forward (2008) PE of about 11 and a forward Price-to-Sales ratio under unity.
To me, CSIQ stood out not only because of these superior metrics but also because its sales were expected to almost triple between 2007 and 2008 and its earnings were projected to increase 6-fold. I also liked the fact that CSIQ had already contracted most of its polysilicon supply for 2008.
On the other hand, I did not like the prospects of Suntech Power (STP), Sunpower (SPWR) and First Solar (FSLR), and I concluded that with forward PEs of 31 to 85 (respectively), these three solars were overpriced.
Before we look at how my prognostications fared, I want to discuss the assumptions, biases and methodology that I used both in my initial comparison and here:
1) My biggest "bias" is that all things being equal, a lower PE (or more accurately, PEG) among comparable companies wins this contest. Obviously, since things are not "all equal," some adjustments must be made, but nevertheless, PEG is the primary driver of this comparison. If that is not a belief that you hold, this article won't have much meaning to you.
2) This comparison is based more on facts that on projections, with one exception. I have calculated PEs against projected 2008 earnings which I obtained from Schwab, showing the average of the analyst estimates for each stock. Using a forward PE was essential because in the solar space, a fast-growing-company's trailing PE is not a meaningful number.
3) In my analysis, I put very little—if any—value in earnings projections for 2009, or, perish the thought, 2010 or beyond. To me, given the range of possibilities on both macro- and microeconomic fronts (How deep and long will this recession be? What will poly prices do in 2009? 2010? Will there be an oversupply of solar panels in 2009? How much will ASP's drop? Will global incentives increase, stay level or decrease?), NOBODY can reliably predict what the earnings will be for these companies in the 2009 calendar year. In my view, it is enough of a stretch to guess where earnings will be at the end of this year.
Indeed, to highlight the unreliability of 2009 "estimates" (read "speculative guesses,") one only needs look at the range of estimates for 2008. For example, one analyst thinks Trina Solar (TSL) will earn $2.37 in 2008, while another believes TSL will earn $4.19—almost double the lower value. Other companies also have a large spread, although I don't think any company's range of analyst estimates is as wide as TSL's.
4) I have not included any information regarding analyst upgrades, downgrades, target prices, or recommendations, for several reasons. First, I intended this exercise to be an objective analysis—and as can be seen from the spread in analyst estimates, the amount of subjectivity in analyst opinions is quite large. Second, I have for months disagreed with most analyst upgrades of several of the sexy names in the solar space, pushing their valuations—before 2007 was even over—to 100X 2008 EPS (I am, of course, thinking of FSLR, but a few other companies have been similarly hyped, without just cause, in my opinion). To me, using 100X multipliers against forward EPS is witchcraft, not financial analysis. Third, analysts' opinions tend to be even worse at inflection points in the economy—and regardless of whether one believes we're in a bear market or not, I think everyone agrees we are at an inflection point.
For reasons that I discussed in two other articles published yesterday and Monday, I believe the solar space will do very well going forward, and that selected companies in this space will do even better. I believe that demand for PV panels will exceed supply for at least 2008 and 2009 because I believe that in the sunniest locations in the US, we are either at grid parity or very close—depending on whether ALL costs of conventionally-fueled power plants are taken into account. If I am correct, this will generate demand that is probably not yet widely appreciated. In addition, I consider it quite likely that various incentives will be renewed, if not expanded, this year. Most companies have guided to approximately a 10% decrease in ASPs in 2009, but I do not believe margin compression will be significant because poly costs will probably drop even more, and because the fabs will become more efficient and end up making more watts with less silicon.
Based on the foregoing, and without further ado, let us now look at the performance of the solars I reviewed three months ago. Due to space limitations, I only show a few columns of information. The first column shows market cap, ranging from $200 million for Akeena Solar (AKNS) to $22 billion for FSLR. The second column shows 2008 estimated sales, while the third column shows 2008 estimated earnings,. The fourth, fifth and sixth columns show closing prices on 1-25-08, 4-18-08, and yesterday, respectively (I wrote this article last week and updated it today, hence two recent-prices columns), followed by a column showing the relative change in price between the two dates. The last two columns calculate forward P/E and forward P/S ratios.
