An In-Depth Look at Solar Stocks

Originally written on June 26, 2008.

This post is organized in the following way:

I. Peering into the Solar Industry

II. Solar stock comparisons, thoughts, and more.

III. The little known solar plays of the future?

Note: This post has been edited since first posted to improve grammar and clarity. I had to view it clearly to make the necessary changes...

The post is not meant to be the "end all and be all "but a great primer from which to base further research on this very important industry... I plan to learn more and more and hopefully post more specific thoughts as this dynamic industry changes over time. I prepared it over the weekend but have waited until after the FOMC to post as the Fed meeting was the most important thing this week by far... You can't talk about how pretty the birds are if your fishing boat is about to hit the rocks... well we're not clear but now at least we know where we stand. So without further ado...

I. A Glance at the Solar Industry

There is a long term bull market it alternative energy that is just getting started. When I say alternative energy I mean all non-fossil fuels, including solar, wind, geothermal, nuclear, and other. 

In the post The Future of Alternative Energy I did not include much more than lip service to solar energy because I felt it required its own post. It's been a long time coming. Then again the timing might be perfect... for the mid-term range... for reasons that will be discussed below.

First here is a list of the companies that are specifically examined in this post: ENER, SPWR, STP, JASO, LDK, TSL, CSIQ, HOKU, ASTI, AKNS, SOL, SOLF, WFR and YGE.

A. Background

Clean and dependable energy is of paramount importance in the resource scarce, pollution rich, world in which we live. The answer to this problem? Last year, judging by the valuations of some of the solar stocks, the market acted as if solar would be the "be all and end all" when it comes to satisfying the global need for electricity. This bothered me, and I wrote the post about alternative energy in general to remind myself and everyone else that solar is only one player.

It will take many sources of energy to fuel this planet. Solar power may not even play the biggest role, as coal in the near term and possibly geothermal or nuclear in the long term, may fill this spot. Regardless, solar will have its place in the overall picture, and more importantly right now solar energy has the investment and capability to develop enormously in the medium to long term.

The valuations of many companies have come down quite a bit and are cheap. When the stocks of a robust long-term growth industry cool it's time to start paying attention. Solar stocks may not rebound tomorrow (though actually they may... this was a metaphor written on Saturday) but as long as the earnings keep accelerating and the overall market doesn't collapse there may be some enormous OPPORTUNITY developing in this space.

However not all the stocks in this industry are equal. Both in terms of quality and price their exist considerable differences between the companies. In this industry especially, much like any new technological sector, certain winners will emerge and become very successful while others will falter.

Additionally, as the industry develops we will continue to find opportunity on both the long and short side as certain stocks become too richly valued or very undervalued. This post looks at the long side but trades for shorts are also an area of possibility. Such volatility often offers inroads to success. Those who have at least a basic understanding of the industry, how it works, and what separates one company from another will be in the best position to take advantage of opportunities. I want You, and I, to be in a position to take best advantage of the solar Phenomenon...

If you hadn't noticed oil prices are at all time highs. Global warming is a major political issue. It is very possible that as we move into the US election and beyond (especially if the Dems win the White House) that the buzz word "solar" will be big. Additionally the earnings of solar companies will be hard to ignore. Unless the overall market falls apart between now and Dec certain solar stocks may offer a very nice play to buy a little in pieces now and hold until the end of the year or beyond. The earnings have little or nothing to do with the US economy and the initial hype of solar stocks has cleared and left some real value behind. What we may find is the kind of value play for out of favor stocks that pays off down the road.

If this market is bad enough though I would recommend primarily playing these solar stocks like all stocks in this market: as trades. Very lucrative trades are possible in this market if you are informed and careful. That is to say that in this market I think you have to also look at the technicals, gauge how the overall market is doing, and set defined target/stop loss criteria (i.e. know where you expect the stock to go vs. where it might go if goes against you so you can define potential risk/reward ratios). As always of course you have to make your own judgment calls here.

One thing is clear: if you understand the industry at least on a basic level, know the differences between the solar stocks, and use proper fundamental and technical guidelines in you investing decisions you will be best positioned to succeed. And frankly, you will have an edge when juxtaposed with the average retail solar stock investors. Let's help get you there...

First let us look a bit at the nuts and bolts behind the solar technology.

