Which Solar Stocks Will Continue To Shine?
In early February 2008, I wrote this article giving my thoughts on 11 solar stocks. As you will recall, the stock market was hurting in January, and so were the solar stocks. In that article, I opined that the high-PE stocks in the group - First Solar (FSLR), SunPower (SPWR), and Suntech (STP) - were overpriced, while two were underpriced and screaming “BUY ME.” I further opined that if the market is truly rational, the investment returns on the low-priced stocks would exceed the returns from the high-PE stocks.
In that first article, I submitted a table I had put together, which calculated forward PE’s for 10 stocks in this space. The table is set out again below, with updated data as of yesterday’s close. As you can see, the market has been largely—but not completely—rational.
Canadian Solar (CSIQ), my favorite stock in January, is up a whopping 119% in a little over 4 months, its PE having increased from a ridiculously-low 11 in January to a more reasonable-but-still-attractive PE of 16 now. My second favorite stock in January—Trina Solar (TSL)—has turned in a respectable performance—up 36% as of yesterday, although it is down today. TSL released “interesting” earnings today and will be discussed in greater detail below.
ReneSola (SOL) actually IPO’ed (at $13.00) after I wrote my article and has also done very well—up 87% since January.
On the other hand, if you average the return on the three high-PE stocks I panned in January, you get an average return of 12%, with one of the three (STP) actually having dropped further since the pretty bad baseline in January.
FSLR did go up pretty substantially (49%), but far, far less than my favorite, CSIQ. Indeed, I believe FSLR is living on its previous laurels and momentum generated by all of its boosters in the investment community. I expect these high-PE stocks to continue to underperform their low-PE brethren going forward.
What has happened is precisely as it should be, in my opinion. FSLR is predicted to double its earnings between 2007 and 2008, and STP and SPWR aren’t even expected to do that, yet they trade at forward PE’s of 26 to 88. On the other hand, CSIQ and TSL are expected to more-than-double THEIR earnings in 2008, and yet their forward PE’s are 16-17. Of course, after today’s earnings report from TSL, I think the consensus for TSL earnings in 2008 will go up at least 10-15% from $3.16 to, putting TSL’s PE at about 12-13.
Solarfun (SOLF), Yingli (YGE) and JA Solar (JASO) trade at PE’s of 20-25, and I do not believe they offer more compelling values compared to TSL and CSIQ that would justify those higher PE’s. If a reader knows of a significant advantage one of these three has over TSL or CSIQ, please comment about it.
In my view, although SPWR is clearly the technology leader in the group today (they are cranking out 22% efficiencies in the lab, and are selling 19.3% efficient panels commercially), its growth rate has definitely decelerated. Indeed, on the conference call some weeks ago, SPWR indicated that revenues in Q2 of this year will be flat with Q1 (whereas TSL, for example, is guiding to about a 40% sequential increase in revenues). In my view, even given its technological prowess, and although it deserves some premium, SPWR is overpriced at a forward PE of 37. This is especially true given the fact that SPWR won’t even double earnings this year, while both TSL and CSIQ are expected to more than double their earnings. In addition, I believe other companies will substantially narrow the efficiency gap in the next year or two, decreasing SPWR’s relative advantage.
Suntech Power (STP) is also slowing in growth, with earnings only expected to go up 50% this year. I panned STP in January because I thought it was overpriced at its PE of 31, and I still think it is overpriced at a PE of 26, compared to CSIQ and TSL at about 14.
As to FSLR, I didn’t like its prospects in January, and I don’t like them any more now. For any company to justify a forward PE of 88, it has to be able to more than double its earnings on an annual basis for several years into the future, usually because it has a proprietary product or service for which there is no meaningful competition (think Microsoft OS’s in the distant past, although even in those days, I don’t think MSFT garnered forward PE’s of almost 100).
Although FSLR will probably double earnings this year, I doubt it will do so next year and the year after that. The expectations are so high that one tiny stumble and all of a sudden, FSLR no longer merits a forward PE of 88, and contraction of the multiple will hurt the stock price, or, at the very least, prevent any increase in stock price. One need not look far to find examples of this—look at STP and SPWR, both of which are trading at about half of their 52-week highs (AAPL and GOOG are two more examples of fabulous companies who got knocked down because they failed to meet continuing outrageous expectations—and they “only” trade at forward PE’s of 30 or so).