The table shows that four of the solars (LDK, SOLF, JASO and AKNS) are lower now than they were 3 months ago, and four have gone up more than 10% (Yingli Green Energy (YGE) is about even). Two are about even money (STP and YGE). The leader has been FSLR, which has gone up 74% (from $171 to $298). In second place is CSIQ, which increased from $18.56, where I recommended it to $26.14, where it closed yesterday. SPWR went up 23%, and TSL increased 18%.
Because CSIQ has gone up so much, it is no longer as much of a bargain as it was when I recommended it—its 2008 PE has increased from 11 to 15. Because TSL's price hasn't moved as much—despite the fact that earnings estimates for 2008 have increased substantially (from $2.83 to $3.39)—TSL is now the best bargain in this group, sporting a forward (2008) PE of 12. Other metrics on TSL are also quite compelling—TSL is projected to increase revenues from about $300 million in 2007 to $800 million in 2008, and to more-than-double its earnings from $1.54 in 2007 to $3.39 in 2008. One analyst believes that TSL will make $4.19/sh in 2008.
Disclosure: I own a large position in TSL, and a decent-sized position in STP. My CSIQ shares will be called away from me over this weekend since I sold $25 calls against my position about 3 weeks ago, but I may buy more CSIQ on a dip. I am not short or long any other stock.
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This article has 39 comments:
JASO had a 3 for 1 split on 2-7-2008.
You did not take that into account.
The correct "% change" given the split is that JASO has actually gone up 28%, puttting it in third place after FSLR (+74%) and CSIQ (+41%).
The PE and PS for JASO are correct, and I don't see why JASO should merit a PE about 2.5 times greater than TSL. Any thoughts from you folks who follow JASO?
Jack
Jack
Without discussing or debating the prospects of FSLR's revenue/earnings growth rate and whether it merits the current 2008 p/e I would first point out that "analysts" havn't been correct on this company once since the very first qtr as a public company. Considering the percentage amount that the company has managed to beat "analysts" projected earnings every quarter to date I think it is prudent to realize that the current 2008 p/e for FSLR, and some of the other higher priced stocks (on p/e 2008 ratio) are only correct so long as the "analysts" are correct this time. While this doesn't bring the PEG ratio to TSL levels or any of the China based solar plays, it would lower it.
Your calculations and analysis of these two companies may be for naught. How do you feel about the fact that these companies JASO and TSL are China companies. China is a communist country that clearly has no qualms about lying to their people and the world. They also subjugate their own people and will press their agenda, whatever it is, hard handidly. How can you trust the earnings comming out of there, when even in the US with all our checks and balances, have had unscrupulous corporate executives?
China stocks is an oxymoron.
Also, their currency is pegged. How do you account for any change in what they may peg their currency to next? I hear they may peg it to the Barney's purple microdust next......So then how will your chart look like then?
I do however agree with your assessment of FSLR and SPWR. Overvalued.
JASO recently inked a 6GW (6000 MW) supply contract through 2015
I'm enjoying your series of articles. Seems to be generating high quality discussion about solar, which is a compliment to your work.
I'd question your heavy reliance on PEG as the basis for picking a solar company to invest in. Don't qualitative factors such as size, technology, management, and prior execution enter into your analysis? Or, in your mind, do these factors matter only in how much they manifest themselves in the PEG, ie the proof is in the pudding and PEG is the pudding?
I can see PEG as a determinative factor for success if you believed the solar panel/component industry was purely a commodity business. There are arguments that that's exactly what it is, or what it will be in the near future. In that case, the company that can produce the interchangeable product, in this case the solar panel, with the most profit (and in a growth industry the most profit growth) wins flat out. Those arguments may be borne out.
However: Brand? Access to markets? Partnerships? Relationships? Guanxi? Diversity? Products? Record?
Do all these take a backseat to PEG?
You may poo-poo the factors I cite as too soft. I'd agree one has to look at the hard measures, the bottom line, etc. However, I'd be more comfortable hearing something like "this company has this great PEG, and here's why they're a great company that's going to continue to win in the solar industry (especially with trailing data limited)."