B. A brief look at the science behind solar and the types of companies involved

There are several main types of solar companies:

1. Companies that produce Solar (photovoltaic) Panels (sell to end users)... including:

a. those that use thin film [CIGS] (primarily FSLR and ENER)

b. those that use polysilicon material (majority of solar companies)

2. Wafer, ingot, etc, material manufacturers (building material for solar panels (see below). Companies include WFR, SOL... a handful of others often private or overseas)

3. Integrated companies that produce end user products and manufacture the basic materials (TSL, LDK, YGE)

Here is my understanding of how the solar panels (Photovoltaic cells) work.
I'll start with polysilicon based panels:

Silicon is an element in the chemistry periodic table. Just like carbon, nitrogen, etc. Silicon is used because of it's semiconductor properties... just as is the case in computers. The silicon absorbs energy (sunlight) and this causes electrons (electrical charge) to "jump" along the polysilicon, ultimately converting the energy from the sun into electricity. The components are assembled like this:

1. Polysilicon- This is silicon and usually oxygen mix to make silicon dioxide (sand). Silicon is the very abundant on earth. However, the silicon in the form of polysilicon (Si plus something else... usually oxygen to makes sand) needs to be converted into 99.999+% pure Silicon (monocrystals) for use in the semiconductor and solar industries. There are only a few companies in the world that currently do this process. WFR is one of them.

The silicon is extracted from sand and then crystallized in aqueous solution to form the monocrystals. These monocrystals are assembled into repeating units called ingots. The ingots in turn are assembled to form wafers. The wafers are put together into panels. Essentially the highly pure wafers do the work. The panels also consist of glass to protect the wafers from weathering.

Ok here is the schema from smallest to largest:

 

Sand (polysilicon... a.k.a polycrystals)--->isolate pure silicon, assemble into "pure" silicon crystals (monocrystals)---->form ingots (wafer building blocks)---->assemble ingots into wafers---->Put the wafers together, put glass in front... you now have solar panels (Photovoltaic Cells).

 

For thin film PV cells the idea is very similar. The crystals are not made of silicon but of CIGS (Copper Indium Gallium Selenide)... these are formed in an number of ways and can be packaged into solar panels. However, CIGS can also be mixed with basic material like types of glass... forming a thin film. Read the link above on CIGS. Again, the important point is that CIGS are less efficient than silicon but cheaper and can integrated with other materials.

However, the high cost of silicon, as I understand it, is not because we lack sand on this planet but because as of now only a limited number of companies form the wafers. These wafers must be bought by both the solar industry and the computer/tech industry. The demand is currently greater than the supply because the industry was used to making product for computers and such... now it has to make enough for the solar industry also. This demand/supply imbalance has driven up price. As more wafer producers come online I expect:

1. The cost of silicon PV panels will come down. This will be an advantage to the polysilicon vs. thin film companies.

2. The margins for the wafer producers should become lower. However, if the solar industry continues to expand the increased revenue may more than make up for this...

3. Note: the method to make silicon wafers is not patented... it was invented years ago... so I imagine the barrier to entry eventually should not be that high for wafer makers.

Polysilicon solar makers vs. Thin Film solar makers to Summarize

1. Polysilicon is converts more energy from the sun into electricity than does thin film. Advantage Polysilicon.

2. Thin film is currently cheaper. The demand for silicon has raised prices and started to cut margins for polysilicon-using solar companies. For now: Advantage thin film.

Here is a quick reference to CIGS vs. polysilicon.

3. Thin film has the potential to be integrated into regular building material, such as special types of glass. This is opposed to the polysilicon panels we are used to seeing on houses.

These are the key differences.

Perhaps a bit of a hybrid between the two types of technologies is ESLR. They use polysilicon but have proprietary "ribbon" technology by which they use thinly stretched polysilicon.

Overall it is interesting to note that the few thin film companies are trading at much higher multiples than the polysilicon ones. This may be because they are overpriced and will come down if polysilicon becomes cheaper or because someone in the industry sees thin film as the future. I don't know... I'll be watching this... but I generally tend to stay away from forward price to earnings of 40 or more... That being said FSLR has stayed high longer than many thought it would so maybe there is something to it... I am not here to bias anyone's opinion on this.

II. A look at specific solar stocks...

As I mentioned there will be winners and there will be losers in this space. This table compares key fundamentals for a number of solar PV companies and materials manufacturers. It may be insightful.

The keys to finding the winners in my opinion include:

1. Quality of management. This is very important. I highly recommend that you listen to at least one previous conference call before investing in any of these companies. CCs are very telling.

2. Price, earnings growth, upward revisions in estimates, margins, realistic ability to hit growth targets...etc. fundies.

3. Position in the industry. Who do they sell to? Are they well positioned for growth? What do they have that their competitors do not....