Frankly, I would not even pay a forward PE of 40 for FSLR, and here’s the reason why not:
The KEY reason FSLR is worth more than the other solars TODAY is because it is the price leader in terms of cost per watt. But there is only one reason for that price leadership—which is that polysilicon is priced in the hundreds of dollars per kilo, whereas within 2 to 3 years, it will be priced in the dozens of dollars (and not that many dozens at that). Since poly is the #1 manufacturing cost for FSLR’s competitors, an 80% decrease in the cost of poly (from, say, $250 to $50)—as is likely to occur over the next several years—will go very far towards eliminating FSLR’s cost advantage. Keep in mind also that FSLR also has one cost DISADVANTAGE that its poly brethren do NOT have—FSLR has to build TWO panels in order to generate the same amount of electricity that a SINGLE poly-based panel will make. That will double FSLR’s cost for aluminum, glass, manufacturing and other costs to build that extra panel.
When you take this into account, I would not be surprised if in three years, a single poly-based 300-watt panel costs no more to make than (2) 150-watt FSLR thin-film panels. And all things (including price) being equal, who wouldn’t prefer ONE 300-watt panel versus TWO FSLR 150’s? In other words, FSLR’s panels will actually have to be at least 15-20% cheaper just to induce purchasers to buy them because the amount of room they require and the extra installation costs will have to be compensated for.
Finally, how much upside is there for a company—any company—with a market cap of $20 billion? I simply don’t see 2-bagger potential for FSLR in the next year, whereas CSIQ and TSL with market caps of around a billion could double or triple in a year or two and still have a market cap FAR less than HALF that of FSLR TODAY. Another way to see this is to look at the price targets for FSLR, which range up to maybe $350 (I don’t follow this closely, so maybe I am wrong here). That gives FSLR an upside of maybe 40%. In contrast, if later in 2008, it looks like TSL will make $5.00/sh in 2009 (consensus before earnings release today was $4.19—see further discussion below), and by the end of 2008, TSL’s PE expands modestly to 18 against 2009 earnings, the resulting price of $90 represents a 2-bagger from the current trading price around $46.
In conclusion, I believe that the solar space will grow vigorously over the next decade, and I believe that at the present time, TSL and CSIQ continue to offer the best risk-reward ratio in this space. I do believe it’s difficult to look very far out (ie, beyond 2009) because I think by 2010, disruptive solar technologies (CIGS or other thin-film PV, concentrating photovoltaic, etc) will be sufficiently commercialized that they may present very serious competition to the polysilicon-based panel producers, but at this point in 2008, TSL, CSIQ and SOL offer the best prospects.
Finally, I want to discuss TSL’s earnings announcement this morning. The earnings headline number was $12.9 million, or 51 cents per share, slightly exceeding consensus of 48 cents, and substantially less than last quarter’s 62 cents. Not surprisingly, investors who did not look under the hood sold TSL today, causing it to drop to about $46 as I write this.
If one looked under the hood, however, one would discover a charge of $4 million against earnings due to “remeasurement of the non-US dollar denominated obligations in the US dollar functional currency”—whatever this means. In the absence of this weird charge that is apparently related to an accounting change that occurred for the first time this quarter, earnings would have been 67 cents. To put it a different way, if this accounting change had occurred next quarter, TSL would have announced earnings of 67 cents and the stock would be at $55 now rather than $46. Amazing how such an unanticipated and seemingly trivial decision can have such major impact.
Also, TSL paid over a million dollars in income taxes this quarter versus a tax benefit of half a million last quarter. Making a further adjustment for this would yield “operational” earnings (ie, earnings based on the sales and profit margins rather than currency exchange and income taxes) of about 75 cents this quarter.
More importantly, guidance for this year was increased—with operating margins of 15-17% expected on revenues of $770 to $808 million. Taking the midpoint on sales and margins ($789 million times 16%) yields operating income for this year of $126 million. Utilizing the same interest cost and exchange losses as just reported but annualizing them equals a cost of about $24 million and taxes at 4.92% (announced on the call) adds up to $6 million, yielding earnings in 2008 of $96 million, or $3.79/sh, yielding a PE of about 12 against the current trading price of about $46.
