Jack Yetiv

Jack Yetiv
Contributor since: 2008
In discussing these above companies, I think a major point needs to be made regarding NGLPF. Although it's great that NGLPF received about $3.5 million on Fri, a much more significant development occurred on Oct. 9--NGLPF made a $58 million application for a payment of the 30% investment tax credit. According to the press release (and to the Treasury's rules), the npayment should be forthcoming in early December since the Blue Mountain geothermal plant against which this credit has been sought has hit thye necessary benchmarks to receive this payment.
I am absolutely flabbergasted the after receiving both the $3.5 million grant and expecting the $58 million credit payment in about 30 days, is not trading at closer to $1.50 than under a dollar.
Jack Yetiv
Disclosure: Long over 100K shares of NGLPF with a cost basis of about 90 cents and RZ.
HERE IS A COMMENT I WROTE IN RESPONSE TO ANOTHER SOLAR ARTICLE ON SA ON SEPT. 23, 2009, in which the author argued that FSLR was worth $150+ and that TSL (a company which I like a lot but which is probably fairly priced in the $30-$35 range) is worth more than $35:
First, I think your metric of cost/watt of panel is the WRONG metric to use. The correct metric is cost per INSTALLED watt. Since you have to install almost twice as many FSLR panels to equal the output of a silicon panel, your land cost is going to be substantially higher, as will be balance of system costs such as racking, wire, labor, etc. When you look at cost per INSTALLED watt, the cost delta between thin-panel and silicon-based panels is much narrower.
In addition, we KNOW that silicon-based panels will produce power for 30 (and more) years--because we have panels of that age out there. We do not have any 30-year-old thin-film panels out there so their longevity is more of a question in my mind.
Also, the rooftop market is almost off-limits to thin-film panels because such panels require almost twice as much roof space.
Given the foregoing opinions which I hold, I disagree that FSLR is good value at $150/share. I do not doubt that FSLR sales will grow significantly in the next few years because overall solar panel sales are going to increase trememdously.
But I will bet you that by the end of this year--if not sooner--FSLR's 50%+ margins will be history, and I will also bet that its margins will be in the 30's in 2010. If margins are cut in half, FSLR can double sales and yet not make any more profit. That outcome does not justify a PE of approx 20, which is where FSLR is right now.
As to TSL, I like it a lot (see my articles on TSL last year, before others began touting it), but am concerned about buying it at $35. Although there is upside potential, I think downside risk is significant as well.
I THINK THE ABOVE COMMENT STILL APPLIES. Obviously, the market now agrees with me that FSLR was overpriced at $150. We'll see what happens with TSL after earnings. As much as I like the solar industry and the potential it has to solve a lot of our problems, it has largely become a commodity business and I believe 15-25% gross margins and 10-15% operating margins will be standard fare in this business going forward.
Jack Yetiv
Jack Yetiv
I think the market sold off not only because of the revenue miss but also because gross margins had dropped from 56% in Q2 to 50% this quarter--and guidance for the 4th quarter was 41-44%. I suspect that the market concluded that this is not a gross margin trajectory that justifies a valuation of 17X this year's earnings--and I agree. I have posted about FSLR in SA for the past couple of years and have had this opinion previously--and the gross margin drop this quarter with guidance for additional drop simply confirms it.
I believe FSLR will increase sales another 20-30% next year over this year, but their earnings will not increase much because their gross and operating margins will be further compressed next year due to continued (though more muted) ASP declines.
Jack Yetiv
Keep in mind that the hybrid powertrain that RZ has showcased in the Hummer could be used, with slight modification, in most SUV's and trucks. That covers almost 50% of the automative market in the US.
Also, as I mentioned in my previous comment, it seems quite likely to me that RZ will be able to apply for the 30% tax credit on its Thermo plant in the next few months, and possibly even before this year is out.
Given the potential of the hybdrid powertrain and the better than 50:50 likelihood that RZ will get a tax credit on Thermo, I think there is more upside potential to downside potential on RZ.
