The 'Problem' With Solar Companies is Not Really a Problem

The news Tuesday that a Goldman Sachs analyst had downgraded Trina Solar (TSL) sent Trina and several of its competitors on a downswing. The analyst cited “cash flow concerns” that applied not only to Trina, but to “many” other solar companies as well. In the afternoon, the Motley Fool chimed in with the insight that companies like Solarfun (SOLF) and ReneSola (SOL) aren't doing nearly as well as their accounting numbers might let on.

That's right, folks. Forget all those pesky little digits. Nobody likes math anyway. It's better to base your financial decisions on vague, unsupported opinions from people who, for all you know, have a vested interest in your agreement.

As long as you're on the vague-opinions-from-shady-sources kick- here's one! Buy solar. I say that as someone with a few short puts. So you know you can trust me.

No? You're not convinced? Well, my friend, it's my word against their's, so lets bring in a tie breaker- the numbers.

Between 2005 and 2006, Solarfun's cost of revenue tripled. However, its net profits increased by a factor of seven. Why? Because part of their growth strategy is cost cutting. In 2007, the growth continued, albeit at a slower pace. In the first quarter of 2008, Solarfun earned $0.32/ADS.

The return on equity for Solarfun was 22.31% in first quareter 2008, compared to 8.36% in 2007. That's almost a threefold increase in ROE! Moreover, Solarfun just entered a business agreement that will decrease raw materials costs.

So what's the problem? The Goldman Sachs analyst and those who parrot his analysis cite concerns about the level of debt on Solarfun's balance sheet. The company is making money. That's a fact that no one can dispute. However, they might possibly have problems being able to pay that debt if their income suddenly and substantially decreased.

Yes, you read that right. Really.

The “problem” with Solarfun, Trina, ReneSola, and the other solar companies is the same “problem” that every corporation in the world has. They need to continue to make money in order to repay their debts. It's that simple.

Check out the numbers on Trina, ReneSola, and the other supposedly shaky solar companies. Make a decision for yourself once you have the data in front of you and have assessed the situation. Don't take my word for it. Don't take anyone's word for it. The numbers are right there, telling us all we can ever really know about a company-- its past. As far as what might happen if they were to lose their income, that's pure speculation.

The analyst says, “If they don't keep earning, they won't be able to pay off their debt!” Well, guess what? If they quadruple their earnings and halve their costs next year, they'll have a profit that is more than three times the sum of their profit and their cost from this year! It's true!

And nobody cares. Why? Because we don't know if they can quadruple their revenue and halve their cost. And we don't know if they'll have a sudden drastic drop in income that will make them unable to pay their debt.

All we do know, the only information we have, is what has happened. And what has happened is some very impressive growth.

Disclosure: Author has short strangles on SOL, SOLF, YGE, AKNS, and ESLR.

Comments

[tginomorebush:]

Goldman etal (those in the know) have been killing every company with their comments. What will happen when the shoe drops at Goldman? ....... Will Goldman continue to downgrade or be downgraded?

2008 Jul 03 08:13 AM

[Piggybank:]

Well said. The analysts made me laugh to. Way to state the obvious.

I don't give a shit about what they say neither.

2008 Jul 03 08:20 AM

[Stockguy456:]

I really like that they have to disclose their interest in the stock.

2008 Jul 03 08:33 AM

[mariposa:]

I thought we learned back in the last "crash" not to pay so much attention to analysts. They are creeping back. Now with more emphasis on the firm and less on the individual barker.
And they still do investment banking with many the rate.
Unfortunately they affect short term prices quite a bit, sometimes.