My point in slogan form: I'd rather by a great company at a good price than a good company at a great price.
This might depend on horizon - mine might be farther out. What's yours? Is the "value" you see in TSL a question of months? Years? A year? You seem to be limiting yourself to a year tops (2009 eps worthless except as speculation, you say) - right?
Re FSLR--yes, analysts have been wrong, which is why I gave it a 20% upgrade from avg analyst estimates from $2.49 to $3--and it's still at 100 PE. See my article tomorrow for more reasons why I don't like FSLR as an investment, although I think it is a great company that is doing critically important work in terms of grid parity. I just don't think it is going to last.
As to earnings growth rate that is projected for FSLR this year compared to last, it's less than that projected for CSIQ and TSL, even with the 20% upgrade I gave FSLR.
To Supershort:
You raise a valid point that to me presents a risk that exists whenever you invest in companies that either manufacture or sell abroad. The question is, How much is that risk worth? And you and I differ on that valuation. I think the risk, though there, is not enough to dissuade me from investing in these stocks. Do keep in mind that to trade the ADR's on our American exchanges, Chinese companies do have to jump thgrough a fair number of hoops--not that different from domestic companies.
Although that's no guarantee of accuracy, it helps.
To vitamin:
Thanks for kind comments.
I think to some extent, you answered the question yourself. For example, if CSIQ can grow its earnings 6-fold from 2007 to 2008, as the average analyst projects (and as is suggested by ~20% qoq increases in sales in 2007), doesn't that tell us about management, execution, access to markets, relationships, etc?
The other reason I concentrated on PEG is because I wanted to write something objective, and if had used all these other factors, it would not have been so.
I did invite others (in tomorrow's article, which actually was meant to be published today) to tell me why they like certain companies better than others, but to me, PEG is the starting point as well as the ENDING POINT UNLESS SOMEONE CAN SHOW ME A REASON TO PAY MORE FOR A HIGHER PEG COMPANY.
So which of these companies do YOU prefer, and why?
As to you last few comments, see tomorrow's article which was cut off from today's article by error.
Finally, yes, my time horizon is a year--or even less. I always reevaluate and often switch my funds as things change. I switched all of my money from HTE to PWE, and all of my solar money from CSIQ to TSL about a week ago. Both decisions seem to be correct--at least so far-- inasmuch as TSL and PWE have gone up since I switched, and HTE and CSIQ have gone down.
Jack
There are many different segments of the solar industry and many different companies each having completely different risk profiles, financial positions and growth prospects. For example, how is AKNS in any way comparable to CSIQ or SOLF or TSL? Do you even know what AKNS does? It's like comparing DELL to INTC just because they are both in the computer industry.
There are countless other examples on non-comparables in the list above that anyone with a modicum of understanding of the solar industry would be able to point out. I only hope that readers of this blog don't make investment decisions in the solar industry based on this misinformation.
In case you do, just remember that the solar industry has many parts and different companies operate in various segments of the industry. Some make silicon panels, others make wafers, some make thin-film, some only make cells, some companies are fully integrated, and others are not etc. To see if one company or another is undervalued, one needs to compare it to another company that operates in the same segment and with the same business profile.
Please spare us your holier-than-thou attitude. You wrote a long comment and never once added to this discourse. All your comment was a bash without advancing this conversation.
What company do you like, and why? Take a position yourself rather than just bashing others.
As to AKNS, please read my original article where I explained that AKNS was NOT comparable but I included it in the table nevertheless because some commenters had asked me to.
As to the others, I know quite well what they do, but I disagree with you that in 2008, at least, PEG's are not a very reliable of sorting through these companies. In 2009, that may be different, if margins in poly production are pinched but ASP's are not.
Frankly, I think PEG's are a good way of sorting through companies EVEN IF THEY ARE NOT IN THE SAME BUSINESS, with certain caveats. My article was already very long as it was and I decided not to get into it in detail, although as you will see from tomorrow's article, there is much more to be said.
To Mr. Ling:
I will respectfully disagree with you on 2009 earnings as being a MORE reliable measure than 2008. How does YOUR analysis of 2009 earnings change the PEG's in my table? Takes FSLR's forward PE down to ONLY 50--two years down the line?
