Temporary Market Bottom? 3 Solar Stocks That Look Like Bargains

Many of the solar stocks are now quite decently priced, and they are showing strength. The S&P500 recently returned to its low of 1250. Yet stocks such as LDK Solar (LDK), ReneSola (SOL), and Solarfun Power (SOLF) are significantly above their year lows. This is a good sign for the industry.

Still, these stocks are significantly off their more recent highs, so they look like bargains again. The reasons for their fall are many:

1. They have fallen with the falling equities markets
2. They fell earlier to consolidate after a huge earnings season run up (virtually all had great earnings)
3. A recent article pointed out that many may face cash flow problems in the near future
4. The possibility has been recently raised that Spain might not continue its subsidies for solar power (or may cut them substantially)
5. The same possibility was raised about German subsidies a little earlier, and
6. There was a recent big decline in the price of oil.

All of these reasons seem to make them good buys now (or at least better buys). They all seem to have attractive valuations. The average earnings predictions (from TD Ameritrade) for the stocks are:

click to enlarge images

The price, 1 year target prices, PE, FPE, and PEG ratios are similarly revealing:

Most of the PE, FPE, and PEG data are from Yahoo Finance.

It is easy to see why these stocks are attractive. LDK and SOL are pricier now, but they have better growth potential. SOLF is cheaper now, but it has a little lower growth potential for the longer term. All would seem to be great buys. There certainly are a lot of reasons why they have been beaten down recently. Currently we may be at or near a near term bottom for solar.

I think there are many reasons for an upturn going forward. One glaring example is that one of the two top topics at the G8 conference this week is energy. Another example is T. Boone Pickens recent insistence that the U.S. needs to immediately and completely become energy independent. Specifically he is calling attention to the huge trade deficit due to oil importation. I think he cited $700 billion dollars this year.

My most recent ball park estimate was a more modest $500 billion, but you can see the obvious importance of this figure. Senators McCain and Obama have also been making energy a key issue in their campaigns recently. All this bodes well for alternate energies such as solar power. It makes one believe that such things as solar paneled cars (which are actually starting to be made) may become staples in the U.S. in the near future. It makes one think that the U.S. government is more likely to strengthen its support for the more widespread adoption of solar power. This would be a tremendous boon to the solar industry.

Several articles came out after the articles about the Germany and Spain subsidy cut speculations. These later articles indicated that there may not be any cuts. These countries are running into the same energy crisis vis-à-vis oil that the U.S. is. In light of the current oil prices, it doesn’t seem that either of these countries can afford to lessen their support for solar energy. Rather, it looks like the U.S. is more likely to strengthen its support, which would be a big boon to the solar industry.

The earnings season for solar stocks is about to begin again. LDK and First Solar (FSLR) are slated to release their earnings July 28, 2008. SOL and SOLF will likely follow within a month. These earnings are likely going to be great. There is no reason to believe otherwise. The same fundamentals that were in place last earnings season are still very much applicable this earnings season. Further companies such as LDK will not have had the bad weather conditions in the spring that disrupted production in the winter (Q1). I think they should all beat again, possibly by considerable margins.

Some people are speculating that oil might return to $100. However, this seems unrealistic to me. The geopolitical ramifications of rebel activity in Nigeria and the nuclear enrichment activities in Iran don’t look like they will end soon. There is still continued growing demand from both China and India, which doesn’t look like it will abate. Further we are in hurricane season, and this year is predicted to bring a higher than average number of hurricanes. Summer is also the driving season.

My impression is that knowledgeable economists believe that oil will trade in the $130-$140 range for most of the summer. It seems likely it will hit $150/barrel or more sometime during the summer or early fall. There is some speculation that demand may slow in the fall as people in the U.S. and elsewhere begin to really realize how much their gasoline is actually costing them (and cut back on usage). However, if this begins at that time to cut into your solar stock prices, you could always sell your solar stock. If you buy now, you will likely have made profits by then.

Some people have suggested that the solar companies all have cash flow problems. As with most startup types of businesses, they do. However, I believe the companies I have listed should survive these problems well. LDK is in a particularly good position. It has firm contracts for virtually all of its production for 2008 and 2009. Further if it gets its polysilicone plant done anywhere near its currently predicted schedule, it will do extremely well. The polysilicone plant should allow LDK to essentially double its margins. All LDK has to do is execute on its plan. LDK has so far shown that it is capable of doing just that. The current earnings estimates for LDK do not fully reflect it getting its plant done on time.