Jack Yetiv
I agree with both the article and the comment, with one potential significant disagreement with the author. He suggests that financing is a big issue. On that we agree. Where we disagree is that he considers financing to be very risky, and I do not believe that to be so (I do realize the market disagrees with me, given that NGLPF has dropped 25% in the past few trading days and RZ has dropped 40% in the past couple of months).
The reason I do not see funding to be as major of a doubt as the author is because of the currently-available 30% investment tax credit. To see how it works, check out the NGLPF press release about 2 weeks ago. NGLPF has applied for a $58 million tax credit against their recently constructed Blue Mountain geo plant. As I understand it, if the certifications have been completed (and NGLPF completed those before applying) and the paperwork is submitted correctly, these credits are paid within 60 days, which in NGLPF's case will be in early December (they submitted the app Oct 9).
Wouldn't most people consider the very-likely influx of a $58 million GRANT (not a loan) in less than 45 days from today to be meaningful financing for a company with a market cap under $100 million?
Although the above comment addresses NGLPF, I believe RZ is working on a similar application for its Thermo plant. Keep in mind that this program is not limited to one plant--in fact, it can be repeated as each plant achieves the necessary milestones
Jack Yetiv
As I have opined on these pages several times recently, I believe the solar business is going to be a relatively low-margin business in 2009 and beyond. SPWRA's conf call simply confirms this impression.
I think the fourth quarter may still show some decent margins because of cost-cutting and because I believe ASP reductions will slow down because demand will exceed supply--primarily because panel-fab-building slowed down significantly in late '08 and the first half of '09, but I believe by next year, ASP's will drop again as production increases to meet demand.
Of course, as prices go down, that will further boost demand, which will arrest pricipitous falls in prices (and hence, margins), but once equilibrium is reached, I believe gross margins of good companies (like SunPower) will be in the 20% range--as they were this quarter (FSLR will have higher margins than the 20's because of its cost advantages, but its margins are going to be compressed as well, rpobably down from the 50's last quarter to the 30s by the end of next year).
I do believe that SPWRA can increase sales by 20-30% next year, but that is not going to yield such a high EPS that it justifies a forward PE against 2010 income in excess of 20.
Jack Yetiv
DISCLOSURE: No position in any solar stock, neither short nor long.
First, thanks for introducing Systaic--I'm not familiar with it and will need to look into it.
Second, I have some disagreements with your conclusions. I have liked TSL since early 2008, as you can see from SA articles I wrote recommending it. In fact, I still like (for the same reasons I expressed in 2008) TSL's integrated business model and the geographic dispersion of its customers, and its forward-thinking lack of reliance on the European market. Having said all that, a forward PE of 13.5 against 2010 projected earnings is not a screaming bargain. Depending on market sentiment for solars, this could be fairly priced, somewhat underpriced (ie, suggesting some upside) or somewhat overpriced (ie, suggesting some downside risk).
Where TSL's stock price goes largely depends, in my opinion, on where ASP's end up in the second half of 2009 and in 2010.
I can make very compelling arguments that ASP's in 2009 and 2010 (1) will fall from where they were in Q2, (2) will go up from where they were in Q2, (3) will stay stable from where they were in Q2.
The problem is--I'm not sure which one of my compelling arguments is most likely to be correct. My GUESS is that ASP's will continue to drop, but not as much as some of the doomsayers think they will, and I believe this will occur because demand will increase in late 2009 and 2010 more than many expect. But my confidence level in this prediction is not super-high, and a forward PE of 13.5 does not leave much room for error.
Further thoughts later.
Jack Yetiv
I've now been reading for months about how storage is going to fill up causing gas to be "dumped" on the market, but the math does not add up. Experts are projecting an injection of 50-60 BCF to be reported this Thurs, Oct. 1, which should put total amt of gas stored at 3.6 TCF. I have read we have somewhere between 3.8 and 4.0 TCF of storage capacity, with the best number, I believe, being the midpoint, 3.9 TCF. That means we can store 300 BCF more before storage is full (yes, I realize different storage locations may have differential fills, but I am talking across the US).

