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

As Expected, First Solar Disappoints

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

As Expected, First Solar Disappoints

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

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 Power Plays Look to Grow with Clean Energy Act, Spanish Subsidies

As one can gather from my previous articles on this space, I am quite bullish on solar, and I think all the names mentioned above will benefit.

However, caution is probably in order here since most of the solars have run up between 30-40% in the past 2-3 weeks. These stocks are very volatile and are famous for running hard--and then retreating hard. Given how much the DOW and Nas have climbed recently, these indices may also be due for a breather.

However, on a pullback of 10-20%, several of the solars mentioned above may be good buys. Personally, I think that at a forward PE (against 2008 projected income) of about 100:1, FSLR is overpriced (note what happened to AAPL and GOOG on a minor stumble), and I think other names in this space present equal if not better upside, with lower downside risk. But I know lots of people disagree with me.

Jack Yetiv

Greentech Media: Solar Sector Headed for a Shakeout

I have read the article and comments twice, and I'm not sure what the author's thesis is. Is it that no solar stock is worth buying today because there is going to be a "shakeout"?

Since when does one write off a whole industry--especially one that many people believe will grow at a compound annual growth rate of 50% or more--just because there are potential problems (on which there is no consensus, but rather a large degree of disagreement) coming down the pike?

The analogy to the dot-com era is highly questionable, given that several of the solars are making money and trading at PE's of 10-15 despite growth rates expected to exceed 100% this year, whereas many of the dot-com companies that crashed never made a penny.

There certainly are some companies in the solar space that I strongly believe are overpriced and will stumble, but does that mean that no company in this space is worth buying?

Jack Yetiv

The Current State of the Solar Energy Sector

To Catcher N The Rye (catchy name!):

You are correct that today, there is little connection between crude oil use and electric use in the US, but many believe that in two decades from now, that will be much changed. I believe that electric cars (actually, some version of plug-in hybrids, PIH's) will be the most common type of car sold in 2025--if not in 2020. Those cars WILL SUBSTITUTE electricity for oil products. Indeed, Israel is expecting to achieve the above goal within 10 years.

This is why many of us see solarly-generated electric as (at least in the future) a substitute for oil. The beauty of this substitution is that there is enough sun resource in the US to produce all the electricity we need for our homes, offices, AND cars/trucks/semi-tract... etc, decreasing the need (and hopefully eliminating it) for us to important oil from countries that don't like us (to put it mildly). Because we have such a large installed base of gasoline/diesel-powere... vehicles (about 250 million of them) in the US, this goal will take decades to realize, but there is little question in my mind that this is where we are going to go.

Electricity is the only realistic substitute for oil in our transportation network.

Although it will take a long time to populate this country with PIH's, you won't have to wait too long to see the beggining of that road. I predict that in 2010--just two years from now--we will be able to buy a plug-in hybrid that will get hundreds of miles to the gallon if its daily commute is less than the normal 30-35 miles per day.

Jack Yetiv

The Current State of the Solar Energy Sector

As someone who closely follows the solar space and holds a large position in Canadian Solar (my favorite solar stock based on valuation--see my article on the topic under CSIQ banner), I agree with much of what has been said above. I want to highlight a few points.

First, grid parity will come in stages--not all at once in x number of years--and indeed, we are at grid parity in some areas already (see my article on grid parity). Second, achieving grid parity will be helped MORE by the difficulty in building coal-fired power plants THAN BY decreasing cost-per-watt of solar (although, of course, that is very important). For various reasons, it is going to become much harder to build coal-fired plants, and the ones that do get built (many won't) will cost a lot more. That process will help get us to near-universal grid parity faster than most people realize.

I believe FSLR's cost advantage will decrease much faster than others do. Poly is at $200 per kilo or more these days. Many people expect poly to reach $50 per kilo within 2-3 years, and when it does, the price of silicon panels will be much closer to FSLR's panels than most people seem to be thinking. In addition, because FSLR's panels will probably be 11% efficient in 2009, and silicon panels will be in the low 20's, you need twice as many FSLR panels to make the same amount of electricity as silicon panels. This means that some of FSLR's remaining cost advantage will be eaten up by material (aluminum for frames, etc) and manufacturing costs involved in making two panels instead of one.

However, I think the demand will grow sufficiently that many (if not most) solar companies will be able to ramp revenues 50% and more annually (depending on execution) for the next several years. I want to highlight something that is not widely appreciated--it seems that some folks believe that FSLR will steal sales from its competitors, but in fact, although FSLR has a cost advantage, it simply does not play in the residential solar space, and I believe that growth in residential demand in 2008 and 2009 will be substantial. That means that there is a big and growing residential pie to split among the companies making silicon-based solar panels.

I agree that utility use of solar is an extremely exciting prospect but want to underline that 2008 will only be the pilot-demonstration stage for this. I doubt any significant quantity of solar power plants will come online before the end of 2009, and more likely, it will happen in 2010.

I also agree that federal solar tax credits will be extended and I believe that many states will roll out their own incentive programs as more citizens object to coal-fired and even nuclear power plants. In addition, other countries will roll out solar incentives--Italy comes to mind, and some countries will continue to (or begin to) heavily subsidize solar in other ways (Israel comes to mind because there is a strong political incentive in Israel to help the world wean itself from OPEC oil).

In sum, the size of the solar pie will grow enough such that I believe that all well-run companies in the solar space won't be hurting for customers for the foreseeable future. We may see some consolidation (mergers and acquisitions) to achieve larger scale, and certainly, marginal players will fall by the wayside.

But generally, I think the prospects for solar in the next few years are exciting indeed.

Jack Yetiv

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