There's a Solar Shakeout Coming - Citigroup

Citigroup’s Timothy Arcuri this morning launched coverage of the solar sector, starting First Solar (FSLR) with a Buy rating, SunPower (SPWR) with a Hold and Evergreen Solar (ESLR) with a Sell.

His broader position is that there’s a shakeout coming in the industry. He sees another few quarters of “benign pricing,” and then a decline of 20% in 2009 and even more in 2010. He sees risks to subsidy programs in Germany and Spain, and cautions that there will be a big ramp in solar supply starting in 2009, and worsening in 2010.

In fact, Arcuri thinks we are headed for more than 60% over-supply of solar cells in 2009, with as much as 100% excess in 2010. In the shakeout he expects will follow, manufacturers with sustainable manufacturing cost advantages will stand out, “driving big divergence in fundamentals,” he says.

First Solar, he says, should reach cost parity with the power grid in 2012, two years before its peers, while maintaining gross margins above 50% through 2010. He thinks the stock’s earnings power is still under appreciated. He set a $450 target on the stock.

SunPower, Arcuri says, will be a survivor. He thinks the company will benefit from lower silicon costs, vertical integration and a model that “appears conservative.” But he also says the company will be challenged offering “premium product in a commodity market.” He set a $105 target ont he stock.

Evergreen, he says, is short on both time and money. Arcuri says the company has “heavy capital needs,” estimating it will require $2.2 billion from 2008-2012 to drive its String Ribbon approach into wide scale manufacturing. Peak earnings of $1 a share suggests downside to $5, he writes. “The Street is negative, and sometimes the crowd is right,” he says.

• First Solar today is up $6.30, or 2.3%, to $282.10.
• SunPower is down 68 cents, or 0.8%, to $83.
• Evergreen Solar is down 56 cents, or 6.3%, to $8.34.

Comments

[tessant:]

so buy the big boys on big moves down. thats how i am going to play it.

-scott
solarfeeds

2008 May 09 01:37 PM

[tessant:]

one thing i forgot - if they have a run up, buy some puts against your long position.

2008 May 09 01:40 PM

[EnergyFinan...:]

If you'd like to learn more about prospects for First Solar and SunPower, you should attend the Renewable Energy Finance Forum-Wall Street (REFFWallStreet.com), held June 18-19 in New York City. First Solar's CEO, Mike Ahearn, and SunPower's CEO, Thomas Werner, will be featured speakers at the event, sharing their thoughts on the future of the solar photovoltaics industry. Other event sessions include discussions of wind power, advanced biofuels, and the economic and policy factors fueling renewable energy development.

2008 May 09 01:47 PM

[Celestialna...:]

... Or sell high and buy it back on the dips? They have been volatile.

2008 May 09 01:48 PM

[Piggybank:]

What a load of nonsense. I bet they the analysts at citigroup make their predictions on whether they throw well or not on a dartboard. Advice brought to you buy people who messed up big time in the credit market, at this point i would just do the reserve of what they are saying, look at their own stock, who still has confidence in this establishment?

Spain and Germany's subsidies program at risk? Like they know anything about it. What they came over here and asked Merkel and Zapatero themselfs? I bet they can't even point Frankfurt on the map.

Solars keep ramping up production due to high demand. Saying this demand won't rise in the future is more speculative giving the trend than saying demand will keep going up. Like Citigroup has a magic orb that can predict the future in this regard.

And then there is the matter of P/E's. FSLR and SPWR are valuated taking into account large growth in a large growth market. If this market won't grow like this Citigroup man predicts, then these stocks are overvalued. Putting a buy with target 450$ on FSLR in this regard is just rediculous, not to speak about SPWR.

Lets face it, Citigroup doesn't know much more about this market than we do, why would we listen to them?

2008 May 09 06:25 PM

[User 120461:]

Just because some geeky analyst stands behind the name Citigroup it does mean jack. Most of the time, these guys are so full on themselves, and so confident in the financial statements that they lack basic understanding on what makes a great company. If they knew better they'd be working for themselves or hedge company.

2008 May 10 01:29 AM

[Trader T:]

FSLR and SPWR are similar to 'pets.com' etc during the tech boom. In ten years they will be faded memories of investors guilty of wishing innovation at pace not supported by science. These companies are good for short term rides, both up and down - but don't invest any of your own long-term money in them.

2008 May 10 07:51 AM

[sgleichman:]

There are some Chinese plays that never get a mention that have PEGs well below 1 and forward PE's in the low teens. For the next two years a few of these companies will provide investors huge returns. Do your DD. I own TSL, CSIQ, YGE and LDK in that order.

