Which Are the Bargains In Solar Stocks?

by: John Ryden May 24, 2008 | about stocks: CSIQ / CSUN / ESLR / FSLR / JASO / SOLF / SPWRA / STP / TSL    

John Ryden

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I think everyone can agree that solar company stocks have been volatile. There seems to be lots of disagreement on their current valuation. Some people see the stocks as having run up too much, over-bought and expensive, suggesting they should decline back to reasonable levels. Others see the stocks as cheap and are just getting started on major up moves.

All of these companies produce basically the same product. The product converts sunlight into electricity. Some of the companies use basic semi-conductor manufacturing processes to turn polysilicon into photo-electric cells. Other companies use more exotic (different) processes to make cells out of thin films.

This chart (click to enlarge) shows us that all of the solar companies are growing rapidly. They are selling at high multiples of trailing earnings, but low multiples of future expected earnings. Many of the companies reported great growth in revenue and earnings in their last quarterly reports, beating analyst expectations. I like the trend.

On my web site I did a review of solar cell manufacturers, comparing their 2007 production of 3.8 GW of power producing capacity with world energy consumption. This is a trivial amount of capacity. They could produce over 10 GW in 2008 and still be only a tiny fraction of world new installed capacity. As long a countries like Germany, Spain and the United States continue to subsidize new solar systems, there seems to be plenty of demand that can't all be met for several years at least.

I like solar stocks as an investment in alternative energy and believe the future for these companies to be bright! I think the government incentive programs will continue and these stocks are cheap based on possible double or triple digit future growth. I especially like the stocks trading at low forward P/E ratios and low 5 year expected PEGs.

Disclosure: I have long positions in CSIQ and TSL.

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This article has 44 comments:

  •  
    May 24 12:50 PM
    Are you sure your currency is correct for SOLF (lmao)! Don't publish P/E's without knowing the currency !

    Everyone knows TSL has the lowest P/E's and your SOLF FPE is misleading - with intention ?
    Reply | Link to Comment
  •  
    May 24 02:16 PM
    The earnings and sales for SOLF have to be converted. One Chinese Yuan equals 14.4068 US cents. Or, One US Dollar equals 6.9416 Yuan.
    So, The 8.19 earnings is actually $1.16 for 2009 and the PE isn't 3 it's 19. Yahoo lists SOLF in Yuan & everyone else in USD. Check Reuters.
    Reply | Link to Comment
  •  
    May 24 02:22 PM
    Solar is not driven purely by economic forces. There is a whole subsidy angle; not to mention local angle. Utilities will buy more solar products from local manufacturers and they will only convert to solar grid if their local govts. will subsidize.

    I do not think P/E or any other multiple will reflect this complication. It also means there will never be a monopoly in solar industry which might be a good thing.
    Reply | Link to Comment
  •  
    May 24 02:53 PM
    Seems to me you left out the best one ...check the FPE on YGE
    SOLF has a small market cap and that is why I am pessimistic at the current price....all had huge run except YGE...that is why they may be the safest bet and news just out should help propel it ( manuf silic )
    Reply | Link to Comment
  •  
    May 24 03:50 PM
    In IBD sol has only 30 million share outstanding, while in yahoo they show 100 million. Does this need to be converted?
    Reply | Link to Comment
  •  
    May 24 04:36 PM
    ESLR won last week $1 BILLION contracts and have 1.85B backlog.
    ESLR IS THE NEXT HERE TO RUN !!!
    they have to change the table and to calculate ESLR contract, things will be much different.
    ESLR NEXT $18
    Reply | Link to Comment
  •  
    May 24 10:04 PM
    I agree totally with you sha6852 regarding ESLR! ESLR will definitely start receiving upgrades and updated price targets. $18.00 is certainly reasonable given that they just doubled their sales for the next 4 years!
    Reply | Link to Comment
  •  
    May 25 04:08 AM
    If you like ESLR then be careful. Goldman Sacks could cut the price target like they did with SOLF. Short interest in ESLR is about the same as SOLF.
    Reply | Link to Comment
  •  
    May 25 04:17 AM
    hi
    Reply | Link to Comment
  •  
    May 25 09:33 AM
    I also like LDK on a valuation and projected growth basis
    Reply | Link to Comment
  •  
    May 25 09:44 AM
    IMO

    STP = a China play AND a solar play all wrapped up in one profitable company. Energy is China's critical success factor, STP is a Chinese company. The Chinese are NOT stupid - like the U.S. politicians - the Chinese WILL use their own domestic company to fill their cast solar energy needs. STP has a place at the head of the table of the boutnious Chinese energy market.

