Tentative Solar Investing Rule #8
No solar company deserves a PE over 15 (using GAAP TTM EPS).
Unless barriers to entry get a lot higher, or somebody develops a production method that others can't copy, nobody is going to be able to sustain gross margins over 30%. FSLR had gross margins of 33% for full-year 2009, the industry leader, and they guided for 38% in 2010, but I think that is unlikely. The industry leaders may be able to sustain gross margins in the range of 20-25%, and the laggards below 20%, IMO.
In general, a stock deserves a PE about equal to the LT EPS growth rate. The solar industry may grow at 35%/Y, measured in MW. That's the consensus. But revenue growth will be less than 35% (because ASPs will fall, probably 10-20%/Y). And earnings growth will be less than revenue growth, if margins fall. And, if debt and share bloat continue, EPS will grow at less than earnings grow. So, the stock price can't be expected to grow at 35%/Y, even if an investor picks the best company. |
