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.

The Solar Sector: Tomorrow’s Winners Today

Enter your comment hereLet's try another way at looking at this chart above in the original article. FSLR has diluted earnings reported of $1.35/share by GOOG finance on trailing twelve months. This is after the 3rd qtr of reported earnings. But again, do you buy a stock based on what they've done, or what they will do in the future. Anyone who has watched the market for a long enough time to see a cycle or two, knows that the market is a forward looking mechanism and the past is not at all as important as what you say you will do going forward. It's a game of "what have you done for me lately"?

Consider the above table in the orginal article. Now that we are one more qtrs data forward from when this tables data was collected (I assume it was based on data through the 2nd qtr of 2007) it is interesting to see the updated results for FSLR at the very least. FSLR had diluted earnings of $.49/share for the last qtr. That put's them at a diluted earnings per share of $1.35 for a trailing 12 month p/e of 141, which is much much less than the 185.59 p/e indicated in the above chart. Considering the price of FSLR on the day the article was writtten, or $155/share, that indicates a p/e of 115. This indicates a one qtr decrease differential of 36% based on one qtrs of earnings. So after you do the math on the other companies after releasing preetty much in line numbers it is easy to see that while FSLR or SPWR may still be more expensive, the differential between a FSLR/SPWR and the also rans is getting much closer due to the fact that the FSLR/SPWR combo is increasing earnings, whether pro forma or diluted, faster than the rest of the bunch. Which leads me into the very reason that they are valued higher than the other, they are better and make more money. It's as simple as that.

Solar Stocks Are Overheated

I'll take that bet on SPWR being $90 in six months. It's already been punished for $50 over the last week. Don't think you'll see much downside on this one at these levels. It's what some people call oversold.

The Solar Sector: Tomorrow’s Winners Today

I'll try this one more time. Further checking and trying to find the EPS numbers in the article I think I have discovered the discrepancy. Yes, Google Finance does list SPWR's EPS as $.20/share. I believe this is fully diluted earnings per share and on a trailing 12 month basis. Yahoo Finance, Marketwatch (the link provided on Google Finance for earnings forecasts), ScottTrade (my broker), and most of the other sites that list earnings forecasts do so on a pro forma basis for the forward fiscal year or forward 12 months.

Using diluted earnings on a trailing 12 month basis is not the best way to view, or value, a young company that is in power growth mode. This is why the majority of analysts, traders, hedgefunds, etc..., use pro forma earnings. Pro forma earnings allow an investor to see what earnings would be without extraordinary items.

As an example, say you are a real estate developer and you want to develop a property into an office tower. At the end of construction and in your first year, even if fully leased, the costs for materials and labor as well as tenant improvements will drive you to a negative or very small first year NOI, or income/profit after all costs and expenses. Buildings are sold and bought based on capitalizing the NOI. If you sold your building the first year based on including these extraordinary costs in your finance model you'd lose your shirt, pants, hat, and every other item you own. So what actually happens is you either take out the extraordinary items and capitalize the income that you would get in the second year without those expenses, or you take a multi year income stream and discount that to todays dollars (Discounted Cash Flow) as the out years of your income stream do not have those current year extraordinary expenses. The same idea works for companies that build plants that last for decades.

Either way, you get a value that is not based on diluted earnings where the expenses are higher due to new capacity expansion. Once that plant is built it is good for decades. You don't have to spend that money on that plant every year the company is in existence. That is why it is better to look at pro forma earnings as opposed to diluted trailing 12 months earnings. While diluted earnings are a nice historical account, what does it mean, at all, going forward?

The Solar Sector: Tomorrow’s Winners Today

And actually, I have no agenda with LDK other than seeing that someone is pumping it up with false information, which TO ME, looks like someone is uderwater on LDK and trying desperately to pump the stock to get out at a better price. I have zero short positions and have no interest at all what LDK does as a company or which direction their share price goes. I happen to own two of the companies this guy has posted on and the information he is using was extremely erroneous. So then I checked his LDK stuff, as it seemed he was long the stock from all the cheerleading going on. Again, I found the earnings information to be erroneous, although with this one it was inflated instead of all the others being deflated. Of course it may be a simple matter of not being able to do simple addition, subtraction, division, and a little mutliplication. Or he simply took the chart from somewhere else without doing any kind of verification of the numbers he was using. Either way, sloppy, sloppy, sloppy.