I believe that the analysts will go through the same math I have just done and that earnings estimates for both 2008 and 2009 will be increased by at least 10-15% in the next few days. Therefore, to me, TSL where it is trading now ($46) is a buy, not a sell.
To those not familiar with the solar space, I must close with a few cautions. First, solar stocks are EXTREMELY volatile, with 20% daily moves NOT unusual. So if you do not have the stomach for seeing your position lose 20% of its value in one day, solar may not be the place for you. Second, the solars have gone up a lot in the past few weeks, and there is a good argument to be made that they need to slide back before they go back up as we anticipate the next earnings season beginning next month. Third, there is reputed to be a psychological connection between oil prices and the solar stocks. To me, this was more of a factor in the past than it is now, but it remains a factor. Thus, if oil slides back from the $120’s, it may take the solars with it. Fifth, some people believe that the stock market in general may be heading back to 12,000 or even below to retest the Jan and March lows, and obviously, such a move may well impact the solars (although the solar often don’t follow the broader market on a day-to-day basis).
On the positive side, I think that there is a fair possibility that in the next few months, Congress may pass an energy bill that will extend the old incentives and create some new ones. Although some of that is already baked in, I believe the passage of this bill may move the solars up another 5-10%. Finally, especially if oil and gas hold up or even go higher, I believe that over the next few months we’ll hear more about factors that will be pro-solar—such as carbon-capture, increased state incentives spurred on by increases in the cost of electricity (due to higher costs of coal and natural gas) and due to environmental concerns, etc.
Whether the “bullish” forces I have discussed above beat the “bearish” ones, I cannot say. But if you are comfortable with the volatility and other risks discussed above, I think that TSL is a buy at $46 or $47 and CSIQ is a decent buy under $40.
Disclosure: I own a large position in TSL, plus some TSL options bought when TSL was $43-$44 recently. I am not short or long any other stock, but also hold a large position in PWE, which will be the subject of a future article.
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This article has 71 comments:
- dicki31785
- 73 Comments
Jun 06 03:15 PMExactly what you said is correct while listening to the TSL conference call this afternoon...the first thing that stuck out was that 4 million dollar charge they took....really made the earnings look "disappointing&qu... while they were really not disappointing at all....Another point that you did not mention and I would like to add is Trina's position in Italy...They positioned themselves excellent in order to take advantage of that emerging solar market...IMO it will be the next Spain....and currently Trina holds a market share of 25% in that market and if you looked at where their products go in the near future they will even expand that markertshare...
Also you did not really get into reduction of unit costs which look quiet promising...with poly costs dropping at least 12-15% in the next year(more realistic is 20%...TSL is conservative in the estimate which surely is not a bad thing) and also non poly costs reduction from $1.17 to 1.05 by the end of the year...So I think their is actually a possibility of a margin expansion....rather than a margin squeeze which other companies possible face with reductions in feed-in tariffs in ESP and GER...All in all the numbers were quiet good and as you said it is so cheap...and after a couple people do their math and raise guidance the stock will go up....I added to my position as well today and will continue doing so in small steps since they are, as you also said, so volatile but i do not expect a big pullback....
also i know it is kind of outta the way....but it looks like the ECB is quiet serious about raising those interest rates(The German Central bank is putting quiet a lot of pressure on them) and if it does not happen this month it will happen next month...putting further pressure on the dollar and this will obviously raise commodity prices...I doubt that is smart for Europe but that was not the point I was trying to make:)...Kind regards from Germany CW
- AKinSS
- 3 Comments
Jun 06 03:28 PMDo you think this is a good time to get into TSL with the selling today? Do you expect more sliding before the next earnings report creating a better buy point?
- buystocks
- 73 Comments
Jun 06 03:38 PM- West1
- 25 Comments
Jun 06 03:44 PMAny idea why the change in "functional currency" to the $, given that most of their business is in Europe? I was under the impression that other foreign solars had been coming out ahead with regards to foreign currency in Q1, so the $4 million loss is an unexpected contrast. Since it is a Chinese company, I did not think being long TSL was inconsistent with a bearish view of the dollar, but now I'm wondering if it is.
