A lot has happened since May 4th when I penned a negative article on First Solar Inc. (FSLR). My expectation was that the crisis in the Euro-Zone would have a material effect on stimulus for solar projects, which in turn would hurt the solar stocks which are so dependent on these subsidies. Since that time, FSLR has dropped from $143.72 to near $106 today, and many other stocks in the sector are down substantially more.
The concerns in the solar industry are certainly valid. Europe has been one of the primary champions of alternative energy and Germany & Spain have been especially beneficial with their generous programs to help defray costs for installing environmentally friendly energy sources. Without these stimulus programs, the demand for solar products could be significantly cut – and with excess capacity in the industry pricing may continue to suffer…
But how far is too far? The Claymore Global Solar Index (TAN) pictured below is off 43% from its 2010 high and many individual stocks have experienced much wider losses. Investors in the sector appear panicked and willing to sell at any price regardless of the fundamental value of the individual companies.
This type of environment can create attractive opportunities for the scrupulous and patient investor. While the trend is negative and selling could continue, several stocks are entering a range where it makes sense to allocate a small amount of long-term capital with the possibility of realizing very large returns when the sector rebounds.
Trina Solar Ltd. (TSL) is off more than 40% in just the last three weeks. At $15 per share, the company looks like a good risk considering earnings are expected at $2.12 for this year and $2.35 for 2011. Even if these earnings levels were cut in half, the stock would still have a low multiple relative to it’s long-term growth prospects.
In the fourth quarter, the company shipped 163.7 MW of solar product and saw its revenue increase to $313 million (over $216 million in the fourth quarter 2008). Gross margins increased to 32.6% which is impressive given the fact that average sales prices per watt dropped from $3.61 in the fourth quarter of 2008 to $1.90 in Q4 2009.
Debt levels are under control with total debt of $585 million and cash on hand of $478 million. In 2010, the company expects Germany and Italy to make up less than half of total sales which is an improvement from past years. However, the dependence on these two countries certainly does pose a risk to investors which is why the stock is so cheap today.
The company will announce first quarter earnings on May 25 before the market opens. Investors will be listening carefully to understand what trends are in play and what feedback management is getting from customers. The stock is currently in a place where even bad news could easily spark a rally. Investors are expecting the worst and so something at or slightly better than “the worst” could quickly drive share prices higher.
Long-term, the entire solar industry could benefit from the wake of BP’s giant oil spill. Environmental concerns will likely drive tighter regulations for fossil fuels, and generate more demand for alternative means such as solar energy. Short-term concerns are weighing down the market, but in the long run we could easily look back on the summer of 2010 as an excellent buying point for solar stocks.
FD: Author does not have a position in any stocks mentioned in this article.
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May 20th, 2010 at 10:08 am
I think the so called smart money that got into all the green investments early has been getting out as reality is sinking in. The long term charts sure don’t look very promising. In the end it will always be economics that prevail, not hope.
May 20th, 2010 at 10:09 am
that is one ugly chart
May 20th, 2010 at 10:09 am
Great article. Although Trina Solar’s gross margins are expected to come out closer to 28% when they announce their 1Q 2010 results next week, your point is well taken: they are the profitability leader in this space and should a price war break out in the second half of the year, they will suffer less than most of their competitors.
While the TSL chart looks atrocious, it is important to contrast it with some of its peers to get a feel for just how well the company is doing compared to the rest of the solar sector, as can be seen in http://seekingalpha.com/instablog/465788-the-green-investor/69833-taming-the-solarcoaster
May 24th, 2010 at 2:24 pm
TSL is certainly best of breed in c-si. We will have to see how they ’solve’ the Euro market problem.
FSLR’s ‘defense’ was to open a plant there.
Still, the labor and electricity costs advantage of TSL being Chinese seems to give it plenty of margin room to do business in the Euro-zone.
May 24th, 2010 at 2:24 pm
“TSL is certainly best of breed in c-si.”
What criteria are you basing this statement on?
Perhaps best in breed for Chinese manufacturers, but otherwise your statement is a huge reach.
May 24th, 2010 at 2:25 pm
Cost competition will have TSL on top with increased pressure in the solar realm.
It will be interesting to see how this all plays out in the long term.
In the short term the market is agreeing with your article…TSL is up 3% at the time of writing this while the major indices are down average 3%…very telling divergence between the Euro and TSL as well as of today.
May 24th, 2010 at 2:25 pm
“Long-term, the entire solar industry could benefit from the wake of BP’s (BP) giant oil spill. Environmental concerns will likely drive tighter regulations for fossil fuels, and generate more demand for alternative means such as solar energy. Short-term concerns are weighing down the market, but in the long run we could easily look back on the summer of 2010 as an excellent buying point for solar stocks.”
Your are on target with this statement…it is already happening.
Make some calls to most U.S. distributors and ask for 250kW. You might have to wait 6 months or so for the more efficient products and similar issues are occurring for utility scale inverters.
May 24th, 2010 at 2:26 pm
J A Solar has a bigger advantage over TSL in EUROPE as they only derive 20% of all revenues from Europe and they are completely hedged against the dropping Euro.
Also, JASO has no long term debt and limited longterm debt of around 99 million, but with their 240 million of cash reserves and 450 million in working capital, they can easily handle the debt service.
Also J A Solar is beating estimate handlily and has for the past three quarters, and raising not only operating margins but also Cell efficiency, now 19.5%..
To bad these writers continue to lump J A Solar into the groups who face the most European exposure, as they clearly have a huge advantage over all other chinese Solar companies with only 20% of their revenues coming from Europe.