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

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

Which Are the Bargains In Solar Stocks?

Larsson, please refer me to where TSL has guided to $4+ for 2008. As to your being "sure" it will be $8 to $10 in 2009, I would really like to know where you got that one.

I have made my methodology clear--I use consensus which I find on Schwab Earnings Reports, for all companies. My own analysis calls for $4.50 on TSL in 2008, and $2.75 on CSIQ. I do not project 2009 because I believe that is witchcraft--waay too many unknowns.

Using my own estimates rather than the consensus does yield a lower PE for TSL than CSIQ. However, I will only be comfortable with my $4.50 estimate once TSL announces.

Jack

Which Are the Bargains In Solar Stocks?

Dear Bubba,

Agree FSLR is overpriced, but I would be fascinated to learn how you arrived at a fair price of $16 for ESLR.

As to the "stupid" money--that was much more true 2 months ago than it is now. What I have seen is that the low PE stocks (CSIQ, SOL, SOLF) have run and the high PE stocks (FSLR, SPWR and STP) have not. Seems to me the "stupid" money is getting smarter.

TSL hasn't moved as much because it hasn't reported. I expect good things from TSL.

Jack

Which Are the Bargains In Solar Stocks?

Some thoughts.

The comment that "everyone knows TSL has the lowest PE" may have been based on my articles when TSL was at $41. Now that CSIQ has fallen from the $40's to the $30's, and now that TSL has gone up from $41 where I recommended it to $48, I think the FPE's on these two companies for 2008 are comparable at about 15.

I think it is folly to use 2009 FPE's when the second quarter of 2008 hasn't even been reported. Too many things can change in 18 months (yes susbidies, no subsidies, ASP's, price of poly, etc).

However, CSIQ has run hard due to its recent blowout quarter, but TSL hasn't yet reported. Assuming the delay in reporting is not indicative of a problem with earnings (and my guess is, it is not), I think TSL has the better chance of running once it does report, although I think the overall DOW may be in for a rough week this week. I plan to buy more TSL if it can be bought at $45 and CSIQ if I can get it at $35.

As to ESLR--yes, the two big orders certainly put this company on the map, but we have no knowledge as to the pricing of the orders, the likely execution by this company, and hence, we have no idea what its net profit margins will be.

So this one is still very speculative in my book. Everyone had great hopes for AKNS a year ago, and what has its price done?

Finally, as to STP--although it surprised this quarter, it also hasn't done much in the past few months, price-wise. Its 2008 PE is close to 30, and I simply see no reason it deserves a PE twice as large as either TSL or CSIQ.

As to YGE, I calculate its PE to be greater than 20, and again, no greater compelling value than TSL/CSIQ.

Final note: The solars have run nicely during solar earnings season, so do NOT be shocked if they slide back and consolidate, especially if the markets retest their March lows. Also, these stocks are EXTREMELY volatile (sometimes for good reasons, often not) and if you can't handle that, this is not the space for you.

Conclusion: Although there is some risk of downside moves, to me, TSL and CSIQ, at $45 and $35, offer the most compelling values in the solar space today.

Jack

PV Industry in Oversupply in 2008

Very well-done article, and good food-for-thought. However, there are several factors that I think you failed to address in your analysis, some of which have been alluded to above: (1) Your capacity figures are "planned," or "projected." We all know how rosy projections may be sometimes. Reality often falls far short. (2) You assume a static capacity situation--ie, companies failing to respond to developing overcapacity. Although they may not be as ahead of the curve as they should be, the companies will respond--although probably not quickly enough nor with enough cancellation of capacity to eliminate overcapacity, but I think it will reduce it substantially. (3) In the tight lending environment that exists now and probably will into 2008 and probably beyond, even if solar companies want to over-expand, they may find themselves limited by ability to borrow. Equity capital (by issuing more shares) will also be limited by the fact that many solar companies are going to get a well-deserved haircut (on top of the one they already got in the past two weeks). (4) Finally, although there will be some margin compression, I don't think it will be as serious as you seem to believe because I believe ASP's for silicon will trend downward with decreasing panel ASP's--unless a company has locked in high silicon prices and is therefore unable to reduce its silicon costs while suffering lower ASP's on panels. Of course, said company may protect itself by simultaneously contracting for BOTH silicon supply AND prices for its panel production.

As to the demand side, if the democrats come to power--especially if they control both the presidency and Congress--I would not be shocked to see solar incentives not only extended but also enhanced.

Jack Yetiv