- VP of Common Sense
- 63 Comments
Jun 06 04:03 PM- User 182177
- 34 Comments
Jun 06 04:07 PM======================...
The chart needs 6 months of data, thus SOL is not included.
All other stocks in Dr. Yetiv's article are in the charts.
Dr. Yetiv's favorite stock, CSIQ, is included in both charts, comparing to the rest. (CSIQ is a real gem.)
stockcharts.com/charts...
stockcharts.com/charts...
- tessant
- 176 Comments
My Website
Jun 06 04:08 PMscott
solarfeeds
- vitamin_j
- 34 Comments
Jun 06 05:08 PMHowever, 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.
- West1
- 25 Comments
Jun 06 05:16 PMShouldn't the Yuan being pegged to the dollar be favorable? My thinking is that if sales are in Euros and costs in Yuan, then the weaker dollar would be good...but if so, why the $4 million loss?
- gebby
- 174 Comments
My Website
Jun 06 05:48 PM- RobDC
- 5 Comments
Jun 06 06:01 PM- ysong
- 2 Comments
Jun 06 06:20 PMIt says in the "Change of Fuctional Currency" section in today's ER that "...Trina China's significant and sustained shift in conducting a majority of its business activities in US dollars".
It also says in the "Net Revenue" section that "... Average sales price ("ASP") was $3.95 in the first quarter of 2008, compared to $3.94 in the fourth quarter of 2007", which means the AVR did not gain nearly as much as USD depreciated.
Both seem to suggest the sales, supposedly most of which were in Europe, were still denominated in US dollars.
The $4.0 million exchange loss was "... primarily associated with Trina China's non-US-denominated obligations that are now required to be remeasured in the US dollar functional currency. Such remeasurements are and will continue to be, to the extent we continue to have such non-US denominated obligations, recorded as transaction gains or losses in the consolidated statement of operations"
So they were converting the non-US-denominated obligations to USD functional currency, and hence recorded the exchange loss. This is opposite to a situation mentioned in Q4 2007 release (when the functional currency was still RMB):
"The Company's 4Q and 2007 financial statements are subject to change based on the Company completing its computation of the fair value of foreign exchange derivatives embedded in two of its material long-term silicon supply contracts. Such contracts provide that the purchase price of the silicon to be acquired is denominated in U.S. Dollars, which is not the functional currency of either of the contracting parties. Given the continued strengthening of the RMB against the USD, the Company believes that the ultimate impact would increase the earnings for both 4Q and fiscal 2007. The impact, if material, will be recorded as "Exchange Gain", a non-operating item, in the consolidated income statement"
I agree with most of Jack said here, but it looks like this kind of exchange loss charge might not be a one-time thing, since they may "continue to have such non-US denominated obligations".
I'm not totally sure about this, but a seemingly logical conclution is, we'll porbably see more "exchange loss" than "exchange gain" after this change of functional currency to USD with the assumption that USD will continue to depreciate against the currencies in which thye hold the non-US denominated obligations.
- svosavvy
- 129 Comments
Jun 06 06:35 PManother great article, I liked it all except I personally think the oil could potentially be more of a wildcard now than it was before. This is purely anecdotal, but, I walked by a tv screen playing cnbc (which I think is the investor version of junk food) and it had the price of crude emblazened in the corner of the screen must have taken at least %10 of the view hole. People are losing their minds on the whole gas thing (thanks media). I follow stp (yes poor me I know) and in the last month outside the german subsidy story this sector has seemed to be glued to the hip of crude movement, its definitely fun to watch.
- knight722
- 13 Comments
Jun 06 07:11 PM- West1
- 25 Comments
Jun 06 07:34 PMThanks for your insight.
- shon
- 3 Comments
Jun 07 09:58 AMand put ESLR in the table, they are the best for the furture.
- shon
- 3 Comments
Jun 07 10:01 AMwhen you look at 2009 estimate and 2010 eatimate the all picture can change a lot. institutional and funds and longs investors looking for that.
- Jack Yetiv
- 442 Comments
Jun 07 10:26 AMIn the meantime, please note that I wrote my article within one hour of the termination of the TSL conference call--hence, no time to address some of the issues.