In my view, that's just as ridiculous as 100 for this year, although I know you see it differently.
Jack Yetiv
The only solar company I do like right now is ATA.TO, the one stock nobody has even heard of. ATA.TO is undergoing a restructuring, and has several divisions, but they own a solar subsidiary called PhotoWatt which could become quite valuable in the year ahead. Photowatt does nearly $200 million in solar PV sales and is years ahead of the competition in actually producing and selling MgSi modules (something that CSIQ is starting to hype).
Since you like CSIQ, you'd be pleased to know that ATA was once the largest shareholder of CSIQ and that the CEO of CSIQ used to work at PhotoWatt, the solar sub. of ATA.
What percent of ATA's revenues and earnings come from making solar cells/selling solar panels?
As a user and buyer of solar componets I have noted a few key points that you might not aware of, yet will significantly affect the prospects of the above mention companies going forward.
1. The purchase of a solar system is a Huge investment on any scale. It is a major capital investment. A home size system of $20,000 would be a modest size system, and not an expense you want want to incure again in 5-10 years. This basic issue is ultimately what drives the decision process for I or a ulilty company investing in solar power.
The primary factors that go into the final decision of what panels I or anyone else will by are...
1. duribility and construction quality.
2.efficiency.
3. amt of watts /per dollar
4. reputation and support of the manufacturer.
5. Installation considerations
In the end, the panels themselves are only about a 1/3 of the cost of the system. so the the importance of a price difference between different panel manufacturers is less important. In fact, when one is expecting at least a 20 year life expectancy out of the panels initial price differences becomes even less significant. I have some panels that are 25yrs old and endure frequent spring wind storms of 50-60mph.
The point of all of this is there are certainly going to be a lot of players jumping into the game but they are selling to tough and knowledgeable costumer, meaning that some of these compaies are going to fail. This is not a semiconductor business where you can crank out a bunch of cheap chips and expect to sell them by the buck full. at least not for home or community size installations which is where the money is.
A point of information; the present major players and the ones with brand recognition in the solar panel buisness are not on your list Regards, John
Thank you for sharing your knowledge of companies in the solar business. I'm new to your blog, but have looked through the articles readily available and don't find much comment regarding ESLR. I have read that they have a unique manufacturing process which may add to price efficiency, that they have good business contacts in Germany and that they are completing a second manufacturing facility with plans for a third. They reported a loss and disclosed the need to raise capital for expansion resulting in a drop in price of the stock. What are your thoughts regarding the future of ESLR's stock price?
Congrats on living off grid, but let me make a quick comment to the investors here that off-grid solar systems do not bear much on our discussion here. They are far more expensive that grid-intertie and are user-intensive (watering batteries, equalizing them, making sure that SOC (state of charge) mdoes not fall below 50% to maximize battery life, etc.
Also, off-grid installation probably account for well under 5% (if not under 1%) of all solar installations in the US in 2007.
Many of the companies you and I read about in HomePower magazine are not on the list either because they are private or do not trade on US exchanges.
To fivedogs:
ESLR's string-ribbon technology is reputed to use less silicon than any other silicon-using panel, and it probably does. However, the company is not yet profitable, probably won't be in 2008, and it is hard for me to determine if it will be in 2009. My analysis was by definition restricted to profitable companies (since non-profitable ones don't have PE's).
For this reason, I did not include EMKR, ESLR or AKNS in my discussion (although the latter was on the table because some readers had asked about it).
Remember also that since silicon will drop a lot by 2009 and especially 2010, ESLR's advantage may not be so great by the time it might become profitable. Also, it's building a fab in Deven, MA, and that manufacturing operation simply won't be able to compete, price-wise, with Chinese fabs.
Jack
Second, not a lot of wind-only stock plays. ZOLT is commonly mentioned, but it makes carbon fiber for more than just turbine blades, and it hasn't executed all that well, either.
Jack
I bought FSLR, CSIQ, and SPWR in February based at least partially on your commentary. So far that has worked out pretty well. I'm leaning towards dumping FSLR after Q1 results come out, as estimates are well below what they did in Q3 and Q4. Maybe I should sell now, but timing is what it is.