As far as the US, this election might prove huge in the attempt to make us a contry that actually produces and manufactures items again. There are states that are ahead of the game and who are "subsidizing" alternative energy manufacturing and attracting AE manufacturing. The US is behind the curve as yet but we may see a solar (and wind) boom here in the next few years.

There are also laws on the book right now in 20+ states that mandate a percentage of electrical power to come from AE sources and the power companies have to invest in solar to comply and meet timelines. This is in it's infancy and bet that Evergreen will also flourish in time.

2008 May 10 08:17 AM

[gebby:]

the analysis is based on static conditions. how about the notion that the us will provide incentives in 2009 and 2010. the analyst can forecast incentives will disappear in germany and spain but he cannot forecast they will appear in the us? i sat in on the citibank presentation. they were lobbying for oil and gas and coal . they are not interested in solar. so dont take citibank's comments seriously. and eric. why do you always write negative articles for the big boys. this article is propaganda. italy and spain are just comming on and spain already indicated they will broaden the incentives already in place. not cut them back. a democratic president oer mccain will address global warming with solar as a large part of the solution. there is no shakeout in the 2009--2010 time frame.

i own, asti stp sol csiq solf tsl eslr enlu thpw

2008 May 10 10:43 AM

[oilsands:]

One of the stupidest articles I have seen in SA. What a joke. No wonder Citigroup is failing.

2008 May 10 11:04 AM

[Walter Morton:]

One random analyst standing behind Citigroup making stupid claims.
Any solar analyst needs to take into account the practical physics that are being exploited by various approaches to solar "tech." ESLR may not have gotten the Jim Cramers of the world raving about them, but their "String Ribbon" technology absolutely works, and is a dependable way to fabricate solar cells. While it is generally agreed that "thin film" solar cells are the most promising way to build cells and it is on this technology that FSLR has become an early leader (watch out if Nanosolar can deliver) their is no long-term deployment of the FSLR type thin film solar cells in use. What happens to thin film cells after they've been on your roof for 10 years? Do they degrade? Nobody knows. Conventional cells of the kind ESLR makes are reliable over 30+ year periods. With oil prices going up, solar in ALL forms will continue to be attractive.

2008 May 10 12:05 PM

[keanemd:]

Hey

This is not the industry to be stock picking. Purchase an ETF like PBW or TAN and you will see the gains.

2008 May 10 03:06 PM

[richjoy:]

I also like the ETFs, they make especially good sense for investing in infant industries (which solar still is).

With respect to Citigroup’s Timothy Arcuri, I suspect not one of you who flame him has ever worked in a corporate invironment...if you had, you would know that some very bright folks work in poor companies, and visa versa. Simply put: your attacks lack credibility.

2008 May 10 04:11 PM

[gebby:]

richjoy, analysts in large firms like citigroup are conflicted. they only write what the director of research tells them to write. they are not independent. this is where the propaganda begins. citigroup has a large stake in the bonds of utitlities. what happens to these investments when they are threatened as consumers start to get their electricity off the grid with solar? i did listen to citibank praise coal nat gas and oil as alternative energies at the green expo in nyc a couple of weeks ago. it was a joke. they were not advocating solar. eric savitz is the end of the propaganda chain. he is a tool. they dont tell you anything they dont want you to know. in this case solar may be oversupplied in a year? it is frustrating to receive such financial porn.

2008 May 10 10:59 PM

[maxbid:]

Interesting that this article, like the talking heads on Fast Money, only focus on the USA solar manufacturers.

For a better comparison, and a look at the P/E's of a broader range of Solar Stocks, the reader might want to check out this site: www.cnanalyst.com/sola... with the latest comparison table dated May 7, 2008.

Here are the 2008 P/E's (from Low to High) of a few solar stocks listed there, but only those with Net Margins in the Positive: TSL@13, WFR@15, SOLF@20, LDK@21, YGE@24, JASO@26, STP@28, SPWR@39, and FSLR@97.

Solar stocks with Negative net margins are ESLR, CSIQ, and others.

As the gentleman above said, do your own DD.

2008 May 11 02:45 PM

[StateofConf...:]

I staying with XSNX who is building a plant in Oregon. Upside for them is greater than most other solar stocks and its a US company.

2008 May 11 04:54 PM

[ArcticFox:]

The worst scenario for fslr would be oversupply as they have one of the least efficient solar cells on the market. Another very interesting company is Coolearth, also competing in the utilities market, but like Nanosolar not publicly traded. Should any of these "superior" technologies go public or announce a ramping up of production, than fslr is headed for a big fall. I see fslr's margins peaking year end 2008 after they finish streamlining their factory output, and profits peaking after they reach full production in 2009. If attempts to increase the value of the USD relative to the euro, another big loss for fslr. If there is an oversupply in 2009, who would want there product with better technologies available. And their current contracts call for a yearly reduction in price.

2008 May 12 03:20 PM