Evergreen Solar (Nasdaq:ESLR) - More Comments Based on Weisel Presentation

Jun 12, 2008
Author: SCP Editor

June 12, 2008 – Evergreen Solar (Nasdaq:ESLR) is presenting this morning at Thomas Weisel’s Alternative Energy Conference and we decided to take a look at the stock to determine whether it is timely or not. The stock closed yesterday at $9.15, putting it at a P/S (ttm) of 14.12, which is pretty rich. For example, LDK (NYSE:LDK) is holding a 5.78x P/S (ttm), Sunpower (Nasdaq:SPWR) is at 6.87x P/S (ttm), Yingli Green Energy (NYSE:YGE) is at 2.98x P/S (ttm) and Suntech is at 3.82x P/S (ttm). The leader in the midstream solar market in terms of market cap is First Solar (Nasdaq:FSLR) with a whopping 31.85x P/S (ttm). Granted, the P/S (ttm) metric is backward looking and perhaps Evergreen is getting a premium relative to future expectations.

The stock rallied recently to the $12 level when the company announced close to $1 billion in contracts through 2013. This is a big jump from the $78-$79 million posted over the past 12 months which is the number supporting the 14x multiple. The company has intimated that deliveries for the contracts will start this year, so if we factor a contribution of 5% of the recently announced contracts into our forecasts for 2008, then our P/S (2008) multiple comes in at 7.62x, and we come up with a price target at $16.94, a premium of 85% from current levels. The current market cap is only about 1.11x the contracts that ESLR just announced.

The Webcast: Overview -

Evergreen Solar (Nasdaq:ESLR) has an ambitious goal to be the lowest cost wafer manufacturer in the world. It is an integrated manufacturer of wafers, cells and panels differentiated by the fact that they make their own wafers. Within the world of silicon based manufacturers (silicon and thin film). In silicon everyone else uses conventional wafers which is casting and sawing to come up with a silicon wafer. In that space, companies use about 10 grams of silicon per watt of power. ESLR gets pellets of silicon, melt them and bring composite string to the silicon melt area, which results in recrystalizing  the silicon resulting in 5 grams of silicon per watt of power. So ESLR promotes the significant cost advantage it brings through its proprietary process to wafer manufacturing.

The company has spent the past couple years proving out the commercial viability of its string ribbon technology validated by the approximately $1 billion in take-or-pay contracts recently announced. Management stressed this morning that it is focused on moving forward methodically to prove the viability of its technology, now moving to a 4 ribbon technology which will enable it to further reduce costs of wafer manufacturing and achieve further cost advantages in the market, as well as improving its yield. The company plans to take total manufacturing costs from today’s $2.65 per watt down to $1.00 by 2014.

Management believes its current advantage in the market is about $0.20 per watt, and even if polysilicon prices come down, it will maintain this advantage due to the fact that it uses less grams per watt than the industry. The company is planning 850 MW by 2012 with expansion plans that are fully supplied by silicon at this point.

Here’s what the analysts are saying:

·         May 28 – Kaufman initiates at a buy (stock closed at $11.26)

·         May 14 – Jeffries & Co. upgrades from hold to buy (stock closed at $9.27)

·         May 9 – Citigroup intiates at sell (stock closed at $8.25)

·         January 29 – Janco Partners upgrades to buy from market perform (stock closed at $12.55)

·         January 23 – Wedbush initiates at hold (stock closed at $11.33)

Overall the tenor of Evergreen’s Q&A with the audience at Weisel’s conference was pretty upbeat, where the management reiterated its growth plans, competitive advantages from a technology and cost perspective as well as its conviction that it is well positioned to adjust to the fluidity of the silicon and solar markets for the foreseeable future. Our take is that if the company looks like it is able to prove out its low cost advantage and ability to deliver wafers on the scale it claims then one of the larger, better capitalized players would likely want to acquire it, or at least, it will begin adding to its backlog in contracts which will drive the stock from current levels. In the near term, the stock could see pressure as a result of a pretty modest set of guidance for the next quarter and broader market weakness. In which case, we would be accumulating.

Disclosure Note: SCPEditor has no position in ESLR as of June 12, 2008.