2008 Jul 03 08:33 AM

[tech man:]

I AM HEAVILY INVESTED IN SOL, RESEARCHED IT WELL, PRICE IS DROPING LIKE A LEAD BALOON. IF ANYONE KNOWS WHY, BESIDES THE OBVIOUS, PLEASE LET ME KNOW. THANKS

2008 Jul 03 09:03 AM

[gebby:]

these companies are better than ge or gs for the foreseeable future

2008 Jul 03 09:17 AM

[fxtrader07:]

good take on the strange downgrades which raise yet another red flag whether they aren't directly flowing from the proprietary trading desks' needs. They are so absurd and silly - and notably, never involve the american overhyped solar fslr that there is only one explanation that makes sense: they directly serve a purpose and that is to lower the concerned stocks' prices.

2008 Jul 03 09:20 AM

[dicki31785:]

Who cares about the analysts I live in Europe and I know what is going to happen next probably a cap of 1GW people throwing around numbers such as 300 MW for Spain it is utterly crazy why would spain do that?Their place on the solar map is excellent in actuality in Spain we will reach Grip parity next year...yes next year if we haven't already reached it....so incentives will come down surely but the demand for a cost cutting technology will not drop as much as the analysts say.....even if incentives are dropped 35%...the effects are much smaller especially for American solar makers or Chinese...due to a favorable exchange rate which will only get better due to FED policy....

Concerning cash flow...can't wait until the first solar companies present in that case SPWR..which has an a huge exchange rate advantage they will blow numbers away and raise guidance...again...To GS these people are criminals but banks need money too...I think in their case they should worry about themselves not being able to pay their debt(maybe not in GS's case)....In any case I am so long TSL look for 75 cents next Q....and an expanding margin in the second half of 2008 and they have 60% of their production pre-sold for 2009...(excluding the new contract with the Italian firm)...So that is a pretty stable outlook with a constant flow of cash income either GS didn't research well or want to kill the stock, my guess tends towards the latter...and by 2010 Grid parity will be reached by Trina...(obviously not in all geographic locations but in most)....and at that PE it is just sooooo cheap...well make a picture for yourself...in any case solar is the answer to a lot of problems now the US has to support it to increase the market(demand) for the solar makers...this is the greatest and cheapest opportunity to get into solar you will see for quiet a while...kind regards from Germany CW

2008 Jul 03 09:25 AM

[canb888:]

The problem with GS is the same as the problem they claim of the solar companies, i.e., "They need to continue to make money in order to repay their debts. It's that simple."

Who can say that is not also true for GS. If GS stop making money, how can they repay their debt? Based on that, should we all start to short GS? It's becoming ridiculous.

2008 Jul 03 10:05 AM

[allisonsrac...:]

Could it possibly be the GS and others are in cohoots with big oil and this corrupt administration that has continued to keep our country dependent on big oil (no coincidence that this administration has HUGE big oil ties) while a third world country like Brazil has become independent of oil???? I don't have an MBA but am I wrong? And didn't this administration just stop any subsidies for solar (clean energy)...despite oil climbing to an all time high today. Happy 4th of July from the Bush administration! Disgusting!!!!

2008 Jul 03 10:26 AM

[Piggybank:]

I gues they just had to find a reason for their downgrade. It would actually be quite funny if the market wasn't dropping like a stone right now.

But i think we already established the fact as investors that much of the oppinions we get from these banks are very superficial and usually just crap.

Their motivations arn't hard to read neither. If all thing's move so fast on upgrades or downgrades, then afcourse it's an easy for these banks to manipulate their positions in their advantage, be it holding or shorting. And we all know they need money very very badly. Manipulating a market then that is very volatile can afcourse provide a lot of potential for money maing then, plenty of possible down- and upside potential.

I live in Europe to, and i have my skepticism to when they tend to touch European subsidies. I am however glad that Europe is years ahead in the market and that our policy makers have shown some vision about alt energy that they arn't likely to drop that fast. Alt energy is a growing sector in Europe, one that provides a lot of income and employment, it's enough incentive IMo for our politicians to continue their support.

And it doesn't always have to be subsidies neither. One particular German city for ex. is now forcing people by law to install solar panels on every new build house from now on. It is expected that by 2010 this will be coman law all over germany, if not also in many other EU country's.

