vitamin_j

Five Top Solar Power Stocks

I would strongly second aquaculture. This article is full of flat-out wrong information.

Evergreen Solar, for example, is not a thin-film solar company. They have a "string ribbon" technology for working w silicon, but it has nothing to do w thin film deposition, nothing at all.

China is definitely not the world's second biggest market - I don't know where that comes from. Spain was probably number two last year - since the Spanish subsidy change, no one knows who's number two this year. It could be the US. But it's not China. They're just getting started with their market.

Also, anyone who knows anything about installations would mention the role an inverter plays, rather than a "control system." (Why not just say "thingamajig"?)

The conversion efficiencies described are way off too. First Solar's thin film panels regularly convert 10% today. Commercially sold silicon panels today are more like 14-15%. Top lab-tested panels are at least in the high 20s, perhaps even more. These numbers make a difference.

The list goes on...

Three Things Obama Will Do to Advance Alternative Energy

I want to see an initiative to put solar on government buildings as much as the next guy, but I think it's premature to say it's "clear" such an initiative will occur. I for one have heard nothing definite on solar from Obama. The only energy "source" he has mentioned as a specific initiative in his transition is efficiency, specifically in schools. If he's made an actual statement that he's going to do something involving solar, I'd appreciate a reference. Otherwise, nothing is "clear" when politics are involved.

"Companies who have domestic production should benefit, including FSLR, STP SPWR, ENER." - Factual error. STP does not have domestic US production (if that's what the vague phrase "domestic production" meant). They have a US sales office, and now a US based installation venture, but no production. They've talked about building a US factory, but haven't yet bc of the credit crisis.

"Wind energy has been proven cheaper than solar and has achieved grid parity to some extent." - This shows a lack of understanding of what "grid parity" means. In California, Hawaii, Italy, and other markets, the annualized cost (over 20-25 years) of installing solar on a large home and the cost of buying grid power at current rates is equivalent. Tiered rates and peak power make a big difference. In places like Alabama, where electricity retails for 7c/kwh, solar's a long way off.

So to compare wind and solar in terms of an abstract "grid parity" is really not meaningful.

Four Reasons to Expect a Solar Boom

Look, I own STP and think the company's real good. However, your assertion

"Companies like First Solar and Suntech Power are self-funded companies that have been making money all the time, and these two companies have sufficient funds to expand their businesses."

is not true. Suntech has been partially funding its Capex through debt issues, most recently this past March. First Solar does indeed fund its expansion entirely through free cash flow. This makes it almost singular among solars. Suntech is one of the best of the silicon-based companies, and unlike most goes in and out of positive free cash flow. Also unlike most other Chinese solars, it is sitting on quite a money pile at the moment, which should give investors greater confidence for near-term headwinds. However, to imply that it funds itself solely through retained earnings like First Solar is misleading.

Canadian Solar: The Next Solar Takeover Target?

My take on why STP or SPWR won't acquire CSIQ:

SPWR's business is based around the idea of producing and selling a premium high-efficiency panel, which offers the benefit of cutting "balance of system" costs (higher efficiency means less panels per system, means less wiring, racking, labor, etc. to install). That focus on "balance of system" explains why SPWR acquired Powerlight and participates in the installation/integrati... business - it's where they will best compete in the solar value chain as their business progresses.

Why then would they want to get a producer that makes panels that are OK, industry standard, but aren't any more efficient than the norm? So they can buy the company, then retrofit all the production lines? Or increase the number of panels per installation? What does UMG get them - beyond panels that are less efficient than the norm? Such an acquisition would just weaken Sunpower's strategy, so I don't see it as likely.

With Suntech, it's a little more of a natural fit. However, I'd question why they wouldn't just take the billion plus they'd spend on CSIQ and put it towards their own capacity expansion? The extra capacity would be the only thing of value STP would gain, plus there would be the money, time, and risks involved in bringing together two different manufacturing organizations, QC methods, etc. It's easy as an investor to treat these things as afterthoughts, but they're the "devils in the details" for M&A.

Finally, I'd mention that Suntech CEO Dr. Shi was pretty dismissive of UMG technology during the Q&A at the recent InterSolar show. So neither company seems likely to acquire CSIQ, in my opinion.

A Look at Four Polysilicon-Based PV Manufacturers' Funding

I agree with "Envoy" that one should consider cash flows when assessing solar companies. "Earnings" should be viewed with a grain of salt, or at least in context, since they're the sexy numbers everyone oohs and ahhs at (or the opposite) each quarter.

