Monday, February 28, 2011

Solar stocks 2011: the anti-dotcom

Usually stocks that crush earnings and are growing revenues by 100%+ year over year are rewarded with higher than market multiples of P/E.

But then I guess there is nothing usual about the solar industry these days. One stock--ticker JKS--reported earnings this morning that beat estimates by $0.80 for the quarter, and it sold off over 3.5% by the end of trading.

Well of course you say, it probably has a P/E of 45 or 50 and ran up ahead of earnings...but actually NO. JKS now has a P/E of under 4.5 and JKS is trading within approximately 10% of what it sold for 1 month ago and 6 months ago--admittedly it is up 20% from 3 months ago (but down 20% from where it was 4 months ago).

Yes JKS's P/E is now under 4.5, AFTER beating Q4 earnings estimates by 50%! raising Q1 revenue guidance by 25% and FY 2011 revenue guidance by 50%.

Unfortunately the reaction (while a tad extreme...) is not unusual for a solar stock this season. With one or two exceptions (FSLR has a P/E 19) it is hard to find a solar stock which has reported earnings with a P/E over 10. SPWR's class A shares (the expensive ones) now trade at a P/E of under 9.8--and these stocks are both frequently listed as industry leaders.

On the other hand there is a phenomenal amount of misinformation floating around about solar...more than is readily explained by simple ignorance. Some analysts (that presumably some people consider experts) can't say for sure if Italy installed nearly 2GW or as much as 6GW in 2010...and in case you don't follow solar, the world market was ~15GW +/- 1GW. (Plus we know that at least half went into Germany.) And why did so much go into Germany? because they told everyone they were lowering their FIT (Feed-in-Tariff) by 13 or 14% mid year and again at the end of the 2010. And what did Germany do again this year? they told us again that they will lower their FIT by another 12 or maybe 15%.

Now if solar manufacturers are capacity constrained they will put their panels into the most lucrative market, which in 2011 is Italy. But if there is extra supply (because Italy says they won't take any more than ~6GW) then they will push their panels into whatever market they can find (and maybe take an 8-10% margin whack--if necessary)...which is why I expect Germany will see ~10GW of panels go in during 2011, 5-6GW into Italy (however they count it there) about 2GW into the US (maybe more if panel prices drop a full 10%) and another GW or two into Japan meaning that nearly 20GW will be installed in just the top 4 or 5 markets in 2011. The rest of the world can easily absorb another 2GW of panels especially if prices drop to ~$1.50-$1.60/W range on average (I'm assuming the average is ~$1.75/W right now). Since panel makers expected a 10% drop last year (and probably only saw a few percent drop if that) they are making good money right now. All the manufacturers are also estimating a bumper earnings year if they can sell out, and they are again assuming a 10% drop this year.

Now is it possible that panel prices drop by more than 10% in 2011? I would say that it is possible, and if they do fall significantly more than 10% then solar stocks might miss their earnings estimates (most are expecting earnings growth of ~30% for the year). But the markets are "discounting" (or they are confused) a drop in panel prices of over 20%, such that earnings contract by more than 50% in 2011--at least that is how I read a P/E of 4.5!. Following the 2008 financial crisis we saw panels, drop even more than 20%, but I'm pretty sure that absent another global crisis panel manufacturers will sell out 2011 capacity long before prices drop to $1.35/W on average.

At any rate, I am very surprised that there are still substantial (and increasing?) short positions in many solar stocks. In many cases over 10% of shares are held short. I understand shorting a stock with a P/E above 50, or one that is missing earnings, but not stocks with a P/E well under 10 that are crushing earnings by 20, 30 or 50 percent? And I do not understand shorting solar stocks with oil at $100/bbl and the potential to go much higher if another oil exporter begins to topple.

But as Paul Simon's lyrics say "who am I to blow against the wind?"