Solar and Cash: The Big Boys Have an Answer - Do You? 30 comments
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Solar stocks, for reasons such as global warming, increasing energy constraints, and a plethora of other factors, have the potential to offer tremendous opportunities. Their volatility can offer further opportunity, as well as significant frustration. A solid understanding of the factors that influence stock price is usually a key to success in trading and investing. This can be particularly true in the solars. This post therefore attempts to shine light into some key issues so that a better understanding may be achieved. On here I want to add some important points my original post "LT Bull Market Solar." I hope this is informative.
Many solar stocks are now cheap based on FY and FWD P/E ratios and PEG ratios. Yet that is not the whole story. Goldman pointed out on the last Trina Solar (TSL) conference call that cash is important. They downgraded TSL largely because they are concerned as to how a rapidly growing business can fulfill its goals without substantial cash and cash flow. Here is an article written about this topic. Here is another take. And to be complete, here is a type of response on the issue.
Below is my take...
Some people may think that Goldman is playing a dirty game of knocking down solars so they can accumulate shares. This may or may not be true but I do want to say that in my opinion the cash issue is important. Very important. We are in the beginning stages of a global credit crisis. Rapidly growing companies, especially ones like TSL and LDK Solar (LDK) that are aiming to expand greatly to achieve vertical integration, are going to need cash. Lots of cash. If they are not already generating lots of this, then where are they going to get it from? The answer has been stock offerings and debt financing. The problem is the winners and losers in the solar space are still unclear, and thus, as credit tightens, it is very possible that cash will be harder to get. Also, if companies choose the share dilution route this makes the P/E ratios too low as the earnings per share goes down with dilution. Thus the companies might not be as cheap as they seem and this must be taken into account.
What happens if growing companies can't generate enough cash?
The extreme scenario is they can't pay their employees/debt and they go bankrupt. Even the hint of this creates risk, and this is not a stock environment for risk! Even if we assume, as I think is true, that the industry is robust enough to preclude much or any bankruptcies, companies that cannot generate cash must slow their expansion. This means that the growth estimates will come down and the value of the stocks are lower then they appear. Just as importantly the risk... that is to say the uncertainty of how much a company can really grow, becomes higher if the company does not have much cash. Risk = lower stock price. Especially in this market. It is also important to note that perception is as important as reality. If the big boys are concerned about the cash issue, then regardless of whether the earnings in the future will generate enough positive flow to pay for expansion or no, the stocks with any hint of cash problems will likely be affected until the issue is shown to be unimportant.
So, in addition to the points I made on the main solar post, I want to add in that it is important to consider cash and debt when comparing the different solar companies. Another metric that is nice to look at is the operating margin. If selling prices come down for any reason or costs go up low operating margins may become an issue. So far, based on the relative performance of CSIQ to some of the other polysilicon solars this has not been so much of an issue. Something to watch though.
Here is a table that compares the most salient metrics of a number of solar companies that I am watching... use this in conjunction with the fundamentals table linked here and first presented on the main solar post.
It is very interesting to note that First Solar (FSLR), the much maligned "overpriced" company, looks pretty good when you realize that it generates substantial operating flow, has substantial cash, and has a strong operating margin. It also has large institutional ownership. This tells me that in this environment especially the big boys, those that know how big this credit mess really is, are certainly concerned about access to funds for these solar companies. FSLR may offer the certainty that some of the polysilicons do not. It has also beaten earnings every quarter in recent history and is growing at a clip that may make... it hurts to say it still... a forward PE of 50 maybe not that bad after all.
For what it's worth, Zack's, a company I respect, has been bullish on FSLR a while with a price target I believe in the 320 to 350 range. Cramer is has also been bullish on the company. Please note that this is not a recommendation. It just aims to show that FSLR may be a much better stock than many give it credit for.
So how do I plan to play to solar issue?
The first thing you have to look at is the macro-picture. If the market is tanking solar stocks do not do well. It is also important to note that solar stocks tend to move together. Go to Yahoo Finance or other sites and compare the charts for a number of solar companies. They move together, with some more volatile, and some having done better than others. The point is that if the solars are getting sold off it is unlikely that many or any will do well in the short-term.
However, when the market goes into its next bear market correction (it will... perhaps as we get closer to the elections and the dog days of summer are over... but maybe sooner... no one knows), some of the more volatile, oversold, promising stocks will lift up just like it did in the last bear market correction. During that time, one of the strongest stocks, Canadian Solar (CSIQ), doubled before falling back with the recent return to the primary overall bear market.(For more on Dow Theory and how secondary corrections work check out the post "It PAYS to be Trendy")
So right now I am not investing in solar but looking hard at what is out there so that when the opportunities arise I will have the understanding/knowledge to hopefully pick the winners. In the last bear market correction, I did not have this type of info on solars at my fingertips, and so I missed that opportunity. I intend to be ready the next time around.