    ALSO agree with ESLR comments. This company will soon acheive profitability, and their connections and activity in SPain and Germany will werve them well as a profitable large global solar provider.

    STP and ESLR will be the solar IBM''s of the immediate future. Both are cheap, both also leverage off the high price of oil and the current political environment.

    Buy on dips, trade on bubbles, and hold hold hold core long terms positions in both stocks and IMO yo'll be looking at $200 to $400 stock valuations over the next 5 to 10 year period.
    Reply | Link to Comment
  •  
    May 25 11:51 AM
    PS

    While no one will be allowed to takeover STP = the Chinese are not stupid as our American politicians are.

    ESLR is a potential takeover candidate as well. Fo instance GE does not currently have a solar component in its business portfolio, GE does have a wind component and a nuclear component in its business portfolio.

    So with STP you get a China play (for free)
    AND with ESLR you also get a potential takeover candidate = soon as they acheive profitability (next 1-2 years)

    IMO
    Reply | Link to Comment
  •  
    May 25 11:56 AM
    I like ESLR particularly for its proprietary tech. for making more from less. $18 is a short term target. $28 is more acceptable.

    Remember the polysilicon shortage a few years back? Its here again, ESLR will reap the benefit more than FSLR simply on a relative basis.
    Reply | Link to Comment
  •  
    May 25 11:56 AM
    Some thoughts.

    The comment that "everyone knows TSL has the lowest PE" may have been based on my articles when TSL was at $41. Now that CSIQ has fallen from the $40's to the $30's, and now that TSL has gone up from $41 where I recommended it to $48, I think the FPE's on these two companies for 2008 are comparable at about 15.

    I think it is folly to use 2009 FPE's when the second quarter of 2008 hasn't even been reported. Too many things can change in 18 months (yes susbidies, no subsidies, ASP's, price of poly, etc).

    However, CSIQ has run hard due to its recent blowout quarter, but TSL hasn't yet reported. Assuming the delay in reporting is not indicative of a problem with earnings (and my guess is, it is not), I think TSL has the better chance of running once it does report, although I think the overall DOW may be in for a rough week this week. I plan to buy more TSL if it can be bought at $45 and CSIQ if I can get it at $35.

    As to ESLR--yes, the two big orders certainly put this company on the map, but we have no knowledge as to the pricing of the orders, the likely execution by this company, and hence, we have no idea what its net profit margins will be.

    So this one is still very speculative in my book. Everyone had great hopes for AKNS a year ago, and what has its price done?

    Finally, as to STP--although it surprised this quarter, it also hasn't done much in the past few months, price-wise. Its 2008 PE is close to 30, and I simply see no reason it deserves a PE twice as large as either TSL or CSIQ.

    As to YGE, I calculate its PE to be greater than 20, and again, no greater compelling value than TSL/CSIQ.

    Final note: The solars have run nicely during solar earnings season, so do NOT be shocked if they slide back and consolidate, especially if the markets retest their March lows. Also, these stocks are EXTREMELY volatile (sometimes for good reasons, often not) and if you can't handle that, this is not the space for you.

    Conclusion: Although there is some risk of downside moves, to me, TSL and CSIQ, at $45 and $35, offer the most compelling values in the solar space today.