If we continue storing an average of 55 BCF per week, on Oct. 29, we should be at about 3.8 TCF--just approaching full on the 3.8 TCF storage capacity number, and a bit under full if you believe the 3.9 TCF number, and even more under if you believe 4.0 TCF of storage capacity.

Usually withdrawal from storage starts in the beginning of Nov. Therefore, unless I'm missing something, there won't be many days (if any) of "dumping" before withdrawal from storage begins.

Jack Yetiv
First, I think your metric of cost/watt of panel is the WRONG metric to use. The correct metric is cost per INSTALLED watt. Since you have to install almost twice as many FSLR panels to equal the output of a silicon panel, your land cost is going to be substantially higher, as will be balance of system costs such as racking, wire, labor, etc. When you look at cost per INSTALLED watt, the cost delta between thin-panel and silicon-based panels is much narrower.

In addition, we KNOW that silicon-based panels will produce power for 30 (and more) years--because we have panels of that age out there. We do not have any 30-year-old thin-film panels out there so their longevity is more of a question in my mind.

Also, the rooftop market is almost off-limits to thin-film panels because such panels require almost twice as much roof space.

Given the foregoing opinions which I hold, I disagree that FSLR is good value at $150/share. I do not doubt that FSLR sales will grow significantly in the next few years because overall solar panel sales are going to increase trememdously.

But I will bet you that by the end of this year--if not sooner--FSLR's 50%+ margins will be history, and I will also bet that its margins will be in the 30's in 2010. If margins are cut in half, FSLR can double sales and yet not make any more profit. That outcome does not justify a PE of approx 20, which is where FSLR is right now.

As to TSL, I like it a lot (see my articles on TSL last year, before others began touting it), but am concerned about buying it at $35. Although there is upside potential, I think downside risk is significant as well.

Jack Yetiv
I have long predicted (since last year) that the integrated Chinese panel-makers (eg, TSL) would challenge TOTAL INSTALLED COSTS using FSLR's panels within a couple of years because I previously opined that the poly-component of TSL's panels would decrease from last year's $1.75 per watt to under 75 cents per watt within two years.
Well, the macroeconomic events of the past year have made my dropping-price-of-poly prediction come true far far sooner than I would have ever guessed. At $30 to $40/kg poly costs, the poly costs per watt are quite low (15 to 20 cents per watt), and probably not THAT different from the cadmium and tellurium in TWO FSLR panels (you need almost two FSLR panels to equal the output of one poly-based TSL panel).
When you also add in the higher BOS (balance-of-system) costs (extra shipping, racking, wire, labor to connect twice as many panels) and land costs, total installed costs should not be very different between FSLR and TSL as long as TSL can get poly in the $30 to $40 range.
My guess is that TSL's projections are not that aggressive. My guess is that TSL has contracted for $30 to $40/kg poly next year and keep in mind that TSL has been dropping non-poly panel-making costs quite aggressively (almost 20% in the past year).
Having said that, I agree that TSL is not a strong buy by any means at $30/share because to me downside risk comes not from TSL's failure to meet the cost-reduction roadmap I have described above but rather, by its margins dropping (from the 27% range it recently reported) due to ASP's dropping more quickly than it is projecting.
Of course, I believe FSLR is overpriced in the $130 range--just like I believed when FSLR was $300 last year. The reason for this is not due to lack of demand--FSLR will sell everything it can produce in the next year or two--but because I project that its gross margins, which have traditionally been in the 50's, will be half that by this time next year.
Jack Yetiv
I would not make much of FSLR's "win," for several reasons (yes, I realize the market has disagreed with me so far, but that was also the case last year when FSLR was $300, and I opined its fair value was closer to $100):
1) What was signed was a memorandum of understanding, not a binding contract. Costs and pricing have not been determined yet. The "devil," as they say, "is in the details."
2) Even if this becomes a binding contract, first meaningful revenue to FSLR does not come for another 18 months or so. Further, I will bet FSLR's traditional 50%+ margins will be cut in half on this project--if not less.