2008 Jul 03 10:54 AM

[ThorsHammer:]

Let me translate this analysis for you...they missed the early run for their clients and are now trying to lower the price to an effective "buy in" point...

2008 Jul 03 11:02 AM

[Wayfarer:]

GS last November called an average price of gold for 2008 of below $700. It drove the price down for a week or two. Many think they were talking their book. I would not at all be surprised if GS was going long solar at this very moment. The fundamentals are excellent.

2008 Jul 03 11:04 AM

[Atticvs Res...:]

Dicki, you say TSL should reach grid parity in 2010. Currently their production cost per watt is about $2.60 all inclusive and are forecast to be about $2.50 by end 2008 or early 2009. What do you forecast their total cost per watt will be in 2010? Do you have any TSL road-map reference you can post here. I understand the thin-film companies may have total costs per watt of about 80 cents by 2010 with ASP's of about $1.20 per watt. I know they are not oranges to oranges but for large installations where labor & installation costs can be spread pretty thinly costs per watt & ASP per watt do matter. I'm leaning toward the belief that if solar companies cannot get ASPs towards grid-parity - i.e. in region of say $1.50/$2.50 per watt (depending on output per panel etc) in the next few years - then they may find the going tough against more competitive offerings.

2008 Jul 03 11:23 AM

[mistermaumau:]

GS had a long position in SOLF and added more 6 weeks ago. Figure it out.

www.mffais.com/solf.ht...

2008 Jul 03 11:24 AM

[chinooking:]

wall street is all about manipulating the stock price to make a profit,with unlimited margin a large or a group of hedge funds can short sell the entire solar industry into the ground,with naked shares they never take possession of,that and manipulation of the news (which they also own,,ie.cnbc).when the squeeze comes they will be on the bottom of it then you can only buy real shares (not naked),,it's a tuff game boy's

2008 Jul 03 11:33 AM

[Road Runner:]

I think you should have spent more effort putting more numbers in your report to show how there is not a cash flow problem at these companies, than lecturing everyone on not putting enough numbers in reports. You need to practice what you preach. You are just perpetuating the perception that blobs are more babble than good information. After reading your report I nothing more than what I knew before reading your report.

2008 Jul 03 11:58 AM

[ysong:]

Merrill Lynch had a research report on TSL titled "Improving working capital management is key" on June 9th. It addressed the same cash flow problem but the tone was much less harsh than GS. I think their view is more balanced.

QUOTE:
"Solid 1Q results
Trina (TSL) once again impressed the Street with solid earnings. 1Q EPS of $0.51 was better than our forecast of $0.48 on higher revenue of $116mn and margin of 25.8% vs. guidance of 23-25%. Recall on Jan 13 we were first to downgrade TSL to Sell based on its expensive polysilicon project on a stretched balance sheet.
We then upgraded the stock back to Neutral once Trina scraped the poly project but we did not upgrade to Buy as due to its looming balance sheet risks. We raise ’08E sales and EPS by 13% and 25% on improved operational results but our new numbers are still 5% below the consensus to reflect our neutral stance.

Needs better working capital management
TSL needs a better working capital strategy to minimize the ST debt level. Trina actually has petty low LT debt of $14mn but ST debt is over $245mn due to its high working capital requirement. As a result, over $120mn of cash is restricted for securing ST debt and it limits TSL’s access to more capital. TSL may still need
$200mn in the next 3Qs with current cash of $38mn.

Cost leverage should continue on a 2H loaded story
As full vertical integration is now in place, we see cost structure to improve over time as capacity ramps. Trina should narrow its current processing cost of $1.17/W to below $1/W vs. peers at $0.80/W. In addition, silicon cost should ease in late 2H08 and operating expense as a % of sales should decrease as well.

