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

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

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

Trina Solar: Will 2009 Be a Breakout Year?

I believe I can answer your questions, Garry:

1) Solars are not going to grow 50-100% PER YEAR--I think 2008 for many solars will be 100%+ better than 2007, but CAGR's will slow to 30-40% in 2009 to 2010.

2) Yes, the future CAN really be that good. Look at MSFT's growth 20 years ago, Dell's 10 years ago, AAPL's in the past 5 years. Solar is more compelling than all of those because the product it makes--electricity--is far more essential than Ipods, and current means of producing it--coal, nat gas, even nuclear--are all fraught with problems, not the least of which is markedly increasing costs.

Solar offers NONE of those problems--and will DECREASE in cost going forward--probably by at least 10-15% next year and an equal amount in 2010.

In Calif, as you can tell from the Southern Calif Edison and PG & E announcements, we are essentially at grid parity. The growing recognition of that fact will boost demand tremendously.

3) They all need capital--either in the form of selling shares, or borrowing money. But in 2009, these companies are going to be making tens of millions of dollars in profit per quarter--and some will hit quarterly earnings of $100 million before the end of next year. That will generate lots of cash for growth.

Also, keep in mind that as their stock prices appreciate, they can get much more cash for selling 5 million shares than when their stock prices are lower.

I'll explain in a future post why I believe the market ran yesterday and today after STP earnings. It had little to do with STP's earnings.

Jack

Trina Solar: Will 2009 Be a Breakout Year?

TO USER 226....:

I don't usually get my facts wrong. I didn't this time, either. Quote from the CC, which is kindly posted on Seeking Alpha:

In respect to long-term financing for our strategic expansion, on July 24th we successfully concluded our convertible bond offering, which can provide for our remaining 2008 funding requirements, in addition to anticipate positive operational cash flows in the second half.

Always good to check the facts very carefully before you criticize someone else.

Jack

Trina Solar: Will 2009 Be a Breakout Year?

A few highlights I think are important:

1) Revenues Q1--$120 million, Q2--$204 million, Q3--$265 million (upper end of guidance, which they will meet or exceed).

2) EPS--ex 1X items--for these three quarters was about 60 cents in Q1 (going from memory), $1.00 this quarter, and I'm guessing about $1.25 next quarter.

3) They announced on the call that they do NOT need any further cash for the rest of 2008, so that takes care of one issue for TSL. By the way, the same applies to CSIQ and SOL, so so much for the guy who was writing on SA a few months ago telling us all these Chinese solars had one foot in bankruptcy court.

4) I don't care what your complaints are about management (and I thought they did a nice conference call this quarter) a company that is growing sales and operational profits at a rate of 25-50% SEQUENTIALLY does NOT deserve a forward PE of SIX (against 2009 earnings that will undoubtedly exceed $5/sh on an operational basis, and may well exceed $5 even taking 1X events into account).

5) As to management's competence, I disagree with the author and above commenters. We all knew that canceling the fab was going to hit Q2 earnings, and frankly, just a $2 million (8-cent) hit is not bad at all. I would have expected twice that.

Second, we all "knew" that forex was going to be a $3 million (12-cent) hit. Therefore, assuming $4 million hit for closing the poly fab and $3 million on forex, you could have reasonably modeled $7 million in one-time hits, versus the actually-announced $8 million (32 cents in total 1X hits).

6) Because we know that closing the fab is over, that hit isn't coming back. As to forex, I still don't understand it well enough to know whether TSL mgt had a choice in going to the US dollar as a functional currency, so I can't either criticize or exonerate management on this issue. But we do know the dollar has shown a lot of strength so far this quarter (I'm not sure if the strength was just against the Euro or also a little against the RMB, although one commenter above suggests the strength is only against the Euro).

In addition, TSL mgt indicated that they are working on diversifying their capital structure to minimize short-term RMB-denominated debt, which will therefore REDUCE the volatility caused by the forex issue. The appreciation of the dollar and the efforts to reduce RMB-denominated debt suggest to me that going forward, the forex losses should be less, and if we have a quarter where the forex losses zero out or become gains, TSL could report a 100% surprise quarter.

7) The forex issue--because it is so large relative to operational earnings--does make it extremely difficult to project earnings for TSL, but even if you take this quarter's $1.00 and subtract the 24 cents of forex, and even if you assume that TSL does not grow EITHER revenues nor earnings for the next 3 quarters, that would give you $3.04 in earnings (76 cents X 4).

Of course, if you make a more realistic (but still very conservative) earnings progression of 86, 96 cents, $1.06 and $1.16, you get $4.04 in earnings in the next 12 months.

Of course, if revenues increase $60 million next quarter, and forex stays the same as this quarter ($6.1 million), I expect that TSL will make close to $1.00--not 86 cents--in Q3. But even taking the progression starting with 86 cents, $4.04 in the next 12 months means that TSL, a company that will undoubtedly double earnings in 2008 versus 2007, and probably go up another 30-40% in 2009, is trading at a forward PE today of LESS THAN 7.5.

Gimme a break. That's absurd, regardless of what you think of management.

And I, for one, think they did fine this quarter (of course, the market is telling me I'm the only one in the world that feels this way, but hey, I'm right and the market is wrong! LOL).

Jack

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

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