Either way FSLR is on the way out of my portfolio. I partially agree with your P/E based analysis, but I also agree with prior posts that P/E alone is not a reason to buy a stock. So other than P/E, what does TSL bring to the table? Also, what would your top three in the sector look like right now?
1) I start by picking a good industry that has good prospects. I explained in my first two articles this week why I think solar has sunny (pun intended) prospects.
2) I look at companies in that space and find the one with the best PEG. Although I don't formally calculate a PEG, I look at PE and then compare with sales and earnings growth based on an average of all analysts that follow that stock.
3) AND THIS IS THE KEY: I start by preferring the best PE versus growth company I can find in that space. THEN, I look at the rest and ask myself--Is there another company in that space that, despite a higher PEG, offers something to me that my favorite does not? And if so, how big of an advantage is that "thing" that the other company has, and how much is it worth?
So, let's apply that approach here. TSL and CSIQ (which has come down to the $24 range I talked about) are trading at forward PE's of about 12-13. TSL is expected to more than double earnings in 2008 (versus 2007) and almost triple revenues. CSIQ--also almost a triple in revenues, and a six-fold increase in earnings.
Both have upside potential. CSIQ surprised last quarter, and if UMG silicon works for them, could generate a BIG (20-30%)upside surprise in 2008. Also, CSIQ has pretty low margins--so has a lot of room to improve. FSLR doesn't.
TSL has upside surprise because (1) sounds like they have done well on buying silicon (out to 2015, from at least two different sources, which I like), (2) I believe cancellation of the poly fab will give TSL upside.
I know others disagree, but IMO, FSLR does NOT have better earnings growth prospects in 2008 than either TSL or CSIQ, and I think FSLR's margins will be PINCHED in 2009 as poly becomes cheaper, and therefore FSLR's pricing advantage will decrease.
Should you sell FSLR before or after earnings? I haven't a clue. FSLR certainly got a nice reaction after last earnings--but it was priced at almost $300 before earnings announcement. But to me, owning a 100 forward PE stock is more about religion and hope than investing.
Jack
For the sake of the other solars I hold, I hope FSLR announces well this Wed and blasts again through $300. But I have absolutely no way of telling whether it will. I don't know whether FSLR will disappoint this time, or next time, or the time after that. But I know it will disappoint given the unrealistic expectations it has engendered.
Look what happened with STP's and SPWR's stock prices after their last quarterly announcements.
Jack
I believe E Trade was reporting earnings in Renmibi currency, not dollars. With a conversion factor of about 7:1, 6.53 Renmibi translates to a bit under $1.
I have seen this error with several Chinese companies I have looked at over the years. As we start to do more global investing, we have to be very careful that the currency we look at is the US dollar.
Jack
Could you tell me the source of 0,71$-2008 EPS in case of SOLF ?
Rgds, BZ
If you think the earnings are about 7X higher than what is on my table, you maybe be looking at earnings in Renmibi. See note above.
Jack
I posted a response a month or so ago when you stated that there were no pure U.S. wind plays. The closest is CPTC, which had as its primary business carbon-fiber-based high-performance power transmission cables. They purchased DeWind (a wind-turbine manufacturer) some time ago at a fire-sale price.
No, they're not currently profitable... but neither was FSLR when I bought it in November 06. In my opinion your insistence on use of P-E based criteria, which forces you to exclude not-yet-profitable companies, will prevent you from tapping into the best parts of the growth curves in the alternative energy sector.
In other words: right sector, but inappropriate trading criteria.
I would love to see data that support your thesis, namely, that investing in pre-profitable companies as a general rule will yield better returns than investing in profitable, fast-growing companies that are being woefully mis-priced by the market.
I have two data points to argue against your thesis:
(1) The acknowledged most successful investor of our times--Warren Buffett--is a value investor, buying good companies in good businesses, that are trading below fair value.
I believe my approach is similar to his, as are my investing returns.
(2) Studies have shown again and again that dividend-paying companies provide a better return than non-dividend-payers. Of course, only profitable comapnies that trade at relatively low PE's can pay any meaningful dividends.