However, LDK looks like it is close to its schedule, if a little bit behind. SOL is in many ways similar to LDK, although it has no polysilicone plant in the works yet. The analysts love it as they give it a current average rating of 1.8. SOLF is probably not as well off in this respect, but it expanded its margins significantly in its most recent quarter. The conditions which allowed for that seem to be firmly in place for this next earnings season also.  It should do well, at least through the end of this year.

Some people have suggested we have not hit a near term bottom in the market, especially since there has been no huge VIX spike (as marked the lows in January and March). However, others, such as Dr. Duru, have pointed out that lows are not always marked by a VIX spike. He mentioned instead a deep low in the T2108 may have in fact marked the market bottom this time. The S&P500 does seem to be bouncing off the 1250 support line. The bell weather fertilizer stocks seem to be rising in the face of falling grain prices. I think the chances that we have seen a near term bottom are good, especially since we got a good retracement in the price of oil (-$10/barrel) in the first couple of days of this week.

If the market is now heading up, solar stocks should do well. If the market is only staying steady, solar stocks should do well with a great earnings season on the horizon. If the markets are still going down, even the best stocks may get hit.

I am not completely sure where the markets are going in the long term. We have apparently entered a bear market. However, for the short term, solar stocks look like they should do well with a great earnings season coming up. These three should all be buys. Further, SOLF (17 million shares) and LDK (15 million shares) both have significant short positions. If these start to unwind as their prices go up, the prices of these stocks will zoom even farther upward. SOLF with almost 40% of its float shorted looks to be the best short squeeze candidate.

Disclosure: Author holds a long position in SOLF and LDK

Comments

[David White:]

I probably should also have mentioned CSIQ. Its current multiple is fairly high, but its FPE is in the same range.

2008 Jul 10 08:01 AM

[David White:]

Ditto TSL, which has excellent multiples currently. As a caveat, it is on GS's Conviction Sell list.

2008 Jul 10 08:32 AM

[David White:]

The jobless claims dropped by 58K in the latest week (July 5). The market had been expecting +6K. This very positive news is more evidence that this may be a good buy point for the above mentioned solar stocks.

2008 Jul 10 08:40 AM

[David White:]

The retail stores also reported better than expected sales for June. The thought is that rebate checks may have played a big part in this. Still it is positive news. Walmart beat their estimates by a lot. They had predicted 2%-4% growth in sales. They came in at 5.8% -- a fantastic result. The market may want to go down after yesterday's big fall, but it should have trouble doing so with so much better than expected news.

2008 Jul 10 09:03 AM

[David White:]

I shoudl further note that LDK, SOLF, and SOL are currently very close if not at strong technical support lines. Technically speaking, they should bounce upward, especially given the advent of earnings for them. The earnings are virtually guaranteed to be great. The only real possible downside may be the guidance. In LDK's case, even this does not seem very plausible. It seems like the most likely clear winner.

2008 Jul 10 09:57 AM

[me!!:]

I like what I have seen of t boone I went to www.tboonpickens.com pretty sweet plan he has. I think his plan is much better then either candidates plan.

2008 Jul 10 10:01 AM

[vitamin_j:]

This article is very poor. First, it misinforms badly about Spanish subsidies. Spain may cut its subsidies significantly, true, but nowhere have I heard that it may eliminate them. Can you cite a source for this claim? Also, the consensus is that the solar industry dodged a bullet with the cuts that ended up being made in Germany - 8% in 2009 and 9% in 2011 vs. a proposed 30% cut in 2009 - it would have been nice to mention that actual information.

Then I think the author glosses over something significant in considering three Chinese companies but not talking about the dynamics of the Chinese equity market.

Finally, what is this "polysilicone"? Are these companies doing a side business in breast implants?

2008 Jul 10 10:03 AM

[Scootter:]

Is FSLR about to make a bid to buy SOLF?

20 B mkt cap vs less than 1 B

Only 5%

Looks like a great buy!

2008 Jul 10 11:03 AM

[David White:]

vitamin_j: You are probably right that I shoudl have mentioned more specific details. However, I think I gave a fairly accurate overall portrayal of the factors that have been driving the solar market place. That was my actual intent. As for the LDK polysilicone factory, they use virgin polysilicone to make the solar microcrystalline wafers (i.e. solar cells). Most polysilicone solar makers do not manufacture their own polysilicone. LDK is in the process of building two polysilicone plants. When these are done, LDK's more highly integrated structure should allow LDK to almost double their margins (a vertical monopoly if you will).

2008 Jul 10 11:12 AM

[David White:]

Scootter: I haven't heard anything about a bid by FSLR to buy SOLF. I believe there is some speculation that SOLF and TSL will merge. If you have any specific info about an FSLR buyout of SOLF, please let everyone know. I am sure they woudl be interested. It would also be another reason for the stock to go up in value.

