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

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

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

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

Flummoxed by Solar Market Action?

Yes, I agree with briando. It wasn't just TSL that moved nicely today--SOL and CSIQ both moved around 10% (or more) as well.

The whole sector has been beaten down far more than needed (but that's how the markets work--they overshoot to the upside and downside), and we have about 10 solars reporting in the next 3 weeks. The news this quarter will be very good to excellent, and I think the news going forward (guidance) will be at least good to very good, and excellent for some companies.

So I do expect some decent moves (30-50% from today's close) out of the solars, especially SOL, TSL and CSIQ.

Jack

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

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

Solar Stocks Feeling the Heat

Robert, thanks for correcting my faulty math. But of course, this only potentiates my point. A 50-US-cent subsidy per KWH is more than generous, and it seems to me should be more than enough to stimulate continued large purchases--even in Spain, not to speak of the other new markets.

Jack

Solar Stocks Feeling the Heat

Not to mention the fact that even at 33 euro cents, that's not exactly a pittance--we're talking about 21 US cents per KWH!

Also, as Spain's subsidies decrease (and Germany's, by a relatively small 8% per year), several new markets are coming in strongly, especially Italy.

Although TSL has been selling off every day for more than a week, strangely enough, in Q3 and onwards, Spain will represent only 16% of TSL's sales, while TSL is the market leader in Italy.

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