Undemanding valuation despite fundraising pressure
Trina trades at 15x of our upgraded ’08 EPS and priced at the lower end of peer range of 15-30x. We believe the poor working capital/cash management continues to be an overhang for the valuation but we believe even with a 10-15% equity dilution from new issues the valuation is still undemanding below 20x."
UNQUOTE

2008 Jul 03 02:46 PM

[Boruma:]

GS's remarks on cashflow were linked to concerns over the continuing availability of credit to fund growth and also ability to refinance debt which in some companies will be terming out over the next 12 months. The GS analysis was based on their knowledge of the bond market and capital market funding sources which have deteriorated since the start of the credit crunch. BUT it is an oversimplification and fundamentally ignores the fact that the bank debt markets (where the brokerages are less experienced in my opinion) are eagerly stepping in to fill the void (particularly in Asia) i.e. renewable energy companies with good fundamentals are not having any difficulty accessing short term bank credit - in the current environment it is impossible to foresee a cash flow crisis in the sector!

2008 Jul 03 02:46 PM

[Global Warm...:]

Solar still requires subsidies as the cost is higher than comparable fossil fuel power. The cost of fossil fuel is going up and the cost of solar is going down. Some solar uses are cost effective now. I would expect that solar subsidies will drop per unit, but not be eliminated. Even will Spain cutting back subsidies, they are not the only country. There should still be enough demand for the industry to grow rapidly for the next several years.

2008 Jul 03 02:52 PM

[adan:]

re: "...So what's the problem?"

it's not oil :-)

2008 Jul 03 02:56 PM

[buysolar:]

Analyst are manipulators of the fearful and greedy herd. What's your angle.

If you think grid parity is special because it is already happened in many places, watch in 5 years.

Solar will blow gas and coal to the side with the new technologies.

We need to embrace All alternatives to Crude, Gas, Coal and Nuclear ASAP. This will drive the cost of them all down and the consumer will reap the benefits of low cost electricity, to charge their cars.

In 10 years we could have a society not worrying about power, when we all pitch in 2 to 3 years, with the lower cost Solar and wind systems. The prices will go down for the end consumer, they always do with emerging technologies.

The price of a computer has dropped substantially over the years, but there are more and more people buying them.

2009 -11 will be Solar boom years if you like PPS.

Who knows where the bottom is?

It could be the end of July.

Since oil is a major contributor to a falling world economy shouldn't the mix with Alternatives be ramped up now.

Sucking up to oil is like giving these major money holding Analysts card Blanche.

Just load up close to the bottom and on the dips and I think you'll be able to start your own solar and wind farm.

That's what I'm going to do.

LDK is a good buy right now no matter what anybody says.

And at the end of July bottom basement sale will you be there, I will.

2008 Jul 03 03:05 PM

[buysolar:]

The end of July bottom basement sale for most stuff: will you be there? I will.

But then again we are just a herd and there is a thing call support and resistance.

There's water there and fire there.

Are you a Bull, Bear, Bat, snake or maybe Red tailed Hawk. You get my drift or will the river take you down to the wave.

Probably best you get a real job and really make something, like a Solar panel or a wind turbine or food.

Economies don't work on just virtualizing and information, I think that's watt brought the Romans down.

2008 Jul 03 03:15 PM

[Stockaccumu...:]

We at Stockaccumulator researched today's negative Motley Solar articles carefully all day. (Strange: all three came out at the same time)... I am sure you all saw them.

The only thing we agree with: the other solars mentioned have a high PE. But SOL (Renesola) now has a foward PE of approx. 4 to 8 into 2009, and 9 to 14 current. Very low, compared to the others.

To include SOL (Renesola), with proven profit shown, exponential, every quarter, is strange... SOL is an excellent buy today, not a sell...

The articles cite nothing for evidence.

We here (and asians and europeans, who do not read Motley Fool, and could care less about Motley) will be buying SOL today. Hence it was up in London.

SOL was rated last month as the 4th best company in the world to invest in, and Zacks still has its highest rating on SOL, as do all analysts. Analysts would not put their good name on SOL as a strong buy, lightly.

SOL is a buyout candidate. SOL supplies to companies mentioned in the article as "potential competitors". The companies suggested as savy competitors, are potential customers of SOL, not competitors. I don't think the writers know what SOL does.