4. Technicals... in this market it is important to at least pay attention to this.

5. Others.... the "it" of the company... what makes it unique, and additional nuances of company.

From my table, and from watching solar stocks for a while, I am particularly interested in finding out more about:

Canadian Solar (CSIQ): This has been my favorite for a while. Excellent management. It has run up quite a bit recently but...

Suntech Power (STP): This company looks to be quite well positioned. I was once very expensive. Now it is looking quite cheap... here is an article on STP.

Trina Solar (TSL): Cheap; good earnings.

Yingli Green Energy (YGE): Super cheap; good earnings.

Solarfun (SOLF): I don't know much about at all, it is cheap...

Evergreen Solar (ESLR): also looks interesting.

Note... actually all of the solar companies are on my radar depending on price, the charts, etc and on further research on my part. These ones are just at the top of my list right now. However JASO and SPWR are worth investigating, LDK makes me a little nervous but some swear by it... You and I will really have to do our own DD here... I hope this is blog provides a great place to start. Also note, as mentioned before, because of the volatility some of these stocks may provide some excellent technical trades as well... look for stocks like TSL that have just been crushed recently, stocks like CSIQ and SOLF that at the time of this post was written (Sat 6/21) were above 200 SMA...

You get the idea.. the beauty of volatility (but also the double edged sword).

Manufacturers:

- MEMC Electronics (WFR)

- ReneSola (SOL)

The manufacturers could do very well right now because of the near-term supply/demand issue talked about. Both WFR and SOL look very promising. However note that WFR especially also sells a lot of products to the tech sector so a slowing there may affect the stock price also...

The returns on some of the solar companies have been staggering (CSIQ from 19 to 40 in a few months) but so have the down turns.

The way I want to play? Look for the solars to be sold off with everything else in market panic and then look to 'pick up the pieces'. The earnings will be there but the market is nervous (RIMM's profits were up over 100% remember) so caution is always warranted. It's for markets like this that technicals and sentiment become so important to move lock-in-step with some of the screaming value plays that are setting up in this space.

III. The little known solar play of the future???

One more point... There is a whole other solar play going on that many people do not even know about. This may in fact be a large part of the future of solar energy. It involves using mirrors to direct sunlight into a pool of water (or oil which then heats water). This water turns into steam and drives turbines. The turbines then convert heat into electricity. It's being used currently in places like Spain and is being tested in places in the US. The big companies in the US behind this according to the article: CVX and GOOG.

Here is the article on Spain.

Really sweet concept.

Here is the work being done by CVX, GOOG, GS, and others in the US.

Now for some excellent additional reading on the solar space by someone I happen to agree with very much overall. In fact I was very pleased to see that someone saw solar much the way I do (the CORRECT way that is... ;))

Which Solar stocks will continue to shine?

WHY CSIQ is the Best Solar Stock.

A look at TSL's recent results and the polysilicon PV makers going forward.

Oh... and if you want to see the reason we need non-carbon based fuel to keep our planet going check out this link of the sun... not in the clouds... but in the smoke during the day... as a result of the massive fires throughout Northern California. I now live in the Bay Area and I can tell you the Sun was truly orange today... Yeah... I think the environment will be an important issue for the next President of the US of A...

Note: Here is a link to a follow up post on solar...

References
http://en.wikipedia.org/wiki/Polysilicon

Check links throughout post to articles. As always take Wiki with some salt...

Disclosure: None

Comments

[Alan Young:]

I'm curious as to what you learn from conference calls. Anything quantifiable should be in the financials, or at least in the analyst reports. So, it's a "quality of management" study, I suppose. Do you judge management on how adept they are at fielding questions, or what?

2008 Jul 17 02:57 PM

[puerhfan:]

Thin film is much more than just CIGS/CIS which is unproven in production as of yet. FSLR uses CdTe not CIGS. a-Si is a third important technology. There are more but that is the big three in my opinion.

2008 Jul 17 04:53 PM

[Tigerman11:]

You didn't mention an analysis on ENER. They have alot of promise. What may set ENER apart is how long the have been in business and the fact that they have multiple business opportunities in the clean tech space. I am interested in your opinion.

