Jack Yetiv

Solar Stocks Break Down Yet Again

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

The Sweet Smell of Solar Values

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

More Downside Ahead for Solar - Barclay's

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

Solar Stocks: Cutting Back on Three Names

I wasn't too impressed with FSLR last quarter, and they WILL fail to meet expectations one of these quarters. But as I have posted here many times before, quarter-to-quarter, and given the cheering section it has, I would never bet against FSLR.

Jack

Solar Stocks: Cutting Back on Three Names

Well, FSLR blew out its earnings and was up $20 in afterhours the last time I checked. I though FSLR would exceed, but not by the level that it did. Another $20-30 tomorrow would not be unusual for FSLR given previous performance.

I think this will turn out to be the catalyst that will light the fire under the solars (of course, yesterday was a pretty good day as well). I think TSL and CSIQ will reach the $40's and SOL will hit low to mid-20's in the next 3 weeks.

Remember, European (especially German and Spanish) solar demand cranked up this quarter due to uncertainty regarding future feed-in tariffs, so I think you will see that most solars will report very well this quarter.

This will be especially true if oil remains in the $120's or higher, although there has been some decoupling between oil and solars (as there should be, of course, as noted above).

Jack

Solar Stocks: Cutting Back on Three Names

And I forgot the biggest one of all right now--Italy.

Jack

Solar Stocks: Cutting Back on Three Names

Mark, I have noted technicals have not been very useful in the solar sector because these stocks simply do not respect either support or resistance levels. Of course, you could always be right, BUT I would never sell just as earnings season gets going.

Yesterday could well have been the typical break to the top that starts a multi-day trend, and that often happens at earnings season (remember ENER, CSIQ, SOL last quarter).

I do agree that the stock market overall may be in for more pain over the next few months, and it may well be smart to take profits as earnings season ends, but for whatever it is worth, I think selling now is a mistake.

I think that whatever Spain does, demand will continue increasing due to Eastern Europe (Czech Republic, etc) which has its own "OPEC" issues with the former Russia which uses oil and gas as a political weapon, China, France, Luxembourg, Japan, China and yes, even the good ole US of A.

Jack Yetiv

Solar Grade: A Silicon Revolution

In additional to decreased cost of silicon, I also expect that watts/gram of poly will probably double in 5 years from todays.

This will be due to two key things: (1) increasing efficiency from about 16% today to mid-20's in 5 years (SPWR should be rolling out 23% panels next year), and (2) thinner wafers.

So even if poly prices did not change, cost of poly per watt will decrease substantially over the next few years. Factor in a drop in poly costs, and overall panel prices are well on their way to costing half as much as they do now within a few years.

Jack

Expect Continued Canadian Solar Financing This Year

Envoy, any comments about the convertible TSL announced today, and the 13% in the stock's price?

Jack

Expect Continued Canadian Solar Financing This Year

Envoy, can you supply me the source for this statement (the first half, of course) which you make above:

"Since the company will have to pay the vast majority of these obligations [the $1.7 billion you refer to] up-front to suppliers in cash, and will not receive adequate cash receipts from customers prior to the necessary payments to suppliers, CSIQ will be in need of serious cash in order to meet its production goals."

Thanks, Jack

Canadian Solar: The Next Solar Takeover Target?

Been very busy lately, working on a Supreme Court brief (finished rough draft last night) while also on vacation (Disneyland past few days).

Anyway, as those who have read my articles know, I am very bullish on solar. People also know I recommended CSIQ about 6 months ago when it was trading at $18.56 as my favorite company in the solar space. Finally, we all know that CSIQ increased guidance this morning by a substantial margin.

My three favorite companies in the solar space today (for best appreciation potential versus least downside risk) are SOL, CSIQ and TSL. Of the three, SOL is probably my favorite because (a) it has a very good forward PE of about 12 against the current price of $15.50, (b) it has lots of positive analyst sentiment and a history of explosive upward moves. It would not take much, in my opinion, to get SOL up to $30, its all-time high, essentially offering a double from where it is trading today.