Or in the one article that cited SOL, the author did not mean to include SOL in all allegations, other than his strange one on "cash flow". These are short brief, murky articles that say little and prove and explain nothing.

Soon you will see articles touting SOL and solar again, and then you will see SOL go through the roof again. Nothing has changed at SOL, other than good change: the unbelievable higher price of oil/gas every day, and national and local governments worldwide jumping aboard the solar bandwagon.

All three articles are unclear, come out at the same time, and do make much sense. Investment houses that we are researching, say the articles are silly, especially with inclusion of SOL (a forward PE at as low as 6 currently) as an "expensive stock", when Solar growth is expected to be explosive in 09' (especially for SOL and its products).

There is no evidence of a money shortage at SOL whatsoever, per analysts who practically audited SOL, but rather there is a money abundance at SOL, and each quarter proves it more to be true.

Are they alleging that the accountants doing the various solar's books are lying to the government and securities authorities in China (and all international securities authorities)? I don't think so. In China, there is serious jail time for such. It is unclear what the articles are trying to do other than spook the shares lower in the US... perhaps to buy solar shares for less, or for their short positions.

Many of the other companies cited do have minimal profit and high PE's... but not SOL (Renesola) hence why all analysts that looked at SOL carefully, including those who went to China visited the company, love SOL. SOL's product is very low cost, cheap to produce. Method of production is inexpensive, unique, SOL's products are strongly in demand. All the things you look for in a company to invest in.

As for solar as an investment in asia, investors located in asia are used to seeing solar panels on street lights everywhere.

And shorting at $13 is unbelievably risky, and a sure way to lose money.

We are buying at this opportunity, not selling today, probably a lot of shares to leverage our average position downward... not out or fear, but to make a great deal of money on SOL by next year this time... We are certain that by summer 09' SOL share price will be well over $58 US.

Strangest of all, a month ago, Motley writers were touting SOL as a fantastic mid and long play, citing endless reasons SOL was a must own. Take a look at the old Motley articles...

SOL currently is not a high flyer at $13 with a forward PE near 6. Not a good idea to sell SOL at a loss today, or ever, no reason to.

Best to all, THE STOCKACCUMULATOR...

2008 Jul 03 03:22 PM

[dicki31785:]

Atticvs research - We have the $1.05 Non Silicon costs + 1.40 silicon costs (2.45) at the end of 2008...I expect that to drop to .85 N.S.C(You can actually move this number down quiet a lot depending on the learning curve)+ .70 silicon costs in 2010...That would put us at 1.55 production costs...The silicon costs are due to come down very sharply for two main reasons,1. The market will be swamped by silicon...I know a guy from Wacker Chemie...(German poly producer) and they expect the market to be swamped and thus opted for a big junk of forward contracts in the future...Also I expect the Grams/Watt used in Wafers to come down to about 4-5 g at least....Then you also have to model what energy prices will be like...That depends on what you believe...In any case this is an aggressive model and picture that I am painting...obviously you can tweak the numbers any way you want to...But I Believe ASP costs will be around 1.50 around that time...Which will put it an Grid Parity in all sunny regions at the very least....

And do not get me started on thin film....their are costs involved their that one does not realize I think the efficiency of the cells is much more important than the cost actually...Obviously not in the long term but the thin film advantage that FSLR has for example will be eaten up real quick because the biggest solar opportunity is on factories...or office buildings....for now....and their efficiency counts and not the cost I mean it is great that FSLR panels are so cheap but you need an abundance of land....then you need to get hooked up to network etc.,etc. So in the places space is a concern and that is just about everywhere especially in Europe it is important to go for efficiency...Where the density is unbelievably high...Otherwise you can use cheaper models....But FSLR is doomed anyhow...but that is for another day....I keep on hearing thus numbers thrown around that you mentioned how is supposed to reach them?Nanosolar...?!?Th... Chinese players are set up well for the future....At least when considering CSIQ,LDK,SOL,STP,TSL..... the only question is how will demand look like in 2009...That is the only year these stocks could get hurt bad....But IMO Spain will not introduce a cap at all...Why would they...They are reaching grid parity next year....They will reduce feed in tariffs about 20 percent and why shouldn't they....the demand will still be their...even with less subsidies...and don't forget that many American/Chinese players will have a huge exchange rate advantage...(With the American adv. bound to stay for awhile with that interest policy and Chinas exchange rate policy is well known...but I guess they will edge up on the Euro in medium to long-term)This will make it easier for these companies to compete...But basically what we need is an incentive package for the US and Spain will work out by itself people(banks) just want solars at cheaper prices....With kind regards from Germany and happy 4th of July...CW