2008 Jul 10 11:15 AM

[Stockaccumu...:]

Best and most true article I ever read on solar... You are a very good writer...

SOL (Renesola) is the best play today of all solars... up briefly by 10% yesterday, clearly ready to take off at its earnings report in a few weeks, you will see it up 8% per day for a couple weeks, like last time when it was up over 250% in 2 months...

Some analysts say SOL has a forward PE of 3 ... yes this is not a typo ... 3! .... But analysts differ, many say 6, either way very low, rediculously low.

...with careful analysis we at SA place SOL at over $60 by summer '09, and we like Piper Jaffray, Investors business Daily and Zacks like it the best of all Solars by far... it may even be a buyout candidate, who knows...

keep writing great articles like this... the world and the US need solar, and investors will make it happen, they will get wealthy doing so ... and the world will be better off...

...too many are spooked for no reason from time to time on nothing silly news... (see the awful poorly written articles (totally unresearched too) over at Motley Fool last week... at least Alpha has some great writers... congrats...

2008 Jul 10 12:18 PM

[vitamin_j:]

Fair enough, David. I don't know enough about LDK specifically to comment on that company in particular.

However, I would note that, when Trina canceled plans to build their own poly plant, investors and analysts applauded this move. If you believe as I do in the thesis that poly prices will be significantly declining due to major new suppliers coming online, why would owning your own poly plant and vertically integrating be such a good thing, as opposed to choosing among suppliers clamoring to give you the best price on a product? And if you do believe that poly will continue to fetch a good price, why not invest in MEMC or the Norwegian REC solar, which both use a more profitable FBR technology, as opposed to a new entrant like LDK (again, I know little of LDK, so it's an honest question)?

Finally, what is your outlook for poly price and what's the evidence for it, as this is a key question for all three companies for the next 1 - 3 years?

Disc: I am long Suntech and Akeena Solar.

2008 Jul 10 12:34 PM

[Stock2Watch:]

This is the worst biased article I’ve read about solar. This industry, at this time, won’t survive without government subsidies. Since the author has a long position in SOLF, he gave the impression that SOLF is about to take off. SOLF like most Chinese solar companies are facing cash flow problem. They are burning more cash than they earn. They need capital infusions for some time, and odds are some won’t succeed. They have been raising capital by issuing convertible notes at ridiculously high rates and diluting shares. SOLF just last week announced (SEC filling) to raise an additional $175M in addition to the 172.5M in convertible notes. Stock price goes down (and up) due to facts, NOT hope. The author (and his article) in my opinion is not credible to talk about this industry.

2008 Jul 10 04:54 PM

[David White:]

vitamin_j: I think analysts reacted positively to TSL's cancelling their poly plant plans because it is an expensive prospect, and TSL was already listed among those companies that would possibly have financing problems. LDK was much farther along in its plans for a poly plant at that time. It may soon have one. As for why it is a good thing, MEMC has some of the highest solar margins in the industry, largely because they make their own polysilicone (and use their own scrap). Even if more poly becomes available next year, LDK will still be well off to have its own poly plant. It will still benefit margin wise. My current understanding is that the poly manufacturing is not ramping up as quickly as had been predicted (use TSL as an example). Therefore the poly prices next year may come down from this year. However, they likely will stay relatively high. Again LDK will be well off to be making their own. LDK has hired a top MEMC person to oversee their poly manufacturing plants (build and running). They are also employing FLR, so they should be a good plants. I am not sure of the exact details of everything yet. I am not sure LDK has given that information out. I believe they do intend to recycle the TCS. They are apparently building a facility to do just that. There is a risk that LDK will have some startup problems with these plants (see Jesse Pichel's diatribe). However, LDK so far appears to be progressing nicely. I believe the LDK Investors Group is planning a visit to the company site in the near future. It is likely they (or LDK) will provide more detailed information about the state of the projects at that time. The LDK Investors Group has certified to some extent that LDK does in fact have the financing to complete this project. Also LDK has generally been beating production goals. They beat last quarter, even after being shut down due to severe weather part of the time. I am looking for a bigger beat this time as there have been no shut downs that I have heard of. LDK, since the spate of lawsuits in the fall, has been very conservative in their guidance. They should beat by a good margin. This should provide a little extra capital for the company, which should also help to relieve any investor fears of capital short fall. There is still the possibility of a margin erosion. This is actually no news. I am hoping it will be slight. They have after all sold their production at fixed prices, so the main margin problems seem to be coming from polysilicone costs. This is why the poly plant is a very good thing for LDK. Further after both the poly plants are done, LDK is predicting margins on a par with (or possibly better than) those enjoyed by FSLR, which is trading at roughly a 5 fold premium to LDK. Also LDK should have a slight advantage over MEMC due to cheaper labor costs in China.

