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

As Intel Joins the Solar Sector, Is There Room for Everyone?

Mark, the answer to your question--whether there is enough room--all depends on whether solar reaches grid parity in average sun locations, which will depend on nat gas/coal prices staying up and carbon taxes coming in, as well as cost of solar coming down.

Since I believe that nat gas and coal WILL remain high (if not go higher) and since I believe we are not far from having to start to pay for CO2 release, I believe average sun locations will reach grid parity within 2-3 years.

Once that happens, I believe demand will increase at a compounded annual rate of well over 100%, and yes, there will be room for at least the next few years.

Beyond a "few years," it's a wild guessing game.

Jack

Which Solar Stocks Will Continue To Shine?

As to the $3.79 number, I devoted a whole paragraph to it in the article. Buystocks, if you missed that, you may have missed other salient parts of the article.

As to poly, there are several hints that its price will be DROPPING dramatically in 2009: (1) prepayments have dropped to just a few percent of the contract value--obviously, because it's getting to be more of a BUYER's market than a seller's on poly, (2) TSL told us to expect poly 15% lower next year, (3) lots of new supply hitting the market in later 2008 and 2009.

As to TSL price--we've been there before. Market isn't necessarily rational short-term. When I recommended CSIQ at $18.56 in Jan, 2008, it promptly dropped to the $15 range--and I bought more.

TSL at $40 is a screaming buy, and I loaded up on more of it today. Could it drop more? Of course. I don't control the market. But was it a good deal at $45 on Fri? Yes.

Is it a better deal to buy that same company at a 10% discount today? Heck, yes.

Will it be an even better deal if it goes to $35? Heck yeah.

Jack

Which Solar Stocks Will Continue To Shine?

Buystocks, the answer to the $3.79 is in the article.

I am also writing another article now that should post tomorrow.

Jack

Which Solar Stocks Will Continue To Shine?

As I recall, CSIQ and one or two of the other solars recorded a currency gain in Q1 because the Euro appreciated against both the RMB and US dollar currencies. That is one of the reasons CSIQ blew out the numbers, and it is one of the reasons I modeled 87 cents for TSL--pre-income-tax.

TSL sells in essentially the same countries that CSIQ sells.

I am still mystified about how CSIQ can record a currency gain while TSL records a loss (amounting to 16 cents per share) under essentially identical circumstances.

If the explanation was that they booked Q1's contracts in US dollars, then this issue should have also impacted Q4, and it did not.

I still don't get it.

Jack

Which Solar Stocks Will Continue To Shine?

Schwab shows 2008 consensus for YGE at 95 cents, and when I wrote this article, YGE was $19.95, not $23 (look at 6-5-08 column, not 1-29-08 column).

I calculate a PE of a bit over 20.

I would also note that only YGE and STP are actually LOWER in June, 2008, than they were in Jan, 2008 (AKNS doesn't really count, I only put it in the table because someone asked me to).

I am not sure that the fact that they are building a new factory with someone else's money convinces me that YGE at a PE of 20 is a better deal that TSL/CSIQ at PE's of 15-16.

Jack

Which Solar Stocks Will Continue To Shine?

Thanks to all for your kind comments. I want to AGAIN review my methodology:

1) I used consensus earnings and revenue projections for 2008 as posted on Schwab (Schwab Earnings Reports) for my table. In other words, I did not "adjust" those numbers per my own opinion. For example, I did not plug in my own calculated $3.79 for TSL earnings--I used 2008 consensus of $3.16.

2) The purpose of the above methodology is that it is far more objective than using other numbers. The fact that the consensus is usually an average of anywhere from 5 to 25 numbers should eliminate outliers and yield a more reliable number.

3) To the extent the above methodology has errors (as any methodology does), they are likely to be SYSTEMATIC errors that will inappropriately lift or lower the projections of the group.

4) Thus, if we are to use $1.28 for SOLF due to the above suggestion, we should also use my $3.79 to $3.95 number for TSL, and my $2.80 number for CSIQ. We could--and SHOULD--do those additional analyses in our comments, as I did in the article and as you folks have here--but I think the table should show a more objective data source.

Specifically as to SOLF, the math above seems reasonable, but I don't know the stock well enough to add any more intelligence there.

As to LDK, I have read a lot about it, and the commentary seems quite divergent. Some people feel that its CEO may be spreading himself too thin with the new Best Solar venture, while others think this will accrue to LDK's benefit. We all know about the accounting problem allegations, which, even if without substance, impact the stock.

But at the end of the day, the consensus estimates tell us growth of earnings from $1.28 in 2007 to $1.68 in 2008--about 30%.

Why should I pay a PE of 25 for that growth when TSL and CSIQ will more than double earnings in 2008--and can be had for PE's slightly above 15 per consensus, and slightly below 15 per my own estimates?

As to why the Chinese solars seem to trade at a discount--your guess is probably as good as mine, but here are my thoughts:

First, some folks consider non-American companies inherently more risky.

Second, some people don't understand that ADR's and "shares" are not that different.

Third, the high-PE stocks--SPWR and FSLR--are both technology leaders and have major boosters within the investment community, and the latter factor especially tends to push them up.

But I think this is changing.

Finally, in my article after next quarter's earnings are released, I will use a forward PE against 2009 projections. I think it is too early to do that now.

Jack

Which Solar Stocks Will Continue To Shine?

I plan to address most of the above comments in a further article I will post over the weekend or next week.

In the meantime, please note that I wrote my article within one hour of the termination of the TSL conference call--hence, no time to address some of the issues.

Also, to reiterate my methodology--I am INDEED a "value" investor in the solar space, and that approach seems to have borne fruit so far. If I can get a company that will triple sales and double earnings this year at a PE which is LESS than the average PE in the S & P, that's a bad thing?

More to come.

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

Trina Solar: Best Value in the Solar Space

User,

I don't know ACCY. What can you tell me about it?

Jack

Trina Solar: Best Value in the Solar Space

GH, thanks for above info. I am aware of ORA and OPTT, and very aware of CREE (LED's also don't have mercury in them, a significant advantage, and much longer life, but price point is a major obstacle at this time).

I have been looking for a good battery play and did not know about ENON-will look into it. I know A123, but sometimes IPO prices in hot areas are unrealistic.

Thanks again, Jack

Trina Solar: Best Value in the Solar Space

GH,

I would love to see data that support your thesis, namely, that investing in pre-profitable companies as a general rule will yield better returns than investing in profitable, fast-growing companies that are being woefully mis-priced by the market.

I have two data points to argue against your thesis:

(1) The acknowledged most successful investor of our times--Warren Buffett--is a value investor, buying good companies in good businesses, that are trading below fair value.

I believe my approach is similar to his, as are my investing returns.

(2) Studies have shown again and again that dividend-paying companies provide a better return than non-dividend-payers. Of course, only profitable comapnies that trade at relatively low PE's can pay any meaningful dividends.

Having said the above, I do occasionally invest money in companies that I believe might be the next Walmart or Bestbuy or Starbucks, even before they are profitable. But I consider those high-risk plays and I don't usually write articles about them.

I also plan to get into venture-capital investing, but I won't be writing articles about that either.

Finally, my investments are usually in large amounts of money, so I cannot reasonably invest in companies that trade less than a few million dollars worth of stock per day because my trades can move the market. In addition, I like to play options on companies that I own, and small cap stocks (under $200-300 million) usually don't have a very liquid options market.

I would say that selectively selling covered calls enhances my annual returns by at least 10-15%.

What company(ies) do you like, and specifically why? Tell me more about CPTC.

Jack