The Solar Sector: Tomorrow’s Winners Today

Again, I have no idea where you guys are getting your numbers. Are you talking about trailing 12 months earnings? Last fiscal years earnings? This years earnings? Next years earnings? One quarter of earnings? The numbers I used are consistent whether you look at google finance or yahoo finance, and actually you know, click the link called earnings estimates. Tough to do, I know, but worth it. If you actually do that, you see that FSLR is selling at 102 times NEXT years earnings and 200 on THIS years estimates.

Hey, here's an idea... actually check the last four quarters of reported earnings for SPWR. Lets see... 4th qtr Dec 2006 $.18, 1st qtr 2007 $.29, 2nd qtr 2007 $.25, 3rd qtr 2007 $.33. So again, where is this $.20 EPS number for SPWR coming from????

First off, maybe you don't understand how p/e ratio's are actually calculated. You take a years worth of earnings, like SPWR's last 4 qtrs, or $1.05 in the last twelve months. Then you divide that sum, or $1.05, into the share price. Using the price at 11:54am (Pacific Time) SPWR's P/E on trailing 12 months earnings is 117. Even allowing for the original article's author erring in using a single qtr of EPS to calculate the p/e ratio, please tell me how you get $.20 per share EPS for SPWR when no quarter they have had is at $.20/share. Frankly, I'm puzzled. It is just factually false however you look at it. SPWR's earnings are estimated to nearly double next year from this years so the p/e is about half of todays on 2008 earnings. Nowhere near 639.67 p/e ratio however you slice it by one quarters of earnings, or however. Unless you have some magic ratio formula you apply to all estimates that allow you to come up with estimates that just don't exist elsewhere. And if we ARE using one quarters estimate to determine p/e lets examine last qtr's reported number for LDK, or $.29/share. That gives LDK a 138 p/e at just over $40/share (today's price).

If I didn't know any better, and I don't, I'd guess that this post is just the original author signing in under a different name. Please post the actual link for these "earnings estimates" you say are correct and match the original authors posted "spreadsheet".

I used Yahoo Finance pages and the earnings estimates aggregated and the listed average earnings estaimte. Checking on Google finance as well as Marketwatch the estimates provided were the same ones I originally used in my post.

Again, people, please do a little homework after reading a post like the original authors to do a quick check on the estiamtes they are using. Please check the numbers I am using. I have absolutely no problem as they will prove out. The estimate numbers I have posted are the ones being touted as consensus estimates on Yahoo Finance, Google Finance, and Marketwatch.

The Solar Sector: Tomorrow’s Winners Today

It may be an honest mistake, but I've seen other somewhat misleading claims as to LDK margins in comparison to other solar companies that was in error as well in another article he posted. If not misleading then very sloppy, at the least, in actually doing any math to find out the actual percentage difference between companies before he states unequivacably that LDK has margins twice that of their closest competitoror, which is NOT true. When you see this it can be an indicator for someone who is long and wants out and is down from their buy point. If you can't use real data to make your case, or show/tell/explain where you got it then its useless and meaningless.

The Solar Sector: Tomorrow’s Winners Today

Also, TSL is definitely vertically integrated as well - not just LDK.

The Solar Sector: Tomorrow’s Winners Today

Actually, LDK very recently, four to five weeks ago, was at $76.75/share. Using that metric LDK had a market cap of a little over $8billion at $76.75/share and a p/e of 59.9 on 2007 consensus earnings estimates. And roughly 40 times 2008 consensus estimates. At todays close (Nov 1) the stock is roughly half what it was a month ago. The reason it dropped was the concern of the allegations that were made by a departing financial controller. Whether true or not, that more than anything else is the reason for the drop to the $40 level.

Second, I'm not sure of your estimates for the companies you mention. At least two of them seem to be in error. SPWR currently has a consensus estimate for 2007 of $1.23 and 2008 of $2.03 for 2007 and 2008 p/e of 101 and 61 respectively on todays close of $126.16/share. FSLR has consensus estimates for 2007 of $.64 and 2008 of $1.42 for p/e's of 242 in 2007 and 109 for 2008 based on todays close of $155.35.

And where does the LDK number of $2.76/share in EPS come from? Is this for 2007? 2008? 2009? Consensus estimates for LDK in 2007 are currently at $1.28 and 2008 of $1.88.