3) The bulk of the revenue from this deal is several years away. Lots can happen between now and then--not the least of which is that I believe that total installed costs of poly-based panels will be LESS than the installed cost of FSLR's thin-film panels LONG before the bulk of the revenue is recognized. This sets up a significant possibility that FSLR's margins will either become razor-thin on this project in 2011 or 2012--or it will lose the contract to one or more Chinese poly-based panel makers.
Jack Yetiv
I predict that by the beginning of next year, one or more of the integrated Chinese solar manufacturers (eg, TSL, SOL, and/or YGE) will have a cost per watt of panel (INCLUDING their silicon cost) that is within a few percent of FSLR's cost per watt of panel. After ADDING in the extra balance-of-system costs (in essence, after taking into account the fact that you need to build and install TWO FSLR panels to match the power output of ONE high-efficiency poly-based panel, a poly-based installation will actually be CHEAPER than a thin-film installation from FSLR.
This means that FSLR's gross margins, which have traditionally been in the 50%+ range will DROP precipitously, exposing FSLR's stock to a real risk of going to $100 or below ($100 represents a forward PE of 10 to 12 against 2010 projected EPS).
If poly drops below the current $40-60/kg price (and I believe it will), the poly portion of the cost of a panel becomes very small and almost irrelevant. For example, assuming a poly price of $40/kg and 5 gm/watt of poly, the poly cost per watt is 20 cents (this time last year, poly costs per watt were running about $1.75/watt!).
Summary--I believe the upside on FSLR is limited, and downside is at least as likely as upside. I believe SOL and TSL are currently the best bets in the solar space with limited downside (unless the whole market crashes) and a decent prospect of 50% upside in the next 6-12 months. Both SOL and TSL are currently valued at a forward PE of about 10, and both will benefit from the fact that China is going at a breakneck speed to incentivize solar and from the fact that as their costs go down, poly-based Chinese manufacturers will grab more of the market share that FSLR would have had last year.
Jack Yetiv
I respectfully disagree with the author and quite a few of the commenters. With poly at $35/kg, and assuming 5 g of poly per watt, the poly cost in a panel is 17 cents/watt--an almost irrelevant cost, and probably equal to the Cd and Te that FSLR puts in its panels.
So low-cost poly DOES essentially kill FSLR's "supposed" cost advantage. As an aside, Si is one of the most abundant elements on earth, and on a longterm basis, there is no reason for poly to cost $35/kg, especially as manufacturing processes to make poly become more efficient, given that the raw material to make it is pretty cheap.
I use the term "supposed" for a reason. Assume that FSLR produces panels with 10% efficiency, and its competitors 20% (SPWRA produces 22% panels today, the Chinese fabs are at 18-19%). Even assuming FSLR's Cd/Te costs were lower than the poly costs, FSLR MUST BUILD TWO PANELS to generate the same amount of power as ONE doubly-efficient poly panel. The aluminum, glass, fabrication, etc cost of the second panel must also be taken into account. Also, if high-efficiency poly panels are put on trackers, FSLR's cost "advantage" becomes even more spurious.
Finally, FSLR needs essentially twice as much real estate to generate the same amount of power as a field of poly-based panels (almost three times as much if the panels are put on trackers). That real estate does not come free--regardless of whether it is land in the Nevada desert or rooftops.
Taking all of these factors into account, I believe that FSLR does NOT deserve a higher forward PE than the likes of TSL, CSIQ, STP and SPWRA.
Jack Yetiv
I agree with the downgrade, although I am not sure I could call a price target as precise as the analyst. On the other hand, I do not agree with the analyst's implication that FSLR deserves a forward PE (against 2010's EPS, not even 2009's) of 25.
As to SPWRA, the fact that it can put out 22% panels versus just 18-19% by its competitors is not a big advantage. It's worth something, but that something will keep dropping as overall panel efficiencies of SPWRA's competitors reach and exceed 20%, and as panel prices continue to drop.
As to FSLR, its cost advantage is fast eroding as poly-based panels are approacing total production cost of $1/watt and ASP's of $2/watt. Finally, because of a lack of truly meaningful differentiation, the solar business is fast becoming a commodity business, with gross margins of probably 15-20% to be reasonably expected in 2010 from the better-run companies.