I like TSL because it offers the best value in the solar space (PE of about 9) but analysts do not like this company for various reasons, mostly relating to the fact that this company's management makes no effort to communicate with the street. They miss more solar conferences than they attend, they announced earnings waaay late last quarter, they hit the street with a surprise "functional currency" issue last quarter, they rarely issue press releases which maintain a level of excitement on the street, etc.

To me, TSL executes nicely (best margins among the poly-based solars, best geographic diversification of any solar, very aggressive sales and earnings ramp) but does an AWFUL job of communicating this success to the investment community.

Therefore, it trades at a very substantial (and partially deserved) discount to its solar brethren. The wild card is whether TSL will change its ways. If it does, then I could see this stock doubling to $60 in short order if it reports well, which it should this quarter. However, if management continues to act as it has, although TSL is very likely to get back to the $40's in the next month, its performance will continue to be underwhelming when compared to its actual execution.

Finally, I continue to like CSIQ at its current price around $37, which is a PE of about 18 against 2008 projected earnings, which will soon be upgraded by the analysts based on today's announcement, lowering the PE to about 15. This company has been managing both its business and its investment-community communications brilliantly, and consequently has generated a lot of excitement among the analysts.

I can see CSIQ passing its recent high of about $52 (based on memory) in this earnings season.

We are heading off to the beach now. I will post later about risks in this space (need for additional capital--a greater concern for TSL than CSIQ or SOL) and why I think it is unlikely these companies will be bought out by SPWR, and probably not by STP either.

Jack

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

To Envoy,

When you say "not one of the solar companies mentioned in these reports, and a few others not mentioned, actually makes any money.", do you mean that somehow their earnings reports is false, or do you mean that their earnings are accurate, but are not sufficient to cover their ALL their outflows--ie, they have negative "cash flow" rather than negative "earnings"?

If you believe their earnings reports are somehow miscalculated, can you give specifics of how you have arrived at this conclusion?

Thanks in advance,

Jack Yetiv

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

AC 48--see my comment on today's Envoy Global story in the comment list.

Rana, as to PWE--last quarter, PWE projected record earnings this year based on an assumption that oil would be at $107 and nat gas (AECO) would be $8.50 this year. Well, oil averaged over $120 in Q2 and AECO gas was about $10.

Since almost all the excess goes to the bottom line, these higher commodity prices will really goose cash flow.

Jack

A Look at Four Polysilicon-Based PV Manufacturers' Funding

Since very few commenters have actually done so, let me comment on the merits of your article, VERY briefly (side-note: The vitriol contained in some of these comments is not helpful--if a poster says stuff you disagree with, address the issue):

1) The major newsflash from your article appears to be that these four companies will either (a) have to borrow more money, and/or (b) issue shares in one form or another.

Anyone semi-informed in this area knows that. No newsflash here.

2) Borrowing money may be difficult, issuing shares may be difficult. As to the former, I'm not sure how true that is in China. I suspect the Chinese govt would prefer these concerns not go belly-up. In addition, recall that these companies have presold all their production in 2008--and much of 2009. Seems to me the risk is pretty low.

As to the latter, ENER and CSIQ and others have had no problems selling extra shares because the resulting dilution is tolerable in the eyes of investors.

3) Be careful out there! Appreciate the sentiment, but shouldn't we "be careful" if we are paying a PE of 100 for FSLR--or are capital issues the ONLY way you value a company?

Jack Yetiv

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

In follow-up to my post yesterday, I bought 8000 sh of SOL today at about $12.95.

Also bought more PWE at ridiculous prices in the $30-range. They will blow out Q2 earnings and yet PWE is trading at the same price it was 3 months ago when oil and gas were about $110 and $10. What has happened to the oil and gas stocks is incredible (they have gotten shot in the past few weeks) given increasing oil and gas prices and expectations that they will remain high.

Jack