Overall, I believe that management is the most important, seconded by the fundamentals, and also backed by the technicals. The cash and debt issues are also very important as are other issues. I always listen to conference calls before investing in a company.
Here are some preliminary notes I remember in researching...
- CSIQ remains one of my favorites because I think their management is very solid. With TSL, there is some concern about the cash issue and rapid expansion... however perhaps they will continue to execute and the price will prove to be a bargain. For this company I think it is important to closely monitor whether financing becomes an issue as the credit crunch deepens. Until they are able to prove otherwise I think there will be pressure on the stock.
- It is nice to note that JA Solar (JASO) already had a major share offering and has cash with no debt.
- The narrow operating margins of CSIQ and SunPower (SPWR) may also be something to watch.
- I got a chance to listen to the archived Yingli Green Energy (YGE) conference call while I working out (hey, time is the most important resource... double tasking is key) and I heard a solid company with substantial RD to narrow the amount of polysilicon use. Of some concern is that over 50% of sales are currently to one country, Spain.
- Regarding Suntech Power (STP), I like the fact that they are big in industrial use of solar panels for farms and the like in China. I haven't had a chance to listen to any more, but if I have time I will. I will now look at FSLR as well. The compelling cash and operating margins may be more important to the guys that move the stocks then the P/E ratios...
Regarding the wafer manufacturers:
There are quite a few smaller ones popping up especially in China.
- MEMC Electronic Materials (WFR) is interesting but is tied to the US semiconductor industry as well as solar. It's cheap and I am looking at it.
- ReneSola (SOL) looks good to me. The question is whether any margin erosion will occur as more manufacturers get into the business and as panel makers use thinner silicon. Still, someone is going to have to provide the wafers if the industry really grows so SOL is very much on my watch list.
Perhaps a combo of CSIQ and SOL or FSLR and WFR etc. may be in order... or SOL and Claymore/MAC Global Solar Index ETF (TAN), etc... I guess the point here is most of the solars are on the table but market conditions, industry conditions, and specifics of each stock need to play out in my mind for serious investment to be made.
There have been some great trades in the solar space on both the long and short side. As we move into the Presidential election, and Green very possibly becomes a buzzword, solar stocks may enjoy a very nice run. The issues brought up on this post may influence who wins and who loses.
On a final note:
- TAN is a solar ETF that is interesting to look at. It involves some ADRs as I understand it that include some European companies. It is fairly new and I am not sure how well it relates to US listed solar stocks. It may indicate an upward trend and be a forecaster for getting into solars or it may be a nice, relatively safer play, in its own right. You should at least know about this vehicle...
If you agree, disagree, or just have something to say by all means comment. Just please be respectful...
Disclosure: none
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This article has 30 comments:
i like the way you point out the risks while not making a stand as it's almost impossible to point out future winners and losers in an evolving industry.
i totaly love SOL (long). it seems they look great almost in every aspect, cash needs aside. since they are wafer suppliers cash needs are lower than for the integrated companies and since it's now a cloud over the manufac.. it seems the company is in better shape than many others. when cash needs will cease to be a problem the company will be less desired as the risk for integrated companies will be percieved as lower.
yet, there is one thing i miss in all the articles regarding solars, they all deal with the manufacturers along the food chain, but i saw none (maybe there are few, but i didn't see them), that deal with the other related companies.
INFRASTRUCTURE and EQUIPMENT. these are two sectors within the industry that will probably still grow even if pricing and margins will be volatile for the manufac...
our goal is to find the cheap stocks in these sectors or to find market leaders that don't have huge price premium.
i already pointed out SPIR (which i'm long), but i'm looking at other companies like FLR ASYS SOLR .... for good entry points.
everyone must do thier own due dilligence on each stock as they are very different (what they do, how big they are, how much risk they carry...) and if they like a stock then it's time to calculate entry price based on the return you demand that will create a high risk reward ratio.
if the price you want can't be achieved you stay out, or you can make a multiple step plan which basically calls for different levels of entry prices (taking into account the number of shares you want to buy). at the end of the proccess you need the average price to be equal or lower than the initial price you calculated. this method is more compicated and more risky so it is better for most to stick with the simple method.
Who will be the next Bill Gates, etc...?
www.sciencedaily.com/r...
I don't buy into the lack of credit at all. There will always be money for the advancing technology. There also seems to be all of this indecision on what type of power will prevail. All methods will be employed before it is over and alternative will become cheaper as traditional power sources become more expensive and technology advances.
Ihave been buying YGE and I will continue to accumulate shares. Solar is a comodity for investment purposes.
Also google: 50% YGE solar
seekingalpha.com/artic...
What happens at night? Or when the wind isn't blowing? You're telling me that you can store the extra energy accumulated during the day to keep our city powered at night?? You're delusional.
Who wants to live in a city that has power outages 50% of the time and is neighbored by a city of solar panels or wind turbines?? Not me, and not your local politician.