    Jack
    Reply | Link to Comment
  •  
    May 25 01:35 PM
    Why do people shun YGE? I think it ha sgreat potential.
    Reply | Link to Comment
  •  
    May 25 03:13 PM
    Jack, TSL's management said they will be reporting the end of May or the beginning of June, since they reported on March 4th 2008, this makes sence.
    Reply | Link to Comment
  •  
    May 25 03:37 PM
    This was one of the more helpful articles on solar stocks that I have read in recent time. The table is especially useful in that it gives pretty clear direction of the revenue & earnings streams of some of these companies. Nice job.
    Reply | Link to Comment
  •  
    May 25 03:37 PM
    This was one of the more helpful articles on solar stocks that I have read in recent time. The table is especially useful in that it gives pretty clear direction of the revenue & earnings streams of some of these companies. Nice job.
    Reply | Link to Comment
  •  
    May 25 04:34 PM
    You can call it redneck arrogance but I don't trust pure China plays. The bottom line is there is no transparency to these companies.

    ESLR is a bargain ay any price below $16 until they bring their new manufacturing facilities to 100% capacity.

    FSLR, Suntech, and most other solars are grossly over priced. All the talk about FPE is humorous and tragic. The market has not been driven by fundamentals for over 10 years. There is way too much stupid money in the market for fundamentals to matter.

    The analysts are no help either. They are driven by a desire to for 15 minutes of fame and rarely have a clue what makes the market move. Consider the recent roller coaster market. One day the market moves down. The analysts proclaim it is due to oil futures hitting $118. The very next day the market posts a very nice gain and the analysts proclaim it is due to oil futures hitting $121. The analysts need to do the world a favor and put away their magic eight balls.

    The dirty little secret of the market is that only a privileged few have access to true market momentum data. Until the exchanged are forced to publish this data free of charge, the real strength or weakness of equities prices will remain hidden to the masses and the stupid money will continue to flow into the pockets of those that are in the know.

    Reply | Link to Comment
  •  
    May 25 07:20 PM
    Dear Bubba,

    Agree FSLR is overpriced, but I would be fascinated to learn how you arrived at a fair price of $16 for ESLR.

    As to the "stupid" money--that was much more true 2 months ago than it is now. What I have seen is that the low PE stocks (CSIQ, SOL, SOLF) have run and the high PE stocks (FSLR, SPWR and STP) have not. Seems to me the "stupid" money is getting smarter.

    TSL hasn't moved as much because it hasn't reported. I expect good things from TSL.

    Jack
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  •  
    May 25 07:48 PM
    Jack, one problem with your articles is, you don't look into TSL's guidence. TSL has guided for more than 4 EPS 2008 and I bet it will be more than 5, and the 2009 EPS is sure 8-10 US$. So, leave these actual to low estimates aside, and you will see that TSL is half the price of CSIQ.
    Reply | Link to Comment
  •  
    May 25 09:43 PM
    Larsson, please refer me to where TSL has guided to $4+ for 2008. As to your being "sure" it will be $8 to $10 in 2009, I would really like to know where you got that one.

    I have made my methodology clear--I use consensus which I find on Schwab Earnings Reports, for all companies. My own analysis calls for $4.50 on TSL in 2008, and $2.75 on CSIQ. I do not project 2009 because I believe that is witchcraft--waay too many unknowns.

    Using my own estimates rather than the consensus does yield a lower PE for TSL than CSIQ. However, I will only be comfortable with my $4.50 estimate once TSL announces.

    Jack
    Reply | Link to Comment
  •  
    May 25 10:58 PM
    Why Forgot LDK Solar its the more Important company and chipper in the solar companies His ernengs AN D EXPANCION VERY GOOD .
    Reply | Link to Comment
  •  
    May 26 01:07 AM
    Jack,

    Over the last several months I've purchased roughly equal amounts of CSIQ, TSL, JASO and YGE. Combined, they account for about 5% of my portfolio. I'm willing to ride out the volitility and see how things play out in the next few years. Any thoughts?
    Would you suggest adding SOL or SOLF?