The longer term questions will likely come from CIGS competion. Polysilicone solar is still more efficient in converting sunlight to energy than CIGS, so it should do better in the business market place where space will be a premium. The same will be true of the UMG technology (see CSIQ, etc.). Polysilicone solar doesn't look like it will be going away soon. LDK looks like it is building itself into the leader in this area. LDK may eventually also go to a combination of technologies (i.e. manufacture some UMG polysilicone solar also). It will be in a great position, when it finally gets done with its poly plants. It is ultimately just a matter of time before they work and work well. Even Jesse Pichel agrees with this. The only real question is the timing of the success.

2008 Jul 10 05:54 PM

[Jmichael:]

"This is the worst biased article I’ve read about solar. This industry, at this time, won’t survive without government subsidies."

This is the big short argument on silicon based solar companies. What happens when silicon drops 25% 50% 75% of it's current cost. I would be more concerned about that then goverment subsidies running out. Subsidies should adjust to production costs until they are gone.

2008 Jul 10 06:13 PM

[David White:]

Stock2Watch: If you are expanding rapidly, you need money to do this. In the solar industry you have to expand rapidly to remain a relevant player. That is why SOLF is issuing convertible bonds. It certainly is not that they are not profitable. However, I did note that my recomendation for SOLF going up was a short term one given the current lack of clarity about the future. SOLF should have great profits this quarter. SOLF currently appears to be at a near term bottom from which it should rise dramatically due to great profit results to be reported in earnings season. That was my point. Longer term there is speculation that the solar market may eventually become overheated. That is when companies such as SOLF may start to have problems. Many are predicting a consolidation phase to come in the solar area. It is not clear that this will happen in the near future. The solar market in the US may well pick up dramatically in the near future. California and many of the southwestern states are primes areas for solar. The US and the states should be supporting this. It is actually much more expensive not to when you consider the rising oil importation costs (uranium costs are genrally rising also). Further solar is clean technology. Clean air lessens health care costs, etc. If solar were in the kind of shape you are claiming, no one would be investing further. The fact that SOLF, etc. are trying to grow as quickly as they can should tell you that there is still a lot of money to be made in the area. Clearly I prefer LDK to SOLF specifically because it is trying to address long term margin concerns. I am not short sighted enough not to realize that SOLF is still oversold at the moment. It should still report great results. That is why I recommend it.

As for the solar industry as a whole, it is heating up. There will eventually be a consolidation. However, some of the predictions that have been amde about the solar industry are based on much lower oil prices. Oil seems instead to be rising beyond people's expectations. China and India will continue to drive the oil prices higher over the long term. The consolidation in the solar industry may be delayed for an indeterminant amount of time. Another example of what I am talking about is the coal industry. Just take a look at the outrageous PE's in that industry. Do you really think solar is going to fall flat on its face in the near future? I don't think the indicators are there. Rather the opposite is being indicated. Perhaps you are one of the shorters of SOLF. If so, it may be a good time to cover those shorts.

2008 Jul 10 06:20 PM

[Bob the Bear:]

You talk about rapid expansion and ability to finance the expansion, what about Uni-solar, wholly owned sub of Energy Conversion Devices(ENER)? They just had a $350,000,000 convertible bond over subscribed underwriting. Plus they just received an order from GM to do the 2,000,000 sf roof of their plant in Spain.
Don't blind yourself to the industry leaders. these people are expanding at better than 100% a year and they are profitable!

2008 Jul 10 09:33 PM

[tessant:]

still no love for STP...the least shady of them all!!!

scott
solarfeeds

2008 Jul 10 10:16 PM

[David White:]

Stock2Watch: I should have also noted that longer term the price of solar is slated to come down. Polysilicone is one of the most efficient ways of trapping solar energy. This form of solar will stay higher because it will be able to demand a higher price from businesses, where space is at a premium. However, companies such as LDK are certainly positioning themselves to be able to drop their prices. For the household consumer there are other types of solar which will likely become cheaper over time. I believe the current average price for solar is about $4.80/watt. Many believe this cost can be brought down to $2/watt (or possibly further). The Thin Film technologies and the UMG polysilicone technology (i.e. being able to use less pure polysilicone) are much cheaper technologies. Some of these companies are now charging more because they can. Over time these prices should drop (at least in 2008 dollar terms). This should make the solar panelling for homes competitive with current energy prices (assuming a loan for purchase). Since these same home energy prices are likely to rise substantially in the next 10 years, a person buying such a system would end up saving a lot of money over the lifetime of the system. An added bonus would be that this is a "cleaner energy" solution. There would be overall added benefits to the decreased health costs in this "cleaner" environment.

