Bapcha’s Stocks.

Three Solar Picks that should thrive – even with reduced subsidies.

Posted on November 18th, 2008 in AKNS, Alternative Energy, Cadmium, Cadmium-Tellurium, CdTe, FSLR, First Solar, PV, Photo-voltaic, SPWR, SPWRA, SPWRB, STP, Silicon, SunPower, SunTech, Tellurium, Uncategorized AKNS, Alternative Energy, Cadmium, Cadmium-Tellurium, CdTe, First Solar, FSLR, Photo-voltaic, PV, Silicon, SPWR, SPWRA, SPWRB, STP, SunPower, SunTech, Tellurium

The last time around that I picked on SunPower – there was a lot of opposition to my conclusions – most of which have proven to be true, plus, their [alternative energy's] situation has been worsened by a decrease in the price of crude oil, and the strength of the dollar [which will cut U.S. based companies' earnings - SunPower - (SPWRA and SPWRB) in particular - as they did not properly hedge their projected foreign sales]. In any case, SunPower’s growth over the next couple of years is projected to be heady – in the twenty to forty percent annualized rate [depending on who you ask].

Most of this growth will be in the EU, and California – where everything alternative-energy is heavily subsidized.  With the European & the CA economy also in the tank [much like the US'], we see the ability to get subsidies as becoming substantially harder as the months/years progress, and companies that rely on these hand-outs – [despite being inherently inefficient, get to rely on subsidies as "free money"] will find it impossible to do business without the aid of the government – making them vulnerable to competition from more efficient players in the same marketplace – domestic and foreign.

But, we will focus on the efficient integrated manufacturers of PV modules – who have demonstrated multiple years of heady growth and profitability, and will survive and thrive – even in an economic environment of reduced subsidies.

SunPower has been in the solar-cell game since 1985, and in the business, for a few years.  Their solar cells’ efficiency is the highest [in the commercial market], and hence they command a premium in the marketplace.  It is best suited for installations – where space is hard to come by. For now, SunPower’s gross margins are pathetic – at 20% – much like a memory company in its last legs of profitability.  But, the management wants to grow this to at least 30% in the next three years, and to 40% in the next five.

Their biggest competitors are SunTech STP, and First Solar FSLR. SunTech is based out of China, and makes their panels for an impressive $2/Watt [SunPower is at a little over $4/watt], and First Solar – which eschews the use of Silicon, and instead uses a Cadmium Telluride [CdTe] based thin film. While FSLR claims that their raw materials are the “by-products” of mining, it is a known fact that Te is a rather rare element – while Silicon is much more readily available [and getting cheaper] – as the biggest barrier to producing pure Silicon is the availability of huge amounts of cheap power.

Pick #1

SunPower.  The company is cheap – at the current valuation.  I opined – that it was worth no more than $40/share [while thinking that it was worth more like $25], a few months ago.  Since we are there due to circumstances that include:

a. The economy,

b. Over-supply of silicon,

c. Too many solar panels on track to flood the market in 2009 [prices are already down 20% y-o-y when we did a channel check],

d. Improper hedging of non-US sales by SunPower,

the stock was begging me to take another look – which I did, and noticed that none of the “problems” afflicting SPWRA/B are operation, management, or technology related. Sure, there is a huge problem with the economy, but most of SPWRA/B’s customers are buying the product as they can see an ROI in the double digits^A – especially in states like CA and HI where the baseline rate is over 11c/KWH [non-time of use pricing, but baseline - which is the lowest rate that people pay (yes, I know, there are exceptions)]. So, the reasons why I like SPWRA/B are:

1. Most of their next two years’ sales will be to non-residential customers – making them inherently less sensitive to the economy;

2. Almost all of SPWRA/B’s customers will receive subsidies or tax credits for buying their PV systems – and generate an ROI in the double digits on their investment.

3. SPWRA/B is attractively valued at 1.2x sales.

4. Heady growth rate that the management is confident at delivering on.

5. Excellent management [with the exception of the hedging issue - which I suppose they were not concerned about - since for the last three years, both their sales and earnings were buoyed by a sagging dollar (and a buoyant Euro)].

6. Technical excellence.

7. The market hates SPWRA/B – while I like it now.

8. The B shares – with eight votes/share are a better deal than the A shares – which have one vote per share, but both Series A and Series B, have the same rights – when it applies to equity in the company, dividends, etc.

Pick #2

SunTech Power. STP makes PV modules. In fact, Akeena Solar’s Andalay Panels are based on SunTech’s panels.  Unfortunately, as an installer, AKNS is beyond the scope of discussion in this article.  I picked STP ahead of FSLR – as STP’s manufacturing costs are similar to that of FSLR’s – despite the fact that SunTech uses Silicon.  Added to the fact that silicon prices have nowhere to go except down, SunTech can easily increase their gross margins from the current mid-20’s in % to about 34%. SunTech’s current relative valuation (in light of its projected growth rate) is even cheaper than SunPower’s. 

STP at $10.10 is valued at 1.1x TTM sales, and a TTM PE of a little under 9. That is cheap for a company projected to grow at over 20% for the next five years, and one that currently is the lost cost leader in the world of integrated PV module manufacturers.

Pick #3.

First Solar.  I picked FSLR at #3 – despite their superior gross margins because:

a. Sand is cheaper than CdTe [but like it was already mentioned in a prior paragraph, it takes a lot of cheap energy to make pure Solar-cell grade silicon].

b. Thin film based solar panels [the kind FSLR makes] are less efficient than silicon-based PV modules.

c. Apart from being less efficient, thin-film based solar cells have much worse performance at low-light conditions – compared to silicon based solar cells.

d. FSLR sells at a premium valuation. At $110/share, FSLR’s market value of $9 Billion is a multiple of 9x TTM sales.  On a TTM PE basis, the stock sells at 32x.

Notes:

A.  Double digit ROI calculations based on a PV system that generates 4KW.  We priced the system through multiple installers, and assumed a PG&E credit of $1.90/Watt and the Federal Tax Credit (30%) for grid connections after Jan 1, 2009.

B. We focus on gross margins and growth rates and cash flow in this article. While we did look at earnings, PE, etc., what matters for semiconductor companies - is valuation, gross margins and growth rate.

C.  The “President Elect Effect” impacted these stocks positively only for a week – as the market realized that all that the part of the $850 Billion that affects alternative energy does – is to continue the subsidies for businesses and increase subsidies from a $2000 tax credit/installed system to a credit of 30% of the cost of an installed system – for individuals.  The non-business PV market represents only about one percent of the total US PV market.

D. FSLR’s modules are the hardest to recycle [though the company will gladly do it for you if you ship it to them to the appropriate location].

E. STP uses both poly and single crystalline silicon based cells in their PV modules.

F. No positions in any of the mentioned stocks.

© Bapcha’s Stocks, 2008.