    Thanks!
    Reply | Link to Comment
  •  
    May 26 01:07 AM
    Jack,

    Over the last several months I've purchased roughly equal amounts of CSIQ, TSL, JASO and YGE. Combined, they account for about 5% of my portfolio. I'm willing to ride out the volitility and see how things play out in the next few years. Any thoughts?
    Would you suggest adding SOL or SOLF?

    Thanks!
    Reply | Link to Comment
  •  
    May 26 01:08 AM
    Jack,

    Over the last several months I've purchased roughly equal amounts of CSIQ, TSL, JASO and YGE. Combined, they account for about 5% of my portfolio. I'm willing to ride out the volitility and see how things play out in the next few years. Any thoughts?
    Would you suggest adding SOL or SOLF?

    Thanks!
    Reply | Link to Comment
  •  
    May 26 01:36 AM
    Wow! I have no idea why my question posted three times. One reply will suffice.
    Reply | Link to Comment
  •  
    May 26 01:36 AM
    Wow! I have no idea why my question posted three times. One reply will suffice.
    Reply | Link to Comment
  •  
    May 26 02:28 AM
    For those of you who can also trade beyond US markets, Chinese monocrystalline silicon ingot and wafer manufacturer Solargiga (solargiga.com) listed in Hong Kong two months ago. Still affordable, trailing P/E 9.
    More at: finance.yahoo.com/q?s=...

    Disclosure: I have long positions in: STP, LDK, YGE, and 0757.HK
    Reply | Link to Comment
  •  
    May 26 03:03 AM
    O.K. Jack understand, in Q4 2007 TSL guided the year 2008, margins & Sales and you can estimate 2008 EPS. Looking to the currency (EURO) Impact, the 4 US$ should move to EPS 5US$ and higher, ASP rises with the high EURO. Consider this too. Considerin this + own TSL guidance, we are now trading on P/E 9-10. The latest estimations for TSL are av. 4.1 EPS 2008 and still way too low as not considering currency.Anyhow Jack, you have predicted CISQ and now you predict TSL, you are the No. 1 here in Solar, respect!
    Reply | Link to Comment
  •  
    May 26 11:35 AM
    Hi Jack,

    As always I agree with you on most things...But that STP doesn't deserve a higher valuation than the likes of CSIQ or TSL is in my opinion not true...the company is the greatest producer of solar panels(overtook Q-cells and I think Sharp)....and I think that size is ,and will be, quiet important in the coming years when it comes to lowering ASP's...(bargaining power, faster learning etc.)...does it justify twice the PE of CSIQ or TSL no probably not but what does it mean?Does it mean that STP is overpriced or that the other two are underpriced?My guess is the latter, these companies are trading at levels that Blue chips usually trade at(but with earnings/revenue growth very much unlike Blue chips)...I think STP will break out in the near-term....at the latest when they will announce a hugh poly deal that is rumored to happen soon....$1 Bil. in short term cash flow certainly speak for that scenario....

    Also i started building a CSIQ position, again, but quiet slow....jumped in @$38 and now waiting either for lower prices (gap close)...or just earn some money either way I am quiet comfortable with the investment at that price in the short term(less than 1 year)....with kind regards from across the pond CW

    Long ABX, CSIQ, STP, TSL

    PS this week in Germany they are meeting to discuss the future of incentives...(EEG)We'l... see what happens there...if anything unexpected happens I would get myself ready for the solar stocks getting pummeled...but nothing extraordinary is expected but who knows....
    Reply | Link to Comment
  •  
    May 26 02:02 PM
    Hi
    You have all your estimates for SOLARFUN incorrect. check out the businessweek website

    2009 Earnings=$1.21

    investing.businessweek...
    Reply | Link to Comment
  •  
    May 26 02:15 PM
    CSIQ look prety good in 2009, they will produces 400mw module, and about 100 to 150mw specialty product. So It will outbid TSL, however TSL might expand from current capacity.

    I am long long with TSL, and CSIQ just now.
    Reply | Link to Comment
  •  
    May 26 02:46 PM
    CSIQ earnings for 2009 maybe $5. UMG has not been factored into current estimate...
    Reply | Link to Comment