Comments on First Solar (Nasdaq:FSLR) and SunPower (Nasdaq:SPWRA) Downgrades

Oct 07, 2008
Author: SCP Editor

October 7, 2008 – Solar stocks haven’t been getting any breaks lately. On Friday, the industry got much needed long-term visibility and Federal support through the extension of renewable tax credits, which will be a huge boost to sales in the U.S. markets, but the solar stocks suffered amidst a broader selloff as the Street focused on the dismal outlook for the domestic and global economies. And then this morning, Goldman Sachs’ solar analyst Michael Molnar cut First Solar (Nasdaq:FSLR) and SunPower (SPWRA) to Sell ratings citing oversupply in the sector for modules and not enough subsidies in Europe, sending the group reeling in pre-market activity. Here is our take:

1.     Molnar’s comments seem to us to coming late. That the solar landscape, both in terms of feedstock production and module production is becoming increasing crowded and competitive, which will lead to commoditization, oversupply and downward pressure is no new news. In our opinion, these factors have been being priced into the group for the last eight months.

2.     The ratings on First Solar (Nasdaq:FSLR) and SunPower (SPWRA) should not be taken as an indiscriminate call to sell all solar companies. Even as of yesterday’s close, FSLR was trading at a 57x P/E and SunPower was trading at a 104x P/E. Other companies in this sector, that remain extremely well positioned are trading at much more modest multiples. LDK Solar (NYSE:LDK) closed yesterday at a 9x P/E. Yingli Green Energy (NYSE:YGE) closed at a 10x P/E. JA Solar (Nasdaq:JASO) closed at a 22x P/E. Trina Solar (NYSE:TSL) closed at an 8x P/E.  

We think that LDK, trading at current multiples, has already more than factored in any of the risks Molnar cites and that the stock is tremendously oversold. The company is expected to grow its income this year from $139 million last year to $309 million this year (122% growth) and its top-line revenue from $524 million to $1.7 billion (224% growth). We are forecasting, based on management comments, FY09 revenue of $2.9 billion and income of $580 million. At yesterday’s close, LDK is trading about 4.4x our forecasted FY09 income and less than 1x FY09 P/S. These multiples don’t reflect a profitable growth stock that is posting triple-digit year-over-year top and bottom-line growth.  

3.     In every growth market, commoditization and oversupply are prevalent. And certainly, these are key factors which impact business margins, which in turn, should play into company valuations and price targets. That being said, there is a tremendous amount of growth in place for the solar industry driven by the government support at the state and federal level, the private sector, and on an international basis. Conventional wisdom is that hundreds of billions will be invested into alternative sources of energy over the next twenty to thirty years. The International Energy Agency and G8 have called or $45 trillion in investments. Solar will certainly get its share.  

We agree with recent comments from some solar executives that predict many companies in the industry today will be gone in a year’s time. That is also a common characteristic of every growth industry which attracts so many, and then consolidates. But for the companies well-positioned from a technology and manufacturing perspective, the catalysts for long-term growth and success are present. And in the case of so many of these companies, we think that this growth is nowhere near being factored in.

Molnar’s comments were a shot-gun approach to the market, where he needed to use a scalpel - or at least this is how it is being translated by the media and the Street. To be sure, First Solar and SunPower will lead the rest of the group lower. We agree, and are on record, with the sense that First Solar and SunPower are overvalued relative to several of their peers, and to that end, the correction is not controversial. But to the extent that the some of the companies we mentioned above (in particular LDK and YGE) are negatively impacted, we can only point to this as a unique opportunity to accumulate.

Important Disclosure Note: SCPEditor and/or his affiliates are LONG LDK and YGE, and do not have positions in TSL, FSLR, SPWRA and JASO. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.