Monday, November 22, 2010

Solar Stocks = Value + Growth

Normally investors in a fast growing sector like solar need to be careful of valuations becoming stretched. P/Es in fast growing sectors will sometimes reach 2-3 times the market average.

Oddly for a market where q1 2010 opened with fears of oversupply and a resulting price war, demand exceeded expectations (100% year over year growth), prices remained stable and a "goldilocks" market ensued in which valuations for most solar stocks have contracted significantly. With only a few weeks left to the year, many solar stocks are selling at 6,8 or 10 times FY 2010 earnings and 3, 5, or 7 times FY 2011 estimates.

One of two interpretations follow: 1) investors are correctly discounting an oversupply situation in 2011 (which the companies themselves do not see) and prices will decline significantly faster than costs leading to much lower earnings in 2011 or 2) this is a unique opportunity to buy into one of the fastest growing industries of the decade, at prices that deeply discount the value and growth potential of the sector.

While the future is inherently uncertain--an oversupply could occur, and investors need to watch this aspect closely--it seems that Wall Street is overly pessimistic about solars, by projecting absurdly low future stock valuations. Just on Friday an analyst at Wedbush downgraded SunPower (SPWRA then trading around $13/sh) and reduced their target price for SPWR from $11/sh to $7/sh. This came only a day after the company confirmed FY 2010 earnings guidance of $1.50/sh and provided FY 2011 earnings guidance of ~$1.90/sh.

SPWRA is now trading around $12/sh, which means the company's FY2010 P/E is 8 with less than 6 weeks to go in the year. And its FY 2011 P/E is just above 6, despite the anticipated 30% growth from 2010-2011. The company is also selling at a discount to book value (P/B = 0.84). Yet the Wedbush analyst thinks the stock is 70% overvalued...(at $7/share the 2010 P/E would be 4.8 and the 2011 P/E would be 3.6 and the P/B would be under 0.5). Such pessimism strikes me as extreme given the current rapidly growing solar market.

Another stock that I follow is LDK Solar which is a Chinese solar play. The company is projected to earn $2 in 2010 and maybe $4 +/- $1 in 2011. LDK trades just a little above $11/share, meaning its FY 2010 P/E is already near 5.5 and its FY 2011 is around 3. I could imagine this valuation on a company that is in serious trouble or embarking on a major restructuring, but not on fast growing profitable companies. Something is out of kilter, and I say its the low valuation!

With the exception of thin film leader FSLR, which is trading at a market multiple, nearly every solar I know of is trading at a substantial discount to the market P/E, yet their revenues and earnings are projected to grow at least 30% in 2011.

The above earnings estimates are predicated on solar panel prices dropping ~10% in 2011. This means that price drops significantly greater than 10% could negatively impact these stocks earnings (although P/Es at 1/3 to 1/2 the market multiple somewhat reduce the downside to stock prices). Since Germany currently installs about 1/2 of all solar panels in the world, the German market support (Feed-in-tariff) is especially important to solar companies. They are set to reduce their FIT 13% in 2011--which is well known in the industry.

While a 13% reduction may sound large, the country reduced its FIT by 26% in two stages in 2010 which partially explains why the Germans will install 2x as much solar in 2010 as in 2009, as companies rush to install panels ahead of these FIT reductions. Assuming Germany leaves its FIT alone in 2011, I don't see any cause for panel prices to drop more than ~10% in 2011 (b/c the economics would be similar in both years for the installers). If Germany were to announce an additional one time large cut to its FIT, this could depress panel prices (although first there would be a surge to install panels ahead of the extra cut). The larger the expected cut the larger the rush. Another possibility that could depress prices is if Germany were to cap the amount of solar at some value below ~10GW/year. Current estimates are for 7-8GW to be installed in 2010 so a cap of say 8GW would imply ~zero growth for the largest solar market and that could put downward price pressure on other markets.

What can sometimes get lost in all this talk of earnings, estimates, and FIT rates is that the solar industry is growing quickly because it supplies safe, reliable and clean power (at a lower and lower cost each year) to a planet desperately in need of exactly this.

Solar companies can bring down prices each year because they benefit from "economies of scale" (it is cheaper to make, or install--per unit--1 million panels each year than it is for half as many) and what is sometimes called "economies of learning" (the concept that you get better at doing something the more times you do it).

There will be stumbles and misses whenever an industry is growing as fast as solar currently is: 50% compound annual growth rates. The only thing investors can do is make sure they buy into companies at valuations that balance the risks and rewards available. It seems to me that now is a rare opportunity (b/c of a flawed Wall Street consensus) to buy into a rapidly growing industry at an exceedingly low valuation.

