The Sunny Side of Solar
Posted By Mark Kinsella On September 5, 2008 @ 4:19 pm In Energy, Equities, Information Technology | 2 Comments
I will try extremely hard to avoid using puns about the sun and solar throughout this article, as I have done so already in the title, but I must admit that it will be difficult. So with that said, on to the topic at hand: solar stocks. It is an ongoing debate as to whether or not the current sell off in solar is nearing the end or if this is just the beginning. This is why whenever a discussion of solar stocks comes up; it is very difficult to single out which stock is the best play. In my opinion, there are really two types of solar stocks that one can invest in. The first are the extremely expensive ones with ridiculously high Forward P/E’s such as First Solar [[1] FSLR: 236.01, -1.12 (-0.47%)] and SunPower [[2] SPWR: 85.74, +0.53 (+0.62%)]. The second category, and the focus of this article, is the fundamentally sound and reasonably priced stocks such as LDK Solar [[3] LDK: 45.15, -0.83 (-1.81%)] and Suntech Power Holdings [[4] STP: 43.27, +1.68 (+4.04%)]. In order to properly understand what makes these stocks a better play, it is important to examine how people are wrongly pricing solar stocks as a whole before looking at the individual stocks.
What’s Going On?
Pricing stocks is never an easy task. Pricing stocks in an industry that has grown over 849% since 2000 is even more difficult. However, the recent sell off in solar stocks has been happening because people are misinterpreting what correctly drives the price. The pricing of solar stocks should start at the most basic economic principle: demand. The demand for every link of the solar supply chain has been increasing as companies are continually expanding their production. Solar effectiveness is increasing and people are attracted more and more to it as the search for renewable sources of energy continues. America has yet to jump on board, but the expansion of solar in Japan/India/China/Europe is making up for it. The global solar market is expected to grow from $13 billion to over $40 billion in 2012.
Another reason why the prices of solar stocks have been driven down recently is because of the ludicrous argument that the price of oil is tied to the price of solar stocks. Where this idea comes from is beyond me. Solar energy does not replace oil and thus a decline in prices of oil should not have any impact on the direction of solar stocks’ prices. Solar energy is here for the long run regardless of where the price of oil is. A more reasonable argument would be to link solar prices to natural gas prices. Natural gas may have a very strong negative impact on the solar industry, but that is another argument for another day.
The Basics
First, I am going to talk about Suntech as it is comes up much more frequently in solar discussions. Suntech Power Holdings designs, develops, manufactures, and markets Photovoltaic (PV) cells and modules. It currently operates five production sites in Wuxi, Luoyang, Qinghai Nagano, Japan and a sixth is under construction in Shanghai. The average conversion efficiency rates (percentage of solar energy that is delivered to the grid) for its monocrystalline and multicrystalline silicon PV cells were 16.4% and 14.9%, respectively, at the end of 2007.
LDK solar is an unbelievably successful company. Their growth rates are staggering and their positioning in the market makes them one of the most influential companies in the industry today. Unlike Suntech, LDK Solar does not make the PV cells and modules, but rather they manufacture multicrystalline solar wafers. Solar wafers are the raw material that is used to make the solar cells. A relatively young company, LDK sells their wafers worldwide to cell and module manufacturers.
A Deeper Look
Solar stocks are historically known for being extremely expensive and very tricky to properly value. This is because it is an industry that is widely speculated by many with very little understanding of what actually controls these stock prices. Let’s start with Suntech.
As you can see from the stock chart, Suntech Power Holdings has taken a ridiculous hit so far in 2008. This move is pretty consistent with the rest of the industry and it is more important to look at what they have planned moving forward. Suntech reported excellent earnings, which has been reflected in the stock price’s recent movements, and looks to continue this through the end of this year and into 2009. Suntech has extremely high capital expenditures, as they take all of their cash and buy minority ownership in silicon providers or invest in the next generation of PV cells. With a Trailing P/E around 35 paired with impressive earnings, their growth potential is great (assuming their investments work out). Suntech is cheap and worth a look if you are interested in going green with solar.
LDK Solar is an extremely powerful growth company. As I discussed earlier, LDK Solar manufactures the solar wafers that are used to make PV cells and modules. By the end of this year, LDK Solar has positioned itself to become the largest solar company in the world. They have already sold their entire inventory for 2008 and 2009 and half of their inventory for 2010 has also been sold. It averaged a 200% year-over-year growth rate for the last three years, which is absolutely staggering growth. LDK had amazing second quarter earnings, crushing analyst expectations by around 75 cents. On top of this, LDK has entered long-term contracts with ten companies year to date including BP [[5] BP: 54.03, -0.23 (-0.42%)] and GE [[6] GE: 27.88, +0.18 (+0.65%)]. A company this successful is extremely hard to be ignored as we move into the fourth quarter and 2009.
Recommendation
In an industry that has taken a massive hit recently, many people are unsure where to look for a good pick. The sell-off in solar stocks is not justified and is occurring mainly because people are afraid of what is going to be the next energy source. The solar industry is one of extremely high expected growth, around 40% a year, and Suntech Power Holdings and LDK Solar are two large contributors to this growth. LDK is a great play that takes advantage of this expanding industry and sheds some sunlight on a cloudy industry (sorry, I had to do it).
-Mark Kinsella |
