Solar Stocks have been drawing attention over the last several weeks with many stocks posting impressive gains reaching into triple digit percentage points. The move has come after solar stocks were pummelled late last year and in early 2009. The action over the past 18 months is an excellent example of how investors’ outlook can move from overly optimistic, to overly pessimistic, to eventually a rational view of the long-term prospects for an industry.
LDK Solar Co., Ltd. (LDK) is not a new name to ZachStocks as we have looked at the stock multiple times in the past 2 years. Subscribers to the ZachStocks Growth Model are currently sitting on 81% gains in the name as our March purchase proved very timely. Wednesday the stock shot up 21% in active trading. The move came after the company updated investors on its progress in ramping up a polysilicon plant which is expected to increase production in the third quarter. While the news was not necessarily a deviation from previous releases, investors were relieved to see that the company was indeed on schedule.
Polysilicon is the raw material for most PV solar modules and is very difficult to produce efficiently. In the past the cost of poly has been a major issue for solar energy as a category because high priced poly made it difficult for solar energy to be cost effective. But advances in technology are finally paying off as the spot market price for poly is falling. LDK is circumventing this process by developing a large scale plant to produce its own raw material.
While LDK continues to perform well on the company level, the macro picture is also showing strength. Recently there have been several announcements of new solar energy projects from both the public and private sector. These types of news releases are driving optimism in the market which is bolstering what have been depressed multiples on solar stocks. On Wednesday a Chinese official said that the country intends to produce 20% of its energy from alternative sources by 2020. While this is certainly an aggressive timetable, the statement helped investors to have confidence that alternative energy truly is a priority for this growing country.
Another force driving solar energy is the rising price of traditional energy sources. Oil has risen more than 100% from its low of $32.40 late last year to a current price near $72. Natural gas has followed a similar pattern making electricity more expensive to generate using traditional means. Higher prices on traditional energy simply makes solar more competitive as projects work with a more attractive cost benefit timeline for how long it would take for a solar installation to become profitable compared to existing solutions.
Some investors have been afraid to get into solar names recently because prices are so much higher than they were 2 months ago. However, looking at valuations for particular names, there still appears to be plenty of attractive investment opportunities. LDK currently trades near $13.50 per share while analysts are expecting the company to make $1.63 in 2010. Historically, high growth solar companies have enjoyed multiples of 30 to 40 times earnings. Now this may have been unreasonable, but at the same time, the current valuation of 8.3 times future earnings seems to be ultra-conservative. And that’s after the stock has already experienced a 260% rise from its March low.
Analysts expectations should be taken with a grain of salt. After all, it is very difficult to predict exactly how pricing dynamics will play out, and what kind of demand will be generated with worldwide stimulus programs. But applying a conservative 15 times expected earnings still gives us a stock price of $24.45 – not a bad return from current levels. If you want to get a bit more aggressive and use a multiple of 20, the price could reach $32.60 which is another 141% above current prices.
Solar stocks will certainly experience volatility as new information becomes available in coming weeks and months. However, the trend is definitely for higher prices, and this is an area which could continue to experience economic strength even with a weak consumer (due to government projects). I would recommend aggressive accounts take at least a modest amount of exposure to solar stocks and LDK particularly as the gains could offset potential losses in other areas.
FD: Author has a long position in the ZachStocks Growth ModelLDK Rides Solar Wave – Up 21% Wednesday