Therefore, I do not believe either SPWRA or FSLR deserve forward multiples in excess of 10-15.
This is true despite the fact that I strongly believe PV sales will climb very rapidly from a relatively low base in 2008, as well they should, because many people are beginning to realize that if we take ALL costs into account (yes, including CO2), grid parity has been achieved.
Jack Yetiv
Jimp,
It has indeed been a long time. Bought a crime-ridden, horribly-run, 346-unit apt complex last summer and for that reason and othyers, have been extremely busy since then. I did not do much in the stock market in the past year except sell calls against my various stock positions, and some of those call finally got exercised (on TSL).
It will probably be another month or two (or three) before I can re-educate myself so that I can write an intelligent article on the solar space.
Jack
In multiple articles I wrote last year, I opined that FSLR, ENER and SPWRA were overpriced, the first two because I believed that much-more-efficient poly-based panels would drop in price and begin to challenge the pricing advantage of thin films. That prediction has turned out to be correct--largely aided by the macroeconomic issues that has since come to pass.
When I wrote my articles in early 2008, my favorite stock was TSL, and that remains the case, although I think $28 is pretty close to fairly priced given the various headwinds that are facing the industry (macroeconomic headwinds as well as competition within the industry which will squeeze margins).
CSUN, SOL and SOLF may become decent plays, depending on what their earnings show in the next few weeks. Until then, I am not sure that the upside potential of any of the solar stocks substantially outweighs their downside risk (which it must be for me to want to invest).
DISCLOSURE: I do own some SOL and CSUN but got all my TSL called away from me at $22.50 after selling covered calls (at $1.65) against my TSL shares last month.
Jack Yetiv
Re Jerrydd comments:
Keep in mind that the cost of building a solar panel has dropped almost 50% in the past decade, and the leading manufacturers are talking about a further decrease of approx. 50% in the next 5 years. as carbon-derived electricity becomes more expensive due to the fact that the cost of the released carbon begins to be passed on to the ratepayers, it will become to everyone that true grid parity has been reached in many parts of the US.
The above will remove ANY cost benefits that may be perceived today in favor of nuclear.
Please also note that within 5-10 years, concentrating PV arrays are likely to be generating a fair bit of baseload power because such plants will have a moderate capacity to store power, at least overnight if not for longer.
Since it takes around 10 years to actually get a nuke planmt built, by the time today's "planned" nuclear plants are actually built, they will be recognized to be largely obsolete, from a cost perspective.
Jack Yetiv
Steve, which other E & P offers a better porospect than PWE, and why?
I believe PWE is a compelling value here--even if they do what PVX just did and drop dividend by 25% (and I think they should do that even if they could sustain this dividend). Even after a 25% cut in the dividend, it would still yield 20% on today's closing price.
Jack Yetiv
Although the analysts are routinely next-to-useless, there is one part of the above that bears careful watching and which I think will be proven valid. Recall that several of these companies announced significant upside earnings surprises in previous quarters due largely to big Euro-based forex gains.
Given what the Euro has done versus the dollar in the past few months, investors should not expect any forex gains in Q3 (and probably even less so in Q4) and that could MATERIALLY impact earnings for CSIQ, STP and others.
In contrast, the strengthening dollar should actually HELP TSL's earnings in Q3 and Q4 because it uses the dollar as its functional currency. At the very least, the dollar's recent strength should limit (and probably eliminate) the forex losses that hurt TSL's Q1 and Q2. Indeed, TSL might even report a bit of a forex gain. Since these forex gains and losses can amount to 20-30 cents per share, their impact on stock price can be quite significant.
As to fundamentals of the solar industry, here are my brief thoughts (I will expand on these in an article at the end of November):
1) World demand will continue to be robust, largely because of the $17 billion renewable subsidy passed as part of the $700 billion bailout.
2) Polysilicon prices will drop 15-20% in 2009 compared to 2008 (and this has already begun in earnest in the spot market, although note that much poly is contracted for at agreed prices, so spot prices won't impact all poly bought).
3) ASP's will be 10-12% lower in 2009 versus 2008 (this has also begun).
