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

Is There an Opportunity in First Solar?

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

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

Picking Solar Energy Winners

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

Trina Solar Takes Aim at First Solar

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

First Solar Set to Conquer China's Growing Market

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

First Solar Sell-Off Is Overdone

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

Bargain of the Week: First Solar

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

Is SunPower Downgrade Warranted?

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

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

Game Changer in Solar Energy: PG&E Inks Deal

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

Game Changer in Solar Energy: PG&E Inks Deal

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

Game Changer in Solar Energy: PG&E Inks Deal

I wrote a series of articles on solar on this site several months ago, so, to avoid repetition, my comments here will be brief:

1) It was actually another Calif utility--Southern Calif Edison--that launched meaningful utility-scale solar in the US with its 250 MW announcement on March 27 of this year. SCE's is a distributed model, where they will rent large commercial rooftops on which they will install dozens if not hundreds of panels. Therefore, solar on distributed rooftops will continue to grow and prosper, especially in new construction (as noted above) and via BIPV (building-integrated photovoltaics).

2) The distributed model has both cost advantages and disadvantages. The disadvantage is that it's easier to install 10,000 panels in one site than to install 100 panels in 100 different sites. However, the advantages probably overcome this--no need to buy land, no need for new transmission (a real issue in many parts of Calif and elsewhere), and minimal transmission losses, which routinely exceed 10-15% of power produced in a power plant.

3) One of my articles argued that in proper locations, we have essentially reached grid parity. SCE's, and now, PGE's deals, prove this to be true. Why is this true? To briefly recap points in my previous series of articles:

a) Solar's power-production profile better suits peak load (although trackers can achieve close to full power for 12 hours, as my own domestic tracking-PV system has now proved for 4 years), making solar KWH's much more valuable than wind's or conventional power plants.

b) The cost of coal and nat gas have increased a lot in the past year (even taking the recent falls into account), making "conventionally-produc... power much more expensive than it used to be.

c) Utilities and their financiers are starting to take carbon production into account, and once you do that, solar becomes very competitive as well.

d) Cost of making solar panels has dropped and will drop even more in 2009 and 2010. Note that the panels for the PGE project won't be getting made until 2009 at the earliest, and more likely in 2010, by which time many solar manufacturers believe their cost of making the panels will be 30% less than it was last year.

Finally, although on the surface of it, this project appears to be "contingent" on extension of the ITC, the reality is that this announcement was meant to put pressure on Congress to do exactly that. I consider it extremely unlikely--especially in the face of this announcement (and I predict you will see other big projects also announced which will be contingent on extension of the ITC)--that Congress will not extend the ITC.

Remember, we also have the likes of Boone Pickens lobbying (and putting pressure on) Congress to act in favor of renewable energy.

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