solar jim

Solar Cycles and Stocks: The Sun Also Rises

the problem with the chinese companies is that if there is a bear market for cells as the article contemplates, they are completely average, they have nothing to differentiate themselves from all the other silicon "non thin film" cell makers. They have average conversion efficiency of about 16% while SPWR is getting ready to roll out a 23% efficiency cell.

In opposition to many types of manufacturing, solar doesn't take all that much labor in the form of people. Its a small part of the total cost equation meaning China doesn't enjoy this huge advantage like they do in textiles or other labor intensive industries.

Solar panels weigh a good bit. Shipping from China, at these oil prices, increases the cost and it becomes harder to maintain any cost advantage.

And the idea that AMAT is going to do anything is laughable. Maybe in ten years. They sell undifferentiated equipment, which was an adaptation of chip gear. I believe that proprietary technologies and equipment are going to do better (FSLR, ENER, Nanosolar), otherwise they would already be buying AMAT equipment instead of continuing to expand with their own technology.

Further Musings on Solar Stocks

I consider fundamental analysis to be similar to einsteinian physics. With physics it works perfect for 99%+ of the situations until you get to the very very small where quantum effects take over and the rules you've been using don't work anymore and break down. Fundamental analysis is simlar, I believe, when using it on young industries that are not close to being mature slower grwoing companies yet.

Further Musings on Solar Stocks

Hey Jack,

If solar were a more mature industry I don't think I would have any issue with anything you've mentioned above. The only mistake I think you may be making is in applying good and very solid fundamental analysis on an industry that is still in, for the most part, hyper growth mode at the early part of its lifetime.

Another function of p/e spreads within an industry relates to the markets belief of risk for each company to execute and earn the projected revenue/earnings going forward. Companies in China are harder to ascertain whether the news is actuality, as well as having less news/releases, and so they therefore generally have lower p/e's than western based companies that other than location are exactly the same.

I would argue with your assessment of FSLR and the others being no different. In fact, there is quite a bit of difference. FSLR has a higher profit margin than all the other solar companies. They have already presold 70% of all the panels they will make through 2012, which includes all the currently announced factory expansions taking them to 1 Gigawatt per year by around mid 09. Except for FSLR, all the ones mentioned above use silicon and as far as I know they all make them they same way in that its a slightly modified version of CPU chip making with many less steps than CPU chips, but still lots more time/work to create that wafer of cells than FSLR takes. FSLR is automated continuous line. They've been increasing the Mw run rate of each line each quarter. Even if another company were to start doing thin film with CdTe they would have to find a different way as FSLR's line tech is proprietary and they have intellectual property on that. Most of the other companies buy stock solar equipment from manufacturers.

If you're looking at companies that all use stock solar equipment than I agree with you exactly on selling whatever the higher p/e stock is and buying the lowest p/e stock because they are the same - apples to apples. So while FSLR does have a high p/e it should have a higher p/e due to their tech position over those that aren't innovating at the edge. I'm not justifying the current price or saying it deserves to be higher, but I do believe it should have a premium to the others due to its position. That may change going forward, but right now, they are the clear leader and will be for at least another few years. Of course, what premium they should receive is open to debate. Going forward, I do not expect to continue to see a premium of 100%+ to the average of the field.

Trina Solar: Best Value in the Solar Space

I don't have any real disagreements with what you are saying. the PEG ratio is usually a large consideration for me with regard to buying equities. However, I do have a little different philosophy on whether the FSLR you mentioned is truly overvalued. I think the PEG ratio is a better analysis tool when looking at more mature companies, or at least companies that are the same in that they make their product/revenue by the exact same process - say VISA vs MA - with the only difference being execution or business practices therefore it makes sense to buy the undervalued one of the two, or however many are in your set.

Without discussing or debating the prospects of FSLR's revenue/earnings growth rate and whether it merits the current 2008 p/e I would first point out that "analysts" havn't been correct on this company once since the very first qtr as a public company. Considering the percentage amount that the company has managed to beat "analysts" projected earnings every quarter to date I think it is prudent to realize that the current 2008 p/e for FSLR, and some of the other higher priced stocks (on p/e 2008 ratio) are only correct so long as the "analysts" are correct this time. While this doesn't bring the PEG ratio to TSL levels or any of the China based solar plays, it would lower it.