4) Overall margins in 2009 will be maintained, but earnings growth will slow down for most companies from +50 to 100% to "only" 30 to 60% as production ramps slow and income taxes increase.
Jack Yetiv
I agree that (1) the marginal cost of production (which is probably $70-$80/barrell) will set the floor, unless (2) OPEC chooses a different setpoint.
My guess is that OPEC will NOT want oil lower than $100, which means that oil might overshoot to maybe $90, but not much lower.
OPEC can achieve whatever price it wants by cutting the proper amount of production from global supply.
Jack Yetiv
Excellent article, but fails to take into account (because it probably cannot) politically-induced manipulation of production, which may change the production curves (and probably the consumption curves) tremendously.
I refer largely (but not exclusively) to OPEC. I think OPEC could serve to smooth the curve even more--until they run out of spare capacity. For example, when Khursaniyah becomes fully operational in the next few months, its production will likely be witheld from the market if oil is at $100 or less. Indeed, when OPEC meets next week, we may well learn of production cuts.
The bottom line is that I strongly believe that politically-induced manipulations of oil production may exert great influence of the above analysis.
In the final analysis though, it seems likely me that oil is unlikely to go south of $100 by a whole lot, and it seems further likely that oil will begin an uptrend over the next few years. I think to guess that oil will be $200 or $500 is to do something we really don't have sufficient data for, but it seems likely oil prices will continue to climb over t5he next few years.
As it was in an article I posted here about 8 months ago, my prediction is for oil to be at $100 to $120 this year and maybe next, with $150 (plus or minus $20) as the new baseline sometime next year or the year after.
Jack Yetiv
The idea of selling non-core assets is to get rid of assets providing a low ROI and replace them with something that offers a better return. For example, maybe these 16,000 barrells of production represent high-cost production due to their geology or location.
One speculation--PWE made the non-core asset deal a month or two months ago, when commodity prices were much higher. They may be able to replace those non-core assets with others at a lower price, and in places that "fit" their E & P activities better.
Until we know the terms, it's impossible to know if this sale was stupid, brilliant or somewhere in between.
Jack
I agree completely with the thesis of the article. However, I think you also need to mention that OPEC reduced production will also protect against downside from the $100-110. I posited that hypothesis in my article on SA in january, 2008, when oil was below $100, and it was reaffirmed a few days ago when Venezuela stated it might well recommend a decrease in OPEC production at the meeting next month.
I do agree that oil may approach if not test $100, and nat gas may hit low $7. If they do, I am going to load up the boat (I'm already pretty loaded, though, primarily with PWE and PVX).
Jack
Great article, Mr. Hamilton. Always appreciate your dispassionate, data-based analysis of the issues.
Frankly, since nobody has actually defined "speculation" it's impossible to determine whether oil prices are largely due to it. Bu thye fact of the matter is that all stocks and commodities are driven by "specualtion" in the braod sense of the world--when I buy a stock, aren't I doing it because I am speculating that it will go up in the future?
How is that different than buying oil because I think it will be higher in the future?
And if I buy an investment property, am I not doing it because I think I will be able to get more for it when I sell it?
Jack
Good article! Question to the author:
How does $8 gas impact the rates of return, and the attractiveness to the investors who put up the moeny to drill the wells?
Can the "guranteed return" to the investors completely eliminate any return to ATN if the gas price goes low enough?
Jack
I believe I can answer your questions, Garry:
1) Solars are not going to grow 50-100% PER YEAR--I think 2008 for many solars will be 100%+ better than 2007, but CAGR's will slow to 30-40% in 2009 to 2010.
2) Yes, the future CAN really be that good. Look at MSFT's growth 20 years ago, Dell's 10 years ago, AAPL's in the past 5 years. Solar is more compelling than all of those because the product it makes--electricity--is far more essential than Ipods, and current means of producing it--coal, nat gas, even nuclear--are all fraught with problems, not the least of which is markedly increasing costs.
Solar offers NONE of those problems--and will DECREASE in cost going forward--probably by at least 10-15% next year and an equal amount in 2010.