These energy sources are used for peak periods. They are not sufficient for base load electricity. Not to mention they make no economic sense as an investment. Just keep that in mind while you play this fad.
Even if they were connected by a magical land bridge, the distances are too far and all of the energy is lost in the transport.
Kerosene was the alternative energy of its days:))))
Let's just say, winners writes the history books. Let's just consider the fact that economics are in continuous motion....true values and true winners are a succeeding attribute. Maybe is time for solar to shine...or you might go for Global Warming all together?...right?
What is more efficient than your own survival? Let it live to see another day, please:)))
No bridges are needed, Ocean floor conections are a lot more efficient. You are looking at about 6000 miles of high voltage cable?
If someone here woud understand better "communism" and what actually communism does, he would probably associate the cash-rich Chinese banks with cash-in-need highly profitable Chinese solar companies. Communism is what put them in the same boat:)))
I track solar companies and none of them pay dividends over 4%. A lot of solar companies have price to book ratios over 2 and price to tangible book values that are even higher.
Then the ONLY way to profit is to be a trader and buy low and sell high.
If you think that a company will be a good investment in 20 years and you want to take that risk then go ahead and invest your money. I am happier getting paid now... with dividends.
I have one pipeline company that pays me a yield of 8.5% on my cost and has excellent management and is profitable. It's TCLP.
LONG TCLP
For transmission/infrastru... CPTC would raise an eyebrow or two IMO.
It would take a field of solar panels or wind turbines the size of a city, to power a city of the same size.
/quote
You don't need wind turbine's the size of the city itself lol. My hometown in Europe has 30.000 souls and is currently almost fully supplied of energy by 9 windmills at the nothern fringe of the city near the industrial zone. ... thats just 9 (2MW) turbine's ... you cant even see them from the other side of the town. :p
/quote
What happens at night? Or when the wind isn't blowing? You're telling me that you can store the extra energy accumulated during the day to keep our city powered at night??
quote/
Some yes, the rest you get from other sources, and the excess you get on good wind days goes to other places. Anyway, its not because the wid blows less at one site that it does so on an other side to. We have windmills al over Europe and there is no problem with exporting for ex electricity from Denmark to france or vice versa.
The Danish have 20% of their energy from wind, and its still growing. And its not like they have regular power outages, au contraire, i think that appens less in Denmark than in other country's.
Anyway, there are enough engineers to provide a sollution for all youre concerns. It's not that i know all the methods on how they resolve these issues, though i doubt you have technical expertise in these fields youreself, no pun intended, just that i doubt that what you put forward are really difficult concerns.
Hey geniuses, its called base load power. Coal is not going away any time soon. It will continue to be used as base load power until it is gone. People forget that energy is a global market. If you can reduce your coal usage in Arizona or Nevada even just during the daylight hours, then it lessens demand on coal and lowers the cost of power even for people in Chicago or New York.
2008 - '400MW' of solar panels - ie about 80MW of actual power on average, which at wholesale electrical prices, say 5c/kwh is 0.05*80000*24*365/1e6 = 36 million dollars of electricity produced by their products for stuff installed this year (being optimistic). 22 Billion in market cap to produce as much electricity as a $60 million nat gas plant.
Ok - so everyone is betting that they can reduce costs by a factor of 5? The press releases all mention single digit increases in efficiency, or modest drops in prices. Even if they figure it all out in 5 or 10 years, someone else with lower costs will come along and take all the business.
With the economy being what it is, everyone is looking for something positive. Follow it up, but don't hold on!
--Tom
*Early adopters- people who want the technology just to say they have it.
*Enviromentalists-need I say more
*Commodity booms-slap me once, shame on you; slap me twice, shame on me. Beware another commodity boom! Get this technology in place as a hedge against another boom.
*People who just want to be off the grid(or be able to sell to it)-I'm on of these, and I would consider moving to AZ just to be able to have a solar powered house. I do live in a windy part of WA though and am looking into a wind generator.
*Plug in electric cars-while using mainly the night time to recharge they will enough of them soon enough to drive up electric rates.
Any more reasons and thoughts are welcome.
Cramer also said there isnt a market for home panels and I think that is rubbish. Natural gas will probably not go back down to where it was just as oil and that will cause electricity to go up. Demand is also growing fast for grid power, faster than supply. Anyone listened to Boone Pickens? I think he's right! All a new home owner would have to do is subtract that 4th bedroom and 3rd bathroom to have free electricity especially in the south! Same thing as fighting oil prices by buying a smaller car. Sure not everyone is wise enough to do this, but many are.
Just giving another side to the argument and plugging my stock of course hehe!
I do wish FSLR good luck as I think what they and the rest of the solar industry is doing is great!
Secondly on the debt issue, you could safely bet that the Chinese companies would have an advantage as they would be adequately supported (funded) by the state or the state owned SWFs.