2008 Jul 10 10:22 PM

[David White:]

Stock2Watch: CSIQ has already started to adopt the UMG technology with some of its production. SOLF, LDK, TSL, SOL, etc. seem naturals to follow this lead with at least part of their production. This should allow all of them to bring the price per watt of this type of solar down considerably from its current level. Consider also that solar probably has at least a 30 year lifetime. If you think about how much energy prices are likely to rise in those 30 years, you may actually be saving money, even with today's high prices. Certainly there are environmental benefits at the very least. Still in a few years the prices are likely destined to drop. LDK should be well positioned. CSIQ by moving to UMG early will likely be well positioned. It is unclear how soon companies like TSL, SOLF, LDK, and SOL are going to move into UMG technology. I do not know all of their plans. However, that is one reason that you cannot simply say that a company like SOLF or CSIQ will fail farther down the line. UMG technology should be very competitive with CIGS and the CdTe Thin Film of FSLR. All of the above companies should be able to move into this technology with relative ease, if they desire to do so. Having a good reputation and a leading position in the industry will be important for obtaining contracts. I should also point out that LDK has already sold virtually all of its production for 2008 and 2009 and years farther out to a lesser degree for fixed prices. This has actually been hurting their margins in the near term as solar prices have been rising. However, it will likely be a benefit when the CIGS companies start producing more solar, which will pressure prices downward. The UMG technology should also eventually pressure prices downward. The visibility of how all of this will play out is probably not there at this time. That is why I chose to focus on the near term earnings. Also LDK's long term plan looks solid. It also looks adaptable to UMG technology. LDK looks like it shoudl do well long term. Other solars you cannot always say they defintiely will do well long term, but you cannot definitely say they won't. You have to constantly reevaluate the situation. Near term, the solar prices are still going up. Near term everyone is selling all the solar they can make. With energy costs skyrocketting, this run is likely to extend farther than some people envisioned at the end of last year. With the advent of the UMG path for polysilicone solar makers, solar companies may do exptremely well for quite some time. The naysayers of January may get burnt badly.

2008 Jul 10 10:56 PM

[David White:]

jmichael: As I noted above, the prices for solar are supposed to drop. The UMG path should especially let the prices for that type of polysilicone solar drop on a price per watt basis. The manufacturers should be able to maintain fairly good margins with this new technology. The overall demand for solar should also go way up as the price drops. The CIGS solar and UMG solar are well suited to the home market price wise. This should keep most if not all of these solar makers highly profitable. I think adoption of the new technologies in a timely manner may be important to the overall health of any one company. CSIQ seems to be one of the leaders in UMG. Perhaps Akeena Solar will end up doing well as they are more on the packaging/installation end.

2008 Jul 10 11:11 PM

[buystocks:]

How do you guys calculate the P/E for CSIQ? I got a P/E of 9 for this year.
First quarter they shipped about 41.8mw module has earning per share
of $0.61.
Now they raised the guldens to 230mw to 260mw, plus the newly
announced 14.9mw, with total
of 244.9mw to 274.9mw for this year 2008.

Simple math tells me that their P/E is with about 9 this year or even
8.

41.8mw/$0.61=244.9mw/X
X=$3.57 for ESP this year.

2008 Jul 11 01:25 AM

[buystocks:]

Note that I calculate the P/E without using the estimated 30-40mw UMG product ship this year which was sold out very early in the last couple of months. CSIQ can compete with thin film with its UMG modules, due to the material cost is A LOT less than using the regular silicon(like 1/10 of the cost).

Long CSIQ, ASTI, ELSR

2008 Jul 11 01:39 AM

[dicki31785:]

Ps
Long ABX,CSIQ,TSL

2008 Jul 11 03:03 AM

[User 182177:]

No other sector that its component companies have such a huge growth prospects in Revenue and Earning as the solar sector. The strongest stock in the solar sector is CSIQ, thus I choose to hang my hat on strength. The technical picture and the fundamental picture of CSIQ point to the same direction, no divergence here - I feel very comfortable to sit on it.

2008 Jul 11 11:28 PM

[David White:]

Since I wrote the above, TSL and CSIQ have both pre-announced outstanding earnings. Further (at least on my chart) there was a spike in the VIX to 39 early this morning. This may mark the market bottom. We may see stocks go up from here for a while.

2008 Jul 16 11:03 AM