The Sweet Smell of Solar Values

by: Shawn Kravetz
For decades, enterprising marketers have unabashedly pitched knockoffs of designer colognes and perfumes at cut rate prices. They were originally marketed with catchy slogans like: “If you like GIORGIO, you’ll love PRIMO.” Today, it might read “If you like OBSESSION, you’ll love RECESSION.”
I thought of this vis a vis solar stocks because we are seeing something reminiscent of this today…with a twist. Today we are seeing the real stuff on sale. It’s Brioni suits at Filene’s Basement or TJ Maxx. Truly the same, but much cheaper and in your size. We humbly offer you four examples of designer quality solar companies without the designer prices.
If you like Yingli (NYSE:YGE), you’ll love Trina (NYSE:TSL). This duo is a fairly traditional relative value play with an edge. The investor community has crowned Yingli as the global low cost leader, a title rightfully deserved in the recent past. However, on the way to Yingli’s coronation, Trina usurped the throne as the low cost king. After crunching the Q2 2009 data, we estimate that Trina sustains a ~10% fully loaded cost advantage over Yingli. Trina can manufacture a module for $2.05 per watt whereas Yingli is producing at $2.30 per watt including COGS, operating expenses and interest expense. In fairness to Yingli, we hold them in high regard as one of the leading global solar companies (and a cost leader) and have owned their stock and related securities in the past. However, with Trina, we own a slightly lower cost producer with 75% of the capacity at ~50% of the enterprise value. Trina has a comparable if not more favorably diversified geographic footprint, higher gross and operating margins, a bankable brand, a better balance sheet (70% less net debt than YGE), and a simpler corporate structure. And most importantly, Trina trades at a discounted valuation to Yingli. Based on consensus (and not our significantly higher proprietary earnings estimates for Trina), Yingli trades at ~16.5X 2010E EPS whereas Trina ~13.5X.
If you like Evergreen Solar (ESLR), you’ll love ATS Automation (OTCPK:ATSAF). We have always liked Evergreen’s string ribbon technology, especially in an era of $400/kg polysilicon. Unfortunately, commercializing that technology ballooned ESLR’s balance sheet. Today, ESLR has a $600 million enterprise value and is likely to remain unprofitable for the near future. ATS Automation manufactures the “Quad” furnaces that are the heart of Evergreen’s wafer technology. While Evergreen has not managed to make money, they are intent on driving their business. Each new factory or JV is a win for ATS without the capex needed by Evergreen or its partners. A source at Evergreen confirmed that they were paying $185,000 per furnace in the boom times of 2008. It truly is getting the milk without buying the cow. Moreover, in ATS we own its other solid automation businesses serving energy, healthcare and other end markets. Finally, ATS owns Photowatt, a solid PV manufacturer and installer with some challenges but well positioned in two of the most rapidly emerging and highly subsidized solar markets: France and Ontario. This makes me think of another example: If you like(d) Spain’s solar market in 2008, you’ll love Ontario. But that’s another story for another time. With a superb management team and a cash rich balance sheet, ATS is an Esplanade favorite.
If you like First Solar (NASDAQ:FSLR), you’ll love integrated Chinese module makers and upgraded metallurgical silicon (CSIQ/TSL/TIM in Canada). Everyone is focused on the “second” First Solar. We admire First Solar (though we don’t own the stock). Frankly, they have no real competition for what they do. The most likely competition on the cost side, however, is not a venture-backed “highly promising” company (possible but unlikely anytime soon), but rather a few companies with one weapon. Start with the global leading processing and administrative cost structure of Canadian Solar (NASDAQ:CSIQ) or Trina. Then add upgraded metallurgical silicon [UMg] (instead of traditional polysilicon), such as that made by Timminco (OTCPK:TIMNF). Most people have assumed that polysilicon will continue its price decline into perpetuity. We disagree. If polysilicon pricing holds or even rises, then UMg becomes a very compelling low cost substitute. In 2010, we can easily envision UMg module costs of: $0.85 processing for the ingot through module. $0.21 for UMg ($30/kg at 7 g/watt), and $0.20 for operating expenses. All in cost of $1.26 versus FSLR fully-loaded at ~$1.23 in Q2 2009 (admittedly, this will decline in 2010). Should FSLR be scared? No, but they should keep an eye on their rear view mirror for this compelling combination.
If you like Phoenix Solar, Real Goods (RSOL), Akeena (AKNS) or any other downstream solar company, you’ll love Systaic. It’s difficult to fault even the most seasoned solar investors for overlooking this tiny EUR EUR 76 million market capitalization solar project developer, yet it trades at ~25% of Phoenix Solar’s enterprise value to ebitda. Systaic boasts a robust 205 megawatt solar power plant pipeline (largely in Italy) that should be realized through the end of 2010. With EUR 700 million in potential revenue from their large solar power plant segment alone, systaic will not remain unnoticed for long. We estimate that the power plant segment can generate over EUR 40 million in EBIT in 2009 alone, which suggests that the entire enterprise is trading at ~2X the power plant segment 2009E EBIT.
In addition to its core and very profitable power plant business, Systaic is nurturing two potentially explosive growth businesses, solar energy roof systems and automotive solar roofs. Management believes that the solar energy roof systems business can generate EUR 100 million in revenue in 2010 (versus ~EUR 30 million in 2009) and that the automotive roof segment can deliver EUR 100 million in revenue within three years. In the meantime, these two businesses barely consume cash, and management is confident that the solar roof systems business will turn a profit in Q4 2009. We have confidence in Systaic’s veteran management team to deliver on these two promising businesses, and we believe that trading at 4.7X our estimate for 2009 EPS and 8X 2009 consensus (two analysts), we get the potential of the energy roof and automotive segments for free.
Ah, the sweet smell of solar values.
Disclosure: Funds the author manages are long ATS Automation, Canadian Solar, Systaic AG, Timminco, and Trina Solar