Is Wall Street's Hatred of the Solar Industry Still "Irrational"?
Much has been made this week about the nearly contemporaneous bankruptcy filings of two American solar companies, Silicon Valley's Solyndra and Evergreen Solar out of Massachusetts. These two had something in common: Both made different types of photovoltaic (PV) panels, and both were more expensive than average PV. These two firms did not fail because they manufactured in America, or because solar itself is untenable (on the contrary), but primarily because they were deploying advanced technology that ultimately could not find enough of a market to achieve the scale required to become profitable.
It's just capitalism.
Many perceived in advance that, while interesting, the niche solar technologies made by these companies might well price them out of a competitive market before they could reach anything like the scale needed to get their costs down. In Solyndra's case, they were making advanced thin films, using a newer chemical deposition technology, and pioneering the cylinder-shaped (as opposed to flat) panel modules, all of which added up to more cost per watt of capacity.
At Evergreen, hopes were high that the company's proprietary "String Ribbon Technology" PV systems could ultimately produce electricity more cheaply than conventional panels. But custom technology means custom manufacturing equipment, training, process, and a lot of other stuff that adds to costs not shared by the competition. If String Ribbon had increased PV efficiency enough to overcome these costs, the outcome may have been different, but as it went, "taking technology from the lab to the marketplace proved to be more expensive than originally projected."
Personally, I feel like both companies gave new ideas a great try and I'm glad they made the effort: Trial and error of new approaches is the lifeblood of technological and thus economic progress. More failures among smaller-scale, niche-technology solar firms may very well follow; solar as an industry will continue to grow.
Of course, companies fail all the time in this world, and it doesn't logically follow that the underlying industries are somehow fatally busted. General Motors only continues to exist from the largesse of U.S. taxpayers, and in a world of true capitalism, GM would be gone. But that does not mean the car industry is irredeemably flawed. The same can be said of solar, not that you'd know from media coverage of the two recently failed firms. Media Matters has a nice roundup of some of the more negative press, including this factually bankrupt gem: "on Fox Business, Chris Horner of the Competitive Enterprise Institute claimed that the solar companies 'are not responding to demand -- they are providing something that doesn't work.'"
How could the products of America's fastest-growing industry not be working? And more importantly, why would one (much less a patriot) wish to disparage solar, now growing at 100% a year, the brightest growth prospect right now in the U.S., in a time when every job added is critical?
Solar will be a huge part of the world's energy future, and the best-run companies stand to become huge, economy-defining enterprises. As rapid as current growth is, from the standpoint of world energy requirements and what technology has the power to meet them at lowest cost, I feel confident in concluding that solar is just getting started. So yes, I still feel that the wholesale derision and short-selling of the entire industry is, as I have written before, "irrational."
And at this point, let me be clear: By "irrational" I mean from a solar stock valuation point of view. Because the solar haters do in fact have financial motivation, but their reasons are about sustaining the run of fossil fuels, where their investments are already vested and entrenched. Naturally, in addition to doing whatever they can to promote oil and coal interests, solar's disparagers also believe it makes sense to thwart any challenges to fossil fuels' present hegemony. Solar, which for now is showing the most promise among renewables in that it has the ability to scale almost indefinitely and will one day soon produce power far more cheaply than can fossil fuels (which will never be rid of the expense of pulling stuff from the ground), is the likeliest threat to fossil fuels and so is first and most squarely in the crosshairs. Facts about whether solar works or is profitable are only relevant from oil's or coal's point of view insofar as they reveal their likeliest competition.
Not that there isn't other negative news in the solar sector. PreviouslyI wrote: "consider China-based solar company LDK Solar (NYS: LDK) . The company's shares have fallen from US$14.49 per share in February to $5.15 as of this writing. I can find no good fundamental reason for the decline: LDK's latest quarterly earnings came in at $0.95 per share where consensus analyst expectations were $0.86; the company has year-on-year sales growth of 120%, a price-to-earnings ratio of only 1.58, plenty of cash on the balance sheet, and a price-to-book ratio of just 0.54. That's right -- even if the company were closed and its assets liquidated, the cash generated at the yard sale would be 46% greater than the current market cap, as though the earnings have no value." [Metrics updated.]
Unfortunately, LDK has recently given 'fundamental reason' for a share price slip, as described on seekingalpha.com:
LDK managed, in one announcement on Thursday, to blow up their whole year.
They had reported Q1 earnings about three weeks before the end of Q2, so it seemed that their guidance for Q2 should have been stable. Unfortunately that was not the case. They drastically cut Q2 module and wafer shipments, revising a projection of 200-plus MW of module sales down to 80 MW of sales for Q2. (In the Q2 conference call, I remember the management proudly announcing how module sales were strongly rising each month.)
Yikes. Bad news and with very little notice. No doubt this provides fodder for solar's detractors, but two things: First, we believe LDK still has good long-term potential. The company still has good metrics overall, is possibly the lowest-cost provider of solar modules in the world, and is renowned for its excellent political connections, including the backing of the Bank of China. Furthermore, its stock is so undervalued that even with the terrible guidance, it's still a bargain for what you're buying; it was just that much more undervalued before. Yes, this news means that LDK's 2011 earnings per share may drop to as far as US$1.20 -- a big drop, but the company is still making the $1.20 yet trading at values usually reserved for companies rapidly losing money and in danger of failing. (I'll note here thatwe're not the only team to keep our buy rating on LDK.) Second, all industries get downside surprises; it doesn't mean their concept as a whole is flawed.
Indeed, in the same month of news of the failures, there were more indicators that the growth of the solar industry continues. Headlines like "JinkoSolar (NYS: JKS) profit shines on market expansion drive" are the inverse of an Evergreen or Solyndra. A cursory search of solar industry headlines reveals items like Jeffries raisingFirst Solar (NAS: FSLR) shares from "Hold" to "Buy" and increasing the company's target price from $115 to $132; insiders at MEMC Electronic Materials (NYS: WFR) having purchased 339,000 insider shares; and Yingli Green Energy (NYS: YGE) saying its most recent quarter's net income nearly doubled to US$58.1 million, or $0.36 per share, from the previous year, easily beating Wall Street forecasts.
So in sum, it's clear that as with any industry, finding and short-selling the weaker companies may well be a profitable venture, but to wholesale short an entire industry, much less a growing one, is, again, irrational.
Specific example of one not to short? Green Alpha Advisors' holding Canadian Solar (NAS: CSIQ) . For 2010, earnings per share were $1.16. EPS estimates are $1.30 in 2011 and $1.50 in 2012. Nice growth. Yet even with these earnings their ratios are pitifully low: Share price to sales is only 0.13; price to earnings is only 4.51; price to book is only 0