Having said the above, I do occasionally invest money in companies that I believe might be the next Walmart or Bestbuy or Starbucks, even before they are profitable. But I consider those high-risk plays and I don't usually write articles about them.
I also plan to get into venture-capital investing, but I won't be writing articles about that either.
Finally, my investments are usually in large amounts of money, so I cannot reasonably invest in companies that trade less than a few million dollars worth of stock per day because my trades can move the market. In addition, I like to play options on companies that I own, and small cap stocks (under $200-300 million) usually don't have a very liquid options market.
I would say that selectively selling covered calls enhances my annual returns by at least 10-15%.
What company(ies) do you like, and specifically why? Tell me more about CPTC.
Jack
I think your reference to Venture Capital investing shows we're actually in complete agreement about the potential for pre-profit companies. The idea of VC, of course, is to take manageable losses on most investments but be more than compensated by the huge gains on the winners.
Besides CPTC, I like a long list but to pick one from each energy-related sub-category that I follow, I like ORA, OPTT, ENON, and CREE.
CPTC is a somewhat odd story, in that they had a solid but temporarily struggling business selling next-generation power transmission lines - which are selling like hotcakes in China and should do fantastically well in the U.S. if we ever figure out how to finance upgrading our power grid. Basically you replace old high-tension lines with these new carbon-fiber-core ones, and you get much improved current-carrying capacity as well as lower losses... on the existing towers and rights-of-way. The lower losses are like increasing generating capacity without burning any more fuel.
The cables have been established as meeting U.S. industrial specs, etc., so, that should be a great business if they're just patient and keep finding places where their cable can prove itself... but then, as that process was proceeding, CPTC's management discovered DeWind at a fire-sale price... and bought it. Various merriment, including a brush with Chapter 11, ensued... but DeWind is a compelling story. Their turbine applies torque-converter technology to eliminate the most frequent cause of wind turbine failure (gearbox problems) - as well as a significant initial and ongoing maintenance cost (inverters). They've recently passed various third-party tests, and set up an insurance deal to calm the concerns of wind farm builders who would like to see a longer track record. As a student of engineering the advantages of their turbines are obvious to me, but of course those subtleties don't make much of an impression on people who finance wind farms.
Pure plays in transmission-line infrastructure improvement and wind-turbine production are extremely hard to find in the U.S. - and CPTC is both. I can't figure out whether CPTC's management are whackos or geniuses... but they're certainly interesting!
ORA - solidly established interational leader in electricity generation from geothermal and recovered-heat sources. Dividend-paying. This is not a pre-profit company; it's much closer to what you write these articles about. Geothermal per-kw costs passed grid parity several years ago, IMO.
OPTT - best investment (IMHO) in the area of ocean-wave power generation. Well beyond the proof-of-concept stage; the technology is proven and they are deploying significant first-tier projects at this point, as well as continuing R&D to scale up to very large projects. These devices effectively tap into a similar energy stream as off-shore wind turbines but IMO this is ultimately a much lower-cost approach, since off-shore wind turbines are incredibly expensive and difficult to maintain. Also definitely better from environmental and NIMBY perspectives.
ENON - one of several I like in the area of lithium-ion batteries. The current state of the battery art is that lithium-ion are going to replace the nickel-metal-hydride batteries currently used by hybrid-electric cars, enabling plug-in hybrids and pure-electric cars. Moreover, the next step after that is these batteries may well become cost-efficient enough to provide the load-filling required by the addition to the grid of large-scale solar and wind generation. Another to watch for in this area would be an IPO by A123 Systems.
CREE - positioned to lead the inevitable transition to LED-based lighting, which with economies of scale I believe will have even cheaper lifetime costs than compact flourescent.
- GH
Check out
nickgogerty.typepad.co...
I believe his work supports your thesis that solar is already at grid parity.
- GH
I have been looking for a good battery play and did not know about ENON-will look into it. I know A123, but sometimes IPO prices in hot areas are unrealistic.
Thanks again, Jack
I don't know ACCY. What can you tell me about it?
Jack