Saturday, November 20, 2010

Observation and projection for solar markets

Here are a few high level observations about the solar market in recent years and some near term projections (in italics):

Solar panel prices
50% drop in panel price led to a 200% increase in demand (with 1 yr time lag)
25% drop in panel price should lead to a 100% increase in demand the following year
12.5% drop in price should lead to a 50% increase in demand the following year

Installed prices
15% drop in price (2008-2009) led to a 50% increase in demand the following year—in the midst of the global credit crisis!
15% drop in price (2009-2010) led to a 100% increase in demand the following year—credit markets recover
Another 15% drop in price should lead to a 75% increase in demand the following year (averaging the two)

Mid 2008 5GW market @ $4W panel ($7.5W installed)
Mid 2009 7.5GW market @$2W ($6.5W installed)
Mid 2010 15GW market @$2W ($5.5W installed)
Mid 2011 20-25GW market @$1.75W ($4.5W installed)
Mid 2012 30-35GW market @ $1.5W ($3.8W installed)
Mid 2013 50-60GW market @$1.35W ($3.5W installed)

Mid2014 75-90GW market @$1.2W ($3W installed)

Sub $7 prices utilities order ~10MW plants
Sub $6 prices utilities order 50MW plants
Sub $5 prices utilities order 250MW plants
Sub $4 prices utilities order 1.25GW plants (?)
Somewhere around $3W installed, I believe solar market will become self sustaining.

I think the installed solar prices are a better metric than solar panel prices, since the installed price is ultimately the price the end user sees.

Wednesday, November 10, 2010

Solar stocks getting no respect

The solar sector has recovered from a nasty first half of 2010, with many shares up 30% from the lows of the year.

But the sector is still getting no respect--even as some companies post very impressive numbers. I continue to like SPWR and MEMC as I believe analysts/investors are not giving them credit for their power plant construction businesses. At $13.8/sh and $12.60/sh respectively, neither stock is getting credit for getting about 70% of its year's earnings in the last quarter of the year. With SPWR ready to report Q3 earnings tomorrow, I will be listening closely to information about Q4 when SPWR is estimated to earn over $1/sh. Depending on how Q4 turns out SPWR should make $1.30-$1.60/share in 2010. So with about 7 weeks to go in the year it is trading at a PE ~10.

Meanwhile a Chinese solar company LDK Solar--which I started watching about 15 weeks ago when they announced a MASSIVE lending facility from a Chinese state bank (worth ~$10 B)--announced earnings 2 days ago of 0.72/sh (well above the 0.43 estimate)...which along with the 0.36/sh they earned in the prior quarter puts them above $1/sh in just 6 months. LDK is predicted to earn another ~$1/sh in q4, bringing FY 2010 to ~$2/sh. LDK also raised 2011 revenue guidance by almost $1B. LDK stock is presently trading at ~$13/sh, meaning its 2010 P/E is about 6.5 despite soaring earnings and revenue.

Friday, November 05, 2010

Cool Keyboard

I must say, this new solar keyboard offers a nifty combination of practicality and cool. I'm thinking that should be my next keyboard. Kuddos to Logitech for creating it, and hat tip to solartodayblog for tracking it down.

Now, I just need a solar mouse...

Wednesday, November 03, 2010

Anyone else hoping for gridlock?

The day after an election is always a little surreal. If your side wins you feel a wonderful sense of elation and possibility; if your side loses you are left shaking your head, wondering how the majority of voters could have fallen for the other side's BS.

While the actual result may not be a big surprise (the polls and pundits all seemed to fairly accurately predict the outcome) and the economy really does suck. Somehow it is human nature to discount the polls that don't favor your side and look for reasons why they may not be right. (I guess that is called denial!) But the reality is still a shock, even if some people/historical precedent predicted it.

Following 8 years of disastrous Bush policies, Obama got about 18 months to make a real difference with both houses of congress. He enacted a stimulus which stopped a recession from turning into a depression, he saved the US auto industry, he gave renewables a helping hand, enabled the legislature to fix a broken health care system (extending coverage to 35 million Americans) and created some financial regulation that may prevent the next financial crisis from spiraling out of control. And he cut taxes on the middle the largest amount in history! All while reducing the deficit by nearly 17% in 2010 (from 1.4T to 1.2T over the mess Bush left).

Now we are left wondering how Obama and the Republicans will extend the Bush tax cuts while reducing the deficit. (Hint: you can do one or the other but not both.) And if there is anything good (literally anything) that can get passed in a Senate where the Dems control only ~53 seats, considering what a struggle it was to accomplish anything when they held 59/60 seats.

I see a lot of gridlock and stalemate coming, unless Obama and the Dems decide to cave (i.e. compromise totally) to the demands of the corporatist Republicans. I'm almost hoping for stalemate--even though that might lead to Obama losing in 2012--just because I abhor the fact that the republican agenda (as near as I can tell) is for the US to return to the good old days of congress helping corporate America screw the little guy at every turn. [And here I thought the message of 2006-2008 to congress was to stop screwing the little guy.] And I firmly count myself among the "little guy" in America crowd, least anyone think I'm condescending.

Basically the best outcome of the next two years is that come 2012 we are no worse off than we are today...