I also agree with other comments that Envoy's analysis doesn't seem to consider these as high-growth companies in a high-growth industry - these companies will need to spend lots on cap-ex, of course, but most solar investors are aware of how much silicon costs right now and take that into account.

Also, I'm still skeptical of Envoy's apparent view that silicon costs will stay high. I'd especially like to hear a reaction to the reports by several companies that long-term contract prepayments - the financial albatross that will supposedly sink these companies, in Envoy's view - have gone from 10 - 12% of the contract to 3-5% of the contract in the past year. This would indicate a trend, right? Envoy doesn't seem to think so. In my view, he is wrongfully taking a snapshot of today's environment and projecting it too far into the future. I think instead it is safe to assume declining silicon prices from 2008 on - one could argue about how fast prices will fall, but fall they will, based on the reporting of long-term contracts mentioned above.

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

I dunno, alpha. Suntech experienced about double the demand for what it could supply this year, and has already sold into next year. That doesn't mean that oversupply couldn't happen, but it doesn't seem like the most pressing problem. Also, new markets are opening up, as the other commenters indicate; electricity prices will be rising, not falling. And falling silicon prices will ease margin pressure from lower panel ASPs - in '09 lower silicon prices will probably increase margins, falling more than ASPs.

Perhaps you might also elaborate on which companies you think will win, if in fact some are destined for the scrap heap via a panel price war, and why. Finally, if your top secret numbers are so great, make a few million and live in style off them, but don't blog the sky is falling and then not back it up with any meat.

Polysilicon-Based PV Manufacturers: Clarifying the Financial Issues

I'd like to hear the blogger's thoughts on Suntech and their strategy. I am a Suntech bull. To add to Jack's comments, they are another company that has reported signing supply agreements with prepayments in the low single digits, and they indicate that these long-term supply contracts will give them 20% lower (than 2007 costs) silicon costs for I believe 800 MW of product in '09. See their recent presentation at InterSolar for the exact details - I'm working from memory.

If you believe long-term, diversified silicon sourcing (they call it "virtual integration" compared to vertical integration) is the way to go, I would think Suntech would be your silicon PV company of choice. They were cash-flow positive before they did their convertible offering in March - a move that solars like Trina and CSIQ are just now making - and have locked up plenty of supply since then. This would give them a major advantage over those players that still need to sign deals to secure a part of their '09 product. Suntech has done this and they still have plenty of money in the bank.

Possible downsides include the fact that refining silicon is very complicated. If MEMC can have a plant shutdown, then any of the newer startups are almost bound to have this occur. Also, I could envision a scenario - though it seems unlikely - where silicon prices decline so much that Suntech finds itself locked into higher rates than it could find on the spot market. Again, such a scenario seems remote.

A Missed Opportunity in Canadian Solar

It's worth noting that all but the last of the problems I cited are actually problems with the US installation market, which is centered in California, and so affect both Akeena and its competitors.

A Missed Opportunity in Canadian Solar

I own some Akeena. It has some significant problems right now (of course, if you believe in the company, you'll probably have some buy opportunities in the $5 range). The problems include the credit/mortgage crisis in their primary market California (most home installations are funded by home equity loans); the continuing high cost of panels (hits their margins, though this should improve some in 2009); the expiring federal tax credit (hits commercial jobs right now, since credit accrues on completion, so planners are being cautious); the fact that Akeena focused big-time on growth over profitability means they're being hit hard on their bottom line. They've already started layoffs and cost-cutting.

On the plus side, they have the capital and lack of debt to get them through the year at their current "burn rate" (which will hopefully decline since they're focusing more on cost discipline); their proprietary panel design is successful and should boost their margins; they're moving into new markets (Hawaii and Colorado); and their prospects are very good once Congress gets it together re renewable energy tax credits. They also stand to benefit as panel prices start to decline in 09. They are one of the major installation players in a field that also includes the private companies SolarCity, REC, and Borrego, as well as the recently public Real Goods Solar.

Which Solar Stocks Will Continue To Shine?

I think STP is currently a great company at a good but not great price. The others are OK companies at great prices. With a horizon of more than a year (outside Yetiv's range I think, to be fair to him), I'd rather own the great company. From this extended POV, I find it quizzical that Yetiv's playing a value game in a growth sector, putting it all on forward P/E as he does, and all for 3-4 month swing trades. Of course, it seems to work, so I can't begrudge him that. More good fortune to you, sir.

