Thursday, September 6, 2012

Shedding Some Light on Solar Stocks

The solar energy industry has gone through a very unstable period in the past years, breaking new highs one year to literally flopping in the next. First Solar (FSLR), for instance, traded at $300 in 2008, to now trading around $15. Other solar businesses also reported a high decline in sales, such as LDK Solar (LDK), which experienced its most lucrative year in 2010, before losing $655 million the next year. In the same year, Yingli Green Energy Holding (YGE) reported a net loss of $509.9 million, while Suntech Power Holdings (STP) reported a loss of $633.3 million. In this article, I will hone in on First Solar and LDK, and see whether these two stocks are viable investments at this time.

Losses in the sector are more on inventory writes-downs as well as provisions of accounts receivables. First Solar has written down a charge of 85 cents per share in fourth quarter of 2011. The majority of LDK Solar's 2011 charges came from inventory write-downs totaling $305.2m of which most were recorded in the fourth quarter, this is four times Yingli Green Energy Holding's $74.7 million and eight times more than Suntech Power Holdings $37 million. The write-downs were due to the companies build up of a high level of inventory, which could not be sold as demand is sagging and prices dropping significantly fast.

First Solar's recent activities

The American firm, First Solar is still recognized as the world's leader when it comes to thin-film photovoltaic [PV]solar panel production and installations. It recently announced the completion of a deal to expand its operations in Australia. First Solar will design and construct two utility scale solar plants which will produce 159 Megawatts [MW] together for AGL Energy. Around two weeks ago, First Solar also revealed a supply agreement with enXco. The company will deliver 61 megawatts peak (MWp) of thin film modules to exXco's California project starting September this year.

On May 3, 2012, First solar and MidAmerica Solar started the largest solar project in the world in California. The power plant is expected to be done in three years and will produce 550 MW of energy, enough to power 160,000 households.

LDK's recent activities

On June 15, 2012, LDK Solar announced a partnership with Solarif, a fully mandated underwriter of HDI Gerling insurance company. The partnership will provide a new and innovative "Secure" offer by LDK Solar to customers. LDK Solar Secure will provide customers a complete insurance package combining an operational 'All Risk Insurance' with a warranty and inherent defect insurance. It includes a full backup of LDK Solar Product and Power Warranties on photovoltaic (PV) modules. Additionally, the embedded All Risk Insurance applies to all other components of the PV system. LDK Solar stocks rose by 7.5% after the announcement to a price of around $2.15 by closing day, the 15th.

A day before, June 14, 2012, LDK Solar introduces new "Professional Series" and "Value Series" photovoltaic [PV] modules at Intersolar Europe, a world exhibition for the solar industry in Munich, Germany from the 13th - 15th of June 2012.

On June 4, 2012, LDK Solar announced that it signed a three photovoltaic project development agreement with the Chinese government which will run over three years. The project is an engineering, procurement, and construction [EPC] agreement which is located in the Gansu province in the People's Republic of China. The first project in Jiuquan City will consist of 200 megawatts annually, the second project in Jayuguan City will consist of 200 MW over three years and the third project in Zhangye City will consist of 200 MW over two years.

The U.S. tariffs in Chinese Solar products

On May 17, 20120, the Washington based newspaper "The Hill" published that the Department of Commerce ruled to impose tariffs on Chinese solar imports. The reports state that Wuxi Suntech and Trina Solar (TSL) will face tariffs of 31.22% and 31.14%, respectively. The department will also impose a 31.18% tariff on 59 other solar panel exporters. While the rest of the Chinese solar panel makers will face a 249.96 percent tariff on their exports. The tariffs apply specifically to crystalline silicon photovoltaic cells, and will be retroactive for 90 days. The department is said to make a final decision in October.

There are some U.S. solar companies that are opposed to the tariff and have warned that China might react against U.S. suppliers. The affects may include a higher cost of solar equipment and hindered efforts to promote renewable energy The move is in response to a government finding that China is flooding the U.S. market with under priced solar panels.

The announcement resulted in the China-based solar stocks declining with Yingli Green Energy down 42 cents or 13%, Trina Solar down 7.9%, Suntech down 14 cents or 4.9%, Canadian Solar (CSIQ) down 4.4% or 14 cents, JA Solar Holdings (JASO) down 5 cents or 4% and LDK Solar falling the least by 2.9% or 9 cents.

U.S. based solar players on the other hand grew as Fist Solar went up by 82 cents or 5.9% and SunPower (SPWR) went up by 9.8%, although mainly boosted by its announcement to build a solar array for Apple (AAPL).

First Solar's valuation and outlook

First Solar has a market capitalization of $1.3 billion and an enterprise value of $1.5 billion. It is currently trading above $15 with a 52-week range of $11 to $134. The price of stock has fallen around 88% year to date with a current ratio of around 2.5 and a profit margin of around -30%. Its return on assets in trailing 12-months [TTM] is around 2.5% and a return on equity of -18%. It has around 86.7 million shares outstanding. It has an operating cash flow of about -5.8 million. First Solar is expected to generate more revenues in the coming future as American households are foreseen to be installing more and more solar panels to augment their power consumption.

LDK Solar, on the other hand, has an enterprise value of $3.3 billion. It is currently trading below $2, with a 52-week range of $1.54 to $7.35. The price of stock has fallen around 70% year to date, with a current ratio of nearly 0.5 and a profit margin of around -60%. Its return on assets in trailing 12-months is -4.8% and a return on equity of -90.9%. In the last quarter of 2011, it posted a revenue decline of 54.4% against the same period in 2010.

With the recent developments in both companies and the current enthusiasm of Japan in solar energy, I would suggest buying First Solar, but would suggest selling LDK shares, as Japan's enthusiasm may not be able to overcome the losses it may incur due to the changes in tariff environment in the U.S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.


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