2008 Jul 04 06:34 AM

[alpha24seven:]

Well you presented the "problem" without even knowing it. The entire solar industry is predicated with success using subsidies. When these companies start flashing big numbers in their 10k/q then the subsidies will end -- hard.

Ever see a heroin junky go clean? Not pretty...

2008 Jul 04 11:55 AM

[svosavvy:]

the oil industry is also highly subsidized, this is why gas is not higher than it is in this country. Thats why oil and gas subsidies are more important to our elected officials. They take the short term at the expense of the long term, kind of like the final days of the Byzantine empire. Paying off the barbarians not to invade works fine until you run out of money.

2008 Jul 05 12:21 AM

[kotika98:]

like the optic fiber telecom companies in 1999, when the dust settles, you will find that ALL of the concerns were true. The accounting is bogus, the revenue increases are dependent on subsidies, the chinese yuan is rising, the global warming suddenly not such a priority anymore, wind power is cheaper (and cleaner), the stock market is in the middle of a bear market, etc...

2008 Jul 07 01:57 PM

[Jake Blues:]

Stockaccumulator said:

>>>>SOL was rated last month as the 4th best company in the world to invest in, and Zacks still has its highest rating on SOL

SOL is a #3 rated stock by Zacks.

2008 Jul 09 02:26 PM

[Jake Blues:]

Stockaccumulator said:

>>>>SOL was rated last month as the 4th best company in the world to invest in, and Zacks still has its highest rating on SOL

Also, please provide a link to the source that named them 4th best company in the world.

2008 Jul 09 02:27 PM

[joea637:]

Back in October of 2007, JA solar had 150 Mil. shares outstanding. Since then, they have split 3 - 1, borrowed 300 and some million and took another 13 million shares out to lend to a certain company to short, but are not considering it in the amount of shares out. When will they start showing and calculating their earnings per share on the correct amount of shares?

2008 Jul 11 12:17 AM

[joea637:]

I feel that solar may be a way to go in the future as far as energy is concerned, but these companies are just like the dot coms of the 90's. Every where that you look, you see that the amount of shares out for JA solar is 150 mil. But they had that amount out since last October. In January they split 3 - 1 so they now have over 450 Mil. shares outstanding, not to mention the 300 and some Mil. they just took out in notes which would be the same as 3 Mil. shares, but they pay interest at least. The COO just resigned, If I had over 40 Mil. shares of the company, I would resign too. These shares are also traded on the London exchage, are those shares included in the amount? What about China? Are there sdhares registered there too? How much is a company worth that does not give all the information needed? think about it before you invest.

2008 Jul 11 12:22 AM

[10Q Detective:]

Raven: Sorry to cloud your sunny day, but SolarFun does have a credit problem. $143 million in ST-debt, backed by Founder Lu (who gets a 2% generation fee worth about $2,4 miilion per annum). Total cost of ST capital is more than 8.35% --which is high.

Transparency troubles: industry.bnet.com/ener.../

And, GCL supply contract has some undisclosed wrinkles:
industry.bnet.com/ener.../

My Best & Stay in touch!

David J Phillips - Editor, 10qdetective.blogspot....
Contributing Energy Analyst
CNET/BNET

2008 Jul 11 06:35 AM