However, I would add to Yetiv's risks that, by following his method and ignoring industry forces and qualitative factors for a company, if unforeseen circumstances soured on your 3-4 month gain, you'll either have to unload at a loss or hold a second-tier solar through an industry shakeout that first tiers like Suntech are going to win.

Trina Solar: Best Value in the Solar Space

Hi Jack -

I'm enjoying your series of articles. Seems to be generating high quality discussion about solar, which is a compliment to your work.

I'd question your heavy reliance on PEG as the basis for picking a solar company to invest in. Don't qualitative factors such as size, technology, management, and prior execution enter into your analysis? Or, in your mind, do these factors matter only in how much they manifest themselves in the PEG, ie the proof is in the pudding and PEG is the pudding?

I can see PEG as a determinative factor for success if you believed the solar panel/component industry was purely a commodity business. There are arguments that that's exactly what it is, or what it will be in the near future. In that case, the company that can produce the interchangeable product, in this case the solar panel, with the most profit (and in a growth industry the most profit growth) wins flat out. Those arguments may be borne out.

However: Brand? Access to markets? Partnerships? Relationships? Guanxi? Diversity? Products? Record?

Do all these take a backseat to PEG?

You may poo-poo the factors I cite as too soft. I'd agree one has to look at the hard measures, the bottom line, etc. However, I'd be more comfortable hearing something like "this company has this great PEG, and here's why they're a great company that's going to continue to win in the solar industry (especially with trailing data limited)."

My point in slogan form: I'd rather by a great company at a good price than a good company at a great price.

This might depend on horizon - mine might be farther out. What's yours? Is the "value" you see in TSL a question of months? Years? A year? You seem to be limiting yourself to a year tops (2009 eps worthless except as speculation, you say) - right?

Canadian Solar: Value Diamond in the Alt. Energy Rough

I actually think (self-justifyingly, I have to admit, since I own some STP) that Suntech is the real value story right now, even though its trailing P/E is currently around 33, forward around 23. Investors have been thrashing this stock since a 4Q call that missed earnings by a small amount, and because they maintained revenue/production guidance for 08 instead of raising it (a wise long-term move, I believe). I think investors are wrong, and that STP will be a long-term winner.

I would ask Mr. Yetiv, why is CSIQ a better deal than STP on any other front but the multiple (since multiples can be fleeting in such a high-growth, highly volatile industry)?

- STP has already grown its capacity, and is now I believe the third largest panel maker in the world. They've got scale, and scale is an advantage now, and an even bigger advantage going forward. Why do I want to buy a panel maker that's not as big, that has to keep putting capex into getting as big, in a market that's increasingly going to favor the big players, and all when further capital for said capex might not be as forthcoming as before?

- Suntech's gross margin was 20% for '07. Its net was 12%. That makes its 07 net better than CSIQ's 07 gross. Why do I want to buy a company with currently low margins, that's going to try really hard to improve them in '08, when I could own a bigger panel maker that also has much bigger margins and much more of an established history of profitability? Please consider margins not just as a multiple of share price, but also as an indicator of company performance, health, and management quality.

- CSIQ is a one-trick pony. They make silicon PV panels. Now they also make silicon PV panels that might not work as well (but are, I assume, still under an industry standard 25-year warranty). Suntech too has their main business in silicon PV panels, however they also have a thin-film line; they have a BIPV business; they're manufacturing and distributing Akeena's Andalay panel (which cuts costs at installation level); they have a high efficiency panel going into production which will put them at the top of the efficiency heap; they have significant R&D and research relationships in Australia and New Zealand. If I want to buy a pure-play solar, why do I want to buy a one-trick panel maker when I can get a much fuller suite of solar products?

- If you're a long-term investor in this industry, you know that solar businesses aren't really competing against each other, but against current grid electricity providers. Suntech has laid out its plan for grid parity by 2012 (if my memory serves). What's CSIQ's plan? Are they thinking along those lines? I haven't heard (doesn't mean they're not), but I definitely want a solar that's got an eye on grid parity.

Now none of the above necessarily precludes CSIQ from being the value darling that Mr. Yetiv believes it to be. However, while their earnings progression looks impressive over 07, I would take such a figure as only the start of why a company is a "value" company. I want to hear why such a company is a great company that's going to excel in its industry. Maybe it is. I'd love to hear the case, qualitative and quantitative. However, I happen to believe that Suntech is in fact the real value story in the market right now, and I'd be interested to know why CSIQ beats it.