Also, to reiterate my methodology--I am INDEED a "value" investor in the solar space, and that approach seems to have borne fruit so far. If I can get a company that will triple sales and double earnings this year at a PE which is LESS than the average PE in the S & P, that's a bad thing?
More to come.
Jack
- thedivot
- 14 Comments
Jun 07 11:11 AMIt must do you proud when the market validates your thesis. Congratulations on a couple of great articles. Back around your first article I flip-flopped between buying CSIQ or YGE and opted for YGE so I blew that one though I think it will do fine longer term. But I also bought LDK & STP near their recent lows so am up over 100% on LDK and over 50% on STP. The solar group is so volatile that you can make money on just about any of the stocks if your timing is good.
Please continue your thorough analysis and interesting articles - they prompt lots of good discussion.
- beandog
- 34 Comments
My Website
Jun 07 11:14 AMStay tuned...
beanieville.blogspot.c...
- jlounsbury59
- 289 Comments
My Website
Jun 07 11:16 AM- alphameister
- 87 Comments
Jun 07 01:34 PMI'm guessing that the huge P/E discounts at which these Chinese super-stocks trade is related to issues regarding the reliability of their accounting practices. Any comments on this?
- Daniel Kowkabany
- 12 Comments
My Website
Jun 07 02:12 PM- KaiK
- 3 Comments
Jun 07 02:27 PMthanks for your great articles. I am learning a lot about the industry and to which solar companies invest in.
CSIQ and TSL are surely great companies and their top and bottom lines are growing rapidly, especially CSIQ's bottom line in the last two quarters. I am already long on TSL, will also plan to invest in CSIQ.
I also believe SOLF will provide equal investment opportunities. Not because its EPS would have gotten as large a boost in May as the two other companies' EPS got, nor I would bet that its quarterly EPS will reach these two companies' Q1/08 EPS level (0.61) during any of the remaining quarters of 2008. However, for some reason SOLF's past EPS and PE numbers did fall a quarter behind its peers at least in Yahoo Finance. They only today updated SOLF's trailing 12month's EPS and PE numbers to real 0.77 and 28, respectively. Therefore, SOLF is already today only a whisker away from your computed Forward 2008 PE target of 25.
Despite SOLF states that their gross margin %-tage may continue to decline due to higher silicon costs, I still believe their operating expenses, interest expenses, taxes, etc. in China business environment will not increase so much that it would fully offset the positive effect of the anticipated 200+% top line grow to their 2008 EPS.
Now if we take SOLF's Q1/08 EPS of 0.32 and multiply it with four (which appear to be analysts' rule of thumb + - something) we will reach Forward 2008 EPS of 1.28 (vs. 0.90 which is current analyst average estimate) to SOLF. With Friday's closing price of 21.64$ we will reach Forward PE (2008) of 17, thus equaling that of TSL's and CSIQ's.
Does this make sense to you? Let me know if you disagree. Additional plus I see in SOLF compared with other Chinese solar companies is that their top management team appear to be more diversified and has many foreigners in the team. Especially, when most of its sales are overseas this will not only help sales, but also alleviates potential cultural conflicts between the company and its foreign customers. Trust me they do happen.
- greencapitalist
- 111 Comments
Jun 07 02:30 PM>>>>FSLR did go up pretty substantially (49%), but far, far less than my favorite, CSIQ. Indeed, I believe FSLR is living on its previous laurels and momentum generated by all of its boosters in the investment community. I expect these high-PE stocks to continue to underperform their low-PE brethren going forward.
i was fslr bull, but 3 things has made me jump out of stock.
1. massive selling (although prearranged) by ceo. he sold off 50% of his stocks!!!!
2. eu seems to be having second thoughts on the toxic cadmium. this is in rumour stages though.
3. certain analysts concerned about te material.
unless these 3 are clarified openly by company, it is advisable not to go long on fslr. of course you can daytrade and/or short it as you feel fit.