In Calif, as you can tell from the Southern Calif Edison and PG & E announcements, we are essentially at grid parity. The growing recognition of that fact will boost demand tremendously.
3) They all need capital--either in the form of selling shares, or borrowing money. But in 2009, these companies are going to be making tens of millions of dollars in profit per quarter--and some will hit quarterly earnings of $100 million before the end of next year. That will generate lots of cash for growth.
Also, keep in mind that as their stock prices appreciate, they can get much more cash for selling 5 million shares than when their stock prices are lower.
I'll explain in a future post why I believe the market ran yesterday and today after STP earnings. It had little to do with STP's earnings.
Jack
TO USER 226....:
I don't usually get my facts wrong. I didn't this time, either. Quote from the CC, which is kindly posted on Seeking Alpha:
In respect to long-term financing for our strategic expansion, on July 24th we successfully concluded our convertible bond offering, which can provide for our remaining 2008 funding requirements, in addition to anticipate positive operational cash flows in the second half.
Always good to check the facts very carefully before you criticize someone else.
Jack
A few highlights I think are important:
1) Revenues Q1--$120 million, Q2--$204 million, Q3--$265 million (upper end of guidance, which they will meet or exceed).
2) EPS--ex 1X items--for these three quarters was about 60 cents in Q1 (going from memory), $1.00 this quarter, and I'm guessing about $1.25 next quarter.
3) They announced on the call that they do NOT need any further cash for the rest of 2008, so that takes care of one issue for TSL. By the way, the same applies to CSIQ and SOL, so so much for the guy who was writing on SA a few months ago telling us all these Chinese solars had one foot in bankruptcy court.
4) I don't care what your complaints are about management (and I thought they did a nice conference call this quarter) a company that is growing sales and operational profits at a rate of 25-50% SEQUENTIALLY does NOT deserve a forward PE of SIX (against 2009 earnings that will undoubtedly exceed $5/sh on an operational basis, and may well exceed $5 even taking 1X events into account).
5) As to management's competence, I disagree with the author and above commenters. We all knew that canceling the fab was going to hit Q2 earnings, and frankly, just a $2 million (8-cent) hit is not bad at all. I would have expected twice that.
Second, we all "knew" that forex was going to be a $3 million (12-cent) hit. Therefore, assuming $4 million hit for closing the poly fab and $3 million on forex, you could have reasonably modeled $7 million in one-time hits, versus the actually-announced $8 million (32 cents in total 1X hits).
6) Because we know that closing the fab is over, that hit isn't coming back. As to forex, I still don't understand it well enough to know whether TSL mgt had a choice in going to the US dollar as a functional currency, so I can't either criticize or exonerate management on this issue. But we do know the dollar has shown a lot of strength so far this quarter (I'm not sure if the strength was just against the Euro or also a little against the RMB, although one commenter above suggests the strength is only against the Euro).
In addition, TSL mgt indicated that they are working on diversifying their capital structure to minimize short-term RMB-denominated debt, which will therefore REDUCE the volatility caused by the forex issue. The appreciation of the dollar and the efforts to reduce RMB-denominated debt suggest to me that going forward, the forex losses should be less, and if we have a quarter where the forex losses zero out or become gains, TSL could report a 100% surprise quarter.
7) The forex issue--because it is so large relative to operational earnings--does make it extremely difficult to project earnings for TSL, but even if you take this quarter's $1.00 and subtract the 24 cents of forex, and even if you assume that TSL does not grow EITHER revenues nor earnings for the next 3 quarters, that would give you $3.04 in earnings (76 cents X 4).
Of course, if you make a more realistic (but still very conservative) earnings progression of 86, 96 cents, $1.06 and $1.16, you get $4.04 in earnings in the next 12 months.
Of course, if revenues increase $60 million next quarter, and forex stays the same as this quarter ($6.1 million), I expect that TSL will make close to $1.00--not 86 cents--in Q3. But even taking the progression starting with 86 cents, $4.04 in the next 12 months means that TSL, a company that will undoubtedly double earnings in 2008 versus 2007, and probably go up another 30-40% in 2009, is trading at a forward PE today of LESS THAN 7.5.