I quickly looked at the others and they seem to be incorrect in your chart as well from consensus estimates.

Every EPS and p/e is wrong in your chart. LDK seems inflated by a good amount over consensus estimates while all the others are shown with quite a bit less than consensus estimates. Could you be long LDK???

While I am long two of the ones you mentioned (FSLR and SPWR) I don't need to manipulate or misrepresent numbers to make a bull case for either of them.

Sunpower's Gross Margins a Mess, Reason to Cut Back on Trina

Hey TraderMark,

I can't remember from the conference call what the overall mix was between the different business segments SPWR has. I do remember they said that 4th qtr margins were expected to be in the 24 to 25 percent range. Again, this was expected due to a more balanced revenue stream from each segment.

I haven't read the transcript yet, but it's on this site at:
seekingalpha.com/artic...

Also, while I still believe that it's revenue growth that is most important, at this point, SPWR and FSLR seem to be monetizing that revenue stream pretty well when looking at next years earnings (estimates) of about $2.00/share. A bank of america analyst (it might be another bank) has a 2009 estimate for SPWR of $3.65, or roughly 26 times 2009 earnings. Considering it is October, and in 3 months that becomes simply next years forward earnings, I think they might actually be cheap, so long as the long term contracts keep coming.

FSLR has contracts for over 2 gigawatts of panels through 2012, not an insignificant amount. Again, they are starting to monetize the revenue stream and earnings are rising as more production lines come online. They currently have the lowest cost per watt and have mentioned multiple times that they expect to compete without subsidy against regular electric with rates at about $.10/kilowatt within a few years.

I think this is the reason that they have such a high multiple compared to every other solar stock. If they pull that off they would be in a market with a trillion dollars spent per year. At the risk of sounding pollyana'ish I think that is one of the main differences between a lot of other bubbles and the solar run. Most new markets have to create demand for something that was never there previously, such as CPU's in the early 80's and convincing people you could actually do things with them. There is already a trillion dollar a year market for energy every year in the world. If you can produce it cheaper for the end customer they don't give a rats ass where or how you made it as long as the light goes on when they flip the switch. And there's always the added benefit of zero emissions.

It appears that solar is within a decade, roughly, of competing with all other current regular electricity sources without subsidy. With subsidies they can compete right now. Solar has their own version of Moore's law that has been in the CPU industry for many many years. This is what helps me sleep at night believing that it's just an amount of time. If the US at the federal level ever regulates CO2, or places some longer term subsidies, say five years, into place then solar will really take off. By then they should be able to compete on their own and grow from there.

As you might guess I own FSLR and SPWR. I also just bought ENER a couple weeks ago, which has a triple junction cell using an amorphous silicon vapor deposition process. Uses about 1 micron thickness of silicon so they are hardly constrained by the price of silicon. FSLR has the same advantage using CdTe elements, which are toxic byproducts of smelting that mines usually pay to dispose of. ENER is ramping production and starting to receive some long term sales contracts. ENER also has the patents on phase change memory chips, which Intel and Samsung have just started mass production of after licensing the rights.

Sunpower's Gross Margins a Mess, Reason to Cut Back on Trina

While I can understand the angst you have regarding gross margins, I believe that was explained within SPWR's conference call by talking about the large outsize amount of business one of their units had. Future qtrs they expect the units to be more equal and therefore margins will increase again starting next qtr (4th qtr).

Considering the stage the company is at makes a difference as well. At this point in the growth cycle of the company revenue growth is the biggest driver. In future years they need to convert that revenue stream going forward into earnings. Right now though, revenue growth is more important than straight earnings or consistently straight line margin growth.

As long as they are expanding capacity at the rate they are, or roughly doubling every year, expenses will remain high and margins will be under pressure. As expansion slows they will be able to keep more of their revenue as earnings instead of plowing it back in to build another plant, but that should be a few years away. Until then revenue growth and capacity expansion should be the drivers for this stock to keep climbing.

As for TSL, I agree with you. The chinese solar plays worry me. I know a few chinese nationals that are either accountants, or have a sister/brother that is one. I have been told by all of them that they have multiple sets of books depending on who they need to show it to. So you really can't be sure of anything that gets reported over there. They get their jobs by convincing the company that they can get the numbers to come out however the company wants them to. As an example, look at the situation with LDK in the last few weeks. I don't believe them to be an isolated incident.