- mistermaumau
- 7 Comments
Jun 07 04:23 PMAgree on SOLF. They are executing in an orderly and predictable manner. They also have a huge advantage by being 1/3 owned by G.E. (not GE) and having two of their directors on the board since a while (their CFO since 2 years I believe). That will surely provide many future possibilities. Finance has been playing around with this one a little but once they lose interest, SOLF will be more appreciated. Margins will not drop short term as the average Euro level for this quarter has remained higher than last quarter. This may turn against SOLF in future as sales are very dependant on Europe although it seems they have started to address the US market now. The drop FSLR will experience when their advantage turns against them will probably cause their shareholders to spread that excess market cap to others in the sector.
- xz1
- 23 Comments
Jun 07 04:29 PM- Tigerman11
- 5 Comments
Jun 07 06:44 PM- Tigerman11
- 5 Comments
Jun 07 06:49 PM- Jack Yetiv
- 442 Comments
Jun 07 07:48 PM1) I used consensus earnings and revenue projections for 2008 as posted on Schwab (Schwab Earnings Reports) for my table. In other words, I did not "adjust" those numbers per my own opinion. For example, I did not plug in my own calculated $3.79 for TSL earnings--I used 2008 consensus of $3.16.
2) The purpose of the above methodology is that it is far more objective than using other numbers. The fact that the consensus is usually an average of anywhere from 5 to 25 numbers should eliminate outliers and yield a more reliable number.
3) To the extent the above methodology has errors (as any methodology does), they are likely to be SYSTEMATIC errors that will inappropriately lift or lower the projections of the group.
4) Thus, if we are to use $1.28 for SOLF due to the above suggestion, we should also use my $3.79 to $3.95 number for TSL, and my $2.80 number for CSIQ. We could--and SHOULD--do those additional analyses in our comments, as I did in the article and as you folks have here--but I think the table should show a more objective data source.
Specifically as to SOLF, the math above seems reasonable, but I don't know the stock well enough to add any more intelligence there.
As to LDK, I have read a lot about it, and the commentary seems quite divergent. Some people feel that its CEO may be spreading himself too thin with the new Best Solar venture, while others think this will accrue to LDK's benefit. We all know about the accounting problem allegations, which, even if without substance, impact the stock.
But at the end of the day, the consensus estimates tell us growth of earnings from $1.28 in 2007 to $1.68 in 2008--about 30%.
Why should I pay a PE of 25 for that growth when TSL and CSIQ will more than double earnings in 2008--and can be had for PE's slightly above 15 per consensus, and slightly below 15 per my own estimates?
As to why the Chinese solars seem to trade at a discount--your guess is probably as good as mine, but here are my thoughts:
First, some folks consider non-American companies inherently more risky.
Second, some people don't understand that ADR's and "shares" are not that different.
Third, the high-PE stocks--SPWR and FSLR--are both technology leaders and have major boosters within the investment community, and the latter factor especially tends to push them up.
But I think this is changing.
Finally, in my article after next quarter's earnings are released, I will use a forward PE against 2009 projections. I think it is too early to do that now.
Jack
- tomc368
- 6 Comments
Jun 07 08:46 PM- Jack Yetiv
- 442 Comments
Jun 07 09:59 PMI calculate a PE of a bit over 20.
I would also note that only YGE and STP are actually LOWER in June, 2008, than they were in Jan, 2008 (AKNS doesn't really count, I only put it in the table because someone asked me to).
I am not sure that the fact that they are building a new factory with someone else's money convinces me that YGE at a PE of 20 is a better deal that TSL/CSIQ at PE's of 15-16.
Jack
- West1
- 25 Comments
Jun 07 11:08 PMDid some further reading and found out about YGE's currency gain of 9.5 million in Q1 2008, and $4 million loss in Q4 2007.
biz.yahoo.com/bw/08051...
"Foreign currency exchange gain was RMB 66.3 million (US$9.5 million) in the first quarter of 2008, compared to a foreign currency exchange loss of RMB 29.2 million in the fourth quarter of 2007 and a foreign currency exchange loss of RMB 0.1 million in the first quarter of 2007. The foreign currency exchange gain in the first quarter of 2008 was primarily due to the appreciation of the Euro against the Renminbi coupled with an increase in Euro-denominated sales, which was partially offset by the depreciation of the U.S. dollar against the Renminbi."
So this seems to indicate that a depreciating dollar against the RMB is also a negative for YGE.
- West1
- 25 Comments
Jun 07 11:22 PMwww.nytimes.com/2008/0...