Gimme a break. That's absurd, regardless of what you think of management.
And I, for one, think they did fine this quarter (of course, the market is telling me I'm the only one in the world that feels this way, but hey, I'm right and the market is wrong! LOL).
Jack
I'm embarrassed to tell you that I cannot recall why, but I don't like ERF as much as I like PWE and PVX. About a month ago, I re-reviewed my picks, and concluded I liked PVX/PWE better.
Based on my hazy memory (double-check me on this), I believe ERF had a higher payout ratio this quarter that either PWE/PVX, while offering a bit less dividend. ERF's RLI (Reserve Life Index) and/or tax pools may be somewhat less, as well.
Of course, I think all of these Canroy's will do well if oil stays over $100 and nat gas doesn't go lower than it is right now. They all will suffer if the contrary comes to pass.
jack
Georealist brings up a good point, which I have made before but want to emphasize:
If you criticize my basket of recommended stocks in the past year (CSIQ, PWE, TSL, PVX and SOL, plus HTE for a while but NOT now), which overall, are probably up 15% after Friday's run in SOL and TSL, then you have to tell me what is better.
If your "better" is to be in cash, that's fine, but "cash" has made people what, 3% in the past year?
Jack
User, I still believe that TSL and SOL offer the best value in the solar space, and have not sold any of my shares in either one. I bought my considerable position in TSL in the low 40's about maybe 3 months ago, so I am way underwater on those. SOL I bought about 3 weeks ago at $13.54, so I'm good on those.
But keep in mind this has been a very fickle, anti-solar, anti-oil market, and even though I thought FSLR and CSIQ announced very well, their stocks really haven't gone anywhere, unlike at any time in the past. Part of this is due to the perceived connection between dropping oil prices and a lower attraction to solar, and part of this is due to negative press on the solar companies and ITC expiration concerns.
TSL is by far the PE leader, trading at what I believe to be a 2008 PE of under 9 (I am projecting income at about $3.50 for 2008), while SOL is at about 11-12 PE, but SOL is much more loved by analysts and the investment community.
TSL announces tomorrow and SOL on Tues. In the past, I would have said that if they blow out their numbers, they will go up 30-40%, but having observed FSLR and CSIQ, I'm not as sure this time around. But the solar stocks have shown some strength recently, so maybe we will get a nice run if these companies report very well. LDK absolutely demolished estimates, and last quarter, probably would have run close to 100%, but only ran about 30% this time.
But since I am not a daytrader, I can wait for the market to recognize the value in these names.
Jack
Don't know much about Optisolar except that it's a private company based in Hayward, CA, where I used to take helo flying lessons! I have often seen it listed as a minor, start-up thin-film producer, but clearly, 550MW is no start-up (to give you a metric--550MW is in the range of what either SPWR, TSL or CSIQ will make in 2009--total company production). Do keep in mind that these contracts won't begin to be realistically performed for at least 6 months, probably closer to a year, and much can change in a year.
My guess (and it is only that) is that Optisolar's efficiency is today in the ballpark of FSLR, which is about 11%. SPWR has laboratory 23.6% efficiency, and I expect their production panels in 2010 will probably be around 25%.
As to McCain and Obama, to my knowledge, neither has come out and stated a position on the ITC, but both have included "renewable energy" as something we ought to do. But even forgetting the two candidates, there is a growing groundswell of support for renewables in this country, and Boone has helped put renewables/wind on the map. Just like poll results will push Obama not to oppose drilling the OCS/ANWR, I believe the same will happen with renewables.
Watch for this topic to become front and center during the debates.
Also, it's entirely possible that this issue will come up when Congress returns from its recess in a couple of weeks. Remember, the states are way ahead of the federal govt on this issue (30 states now have RPS's, Renewable Portfolio Standards), which will also generate pressure on Congress to do something. Finally, as the economy slows, and unemployment increases, extending the ITC will be sold as a "jobs creation" plan--which of course, it will be.
One way or another--and for so many reasons--this country HAS to support renewables. And, I believe that although we'll be late to the party (compared to Europe), once we get to the party, we'll be the heaviest drinkers.
Jack