2008 Jul 17 05:33 PM

[frflyer:]

A few comments.
Thin film is less expensive to make as you say, and less effecient than normal silicon based cells. The point that is often missed is that they both have their markets. Where square footage is an issue, like on your rooftop, the normal silicon cells with their higher efficiency are the way to go. This assumes you are looking for the most watts per square foot. In less space constrained applications, like where you are using on the ground acreage for a large solar installation, thin film makes more sense, with it's lower cost. I don't see either one knocking the other out of the box.
I would also advise against underestimating how much solar power can contribute to our energy needs. Between PV installations on rooftops etc, which provides some needed "distributed energy", and solar power plants in the southwest and their centralized power, solar can be a majority power source and do so economically.

How many are using apples to apples comparisons when they compare wind or solar with conventional power supplies? Are the hidden costs of coal, gas and oil being considered? How about the hidden costs of nuclear? According to Set America Free.org,
the hidden costs of oil and gas in the U.S. amount to over $800 billion annually, which includes over $80 billion in tax credits and subsidies to the oil and gas industry. On top of that, oil is contributing well over $300 billion annually to our trade deficit. Then there are the wars in the middle east, with their losss of life, America's prestige in the world and all the other problems in the mideast, Venezuala etc. Have you read the proposal at Scientific American that promises to attain 69% solar energy in the U.S. by 2050, just using solar power plants in the southwest? Have you seen the proposals by Set America Free?
Wind industry people say we could have 20% wind power by 2030 or so. Denmark already has 20% wind power. Somehow the supposed problems with "intermittency" with solar and wind aren't stopping other countries, like Denmark and Germany. Parts of Germany and Denmark have 40% wind power. There is an overwhelming amount of dis-information out there, trying to downplay the potential of alternative energy, particularly solar and wind. All it takes is the political will to do what is right. That is where 90% of the hype is coming from, so the next time you hear about the hype of solar, take it with a grain of salt. In many sunny parts of the country, which also happen to have high electric rates, like California, solar is already at grid parity. According to Ausra, one of the solar thermal companies, they could power the whole country, at competitive rates, using less land than now used for coal mining.

"Like nuclear plants, coal plants tie up great gobs of capital during their extended construction periods. For the sponsors of such projects, the shifting sands of economic uncertainty can spell financial disaster, as many a utility learned the hard way during nuclear's fiscal meltdown."

"In contrast, solar, wind, and conservation all have shorter lead times, a fiscal advantage not sufficiently appreciated, especially in uncertain economic environments like the present. So in addition to loving these options for being "green," planners can also love them for being "just in time."
gristmill.grist.org/st...

There is a pdf, which you can download, called "The Lean Guide to Nuclear Energy",
which shows why nuclear is not the best choice.
Here are some links:

www.setamericafree.org...
A Blueprint For U.S. Energy Security

www.setamericafree.org...

Scientific American A Solar Grand Plan
www.sciam.com/article....

www.pluginpartners.org/

www.eoearth.org/articl...

www.ausra.com/

www.esolar.com/

www.brightsourceenergy.../

2008 Jul 17 05:37 PM

[GH:]

Geez. It is such a waste of time reading the vast majority of SeekingAlpha articles. There are about 3 really competent authors, and then hundreds who are rank amateurs who put maybe a week into reading some books and articles and think they know enough about a sector as huge as solar power to write an "in depth" article.

No more for me, thanks. Goodbye, SeekingAlpha.

2008 Jul 17 06:44 PM

[The-Yellow-...:]

GH:
It's interesting that seeking alpha chose this title for the article. The original article on my blog is titled: Long Term Bull Market-Solar. I am appreciative of Seeking Alpha for creating a forum to express and share ideas... however I personally would not have been quite as bold in my title...

I have a background in biochemistry (UCLA)and actually am best acquainted with the bioscience and pharma... although I have used my scientific knowledge and thinking to sharpen focus on broader swabs of the market. You will find the science breakdown included and also that as I mention this is not the "be all end all article", if there is such a thing, but intended as an investigative glimpse that is meant as a foundation to be built upon over time. I already added a subsequent follow up article on the issue of cash flow and the GS downgrade of TSL at the end of the article (under top posts)-LT Bull Market Solar. I expect to add more over time as I see solar being around for a long time to come...

2008 Jul 18 03:08 AM

[The-Yellow-...:]

I will try to answer some of the other questions posed this weekend

2008 Jul 18 03:09 AM

[adhard:]

well, thanks anyway for explaining some of the basics and clearing up some matters and also the links! bits and bits accumulate....

2008 Jul 18 08:58 AM

[TV:]

You didn't mention DSTI and it's not in a part of your table list, why

2008 Jul 18 01:07 PM

[TIRED:]

you did not comment on eslr why or you don't know much about eslr it is a good one to own i own thousands shares they have some new contracts worth millions i would like your comment i know it is good one to own i am stii buying

2008 Jul 18 02:05 PM

[The-Yellow-...:]

Some replies:

First and foremost I want to make a brief comment to GH. How is bashing Seeking Alpha helpful to anyone? There are some very intelligent posts on here. Not all... but some very good ones. In fact, when I am trying to learn about a company I am not familiar with I first look at the charts, then the key statistics/analyst estimates, and then go directly to the financial blogs in yahoo. Many are Seeking Alpha articles.

The blogs offer the retail investor a deeper look... if you don't like, don't agree, or already know everything written in them then don't read them! However, what you will not tend to find is unwarranted, self-driven bashing (often the case in message boards). Also, it is not the voice of "authority"... which is a good thing because many of the analysts I believe have their own agendas. The ISRG downgrade at 250? I called that a bluff (on my site) because I know ISRG has a solid business and I know that the stock keeps getting downgraded by some analyst for the same reason and then rises before earnings. It is up 10% since the "downgrade"... a nice little trade.

Everyone has to be able to think for themselves here. If you're looking for an "authority figure" you will either have to pay them a lot of money (and they may still be wrong) or you have to wonder if they are really acting in your best interest. The Seeking Alpha articles include thoughtful information in a concise place. Not bad.

Ok... now that I got that out of my system...

Aalen: Conference calls are like body language: it tells you the tone of the conference, how people feel about the company, and whether people really are impressed or not. The TSL CC is a perfect example. When GS asks questions I listen. When they gave a disapproving hint about the cash flow generation that meant TSL was in trouble at least short-term. The downgrade did not surprise me bc of the CC.

The CC also tells you about the management, details, so much there

Puerlfan:
Excellent points. This is why an article like this can be valuable... their are people who know thin film and other facets of the solar industry like no one else. I have to admit the prices of FSLR and ENER had me focus more on silicon based then thin film... however when one looks at the dependability and cash flow of the thin films (FSLR at least) it becomes clear why institutions have been holding them more so far overall.

frflyr: Solar will be there but don't discount wind or any of the others... There's a reason T.Boone Pickens is investing so much in wind farms... also nice addition with the info

Others: If I didn't mention your stock in detail it is because I chose to look at a reasonable group of stocks and focus primarily on those that are currently profitable. I expect that there will eventually be pruning and consolidation in this industry and that it is still too early for anyone to tell how it will work out. For now all are in play... solid fundamentals and cash flow are pluses... but so is new technology.

Overall... if this article taught you anything you did not know or made you think then it was successful in its aim. Think of Seeking Alpha and other blog sites as an investment community and a place to generate and share ideas... not the final stop in decision making... and I think you will be more likely to unlock it's value and succeed.

2008 Jul 18 07:52 PM

[The-Yellow-...:]

its value. Typo...

2008 Jul 18 07:57 PM

[Fish Gone Bad:]

The purpose of investing money is to make a profit. This week the markets saw the US Government declaring support of Fannie Mae, Freddie Mac, the rest of the financials, while declaring war on short sellers. This week also saw the top of oil at close to $150/barrel. First the financials: I truly despise all of the financials except JP Morgan. The short sellers did not make these companies make risky loans, and these loans are still an ongoing problem. For now, I am not investing in them, I am just waiting for them to top out again before trading them to the downside.
Second the transportation sector: Now is the time to invest in companies that use a lot of energy and can now make money in the near term with declining fuel prices. Things like the airlines and trucking companies. Trucks have to move food, and planes have to fly people around the world.
Now on to solar companies: I have been in love with solar since the oil crisis of the 70's. There is a time to own, and a time to not own all things. By the way these stocks have "not been going up", I do not see a bottom in this sector in any time frame that I would like to put into print. That said, ENER still looks pretty strong and LDK should be an interesting buy once it gets into the $20-$25 range.
FishGoneBad.com

2008 Jul 19 02:00 AM

[Stockguy456:]

I did not really get much out of the article. What are the top 5 stocks that will be around in 5 years? (Have the best chance) Lots of stocks not listed! I too like eslr

2008 Jul 25 10:07 AM

[David White:]

The SEC is considering expanding the emergency short selling rules to include all or virtually all stocks. If this happened, a number of solar stocks would likely benefit. LDK, TSL, and SOLF are a few that come quickly to mind.

2008 Jul 28 08:57 AM

[Etf Planet:]

Great Article! a nice summary for people wanting to get a good basic understanding of the solar players

2008 Aug 17 04:47 PM