Trina Solar: Best Value in the Solar Space

by: Jack Yetiv

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 (NASDAQ: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 (NYSE:STP), Sunpower (NASDAQ:SPWR) and First Solar (NASDAQ: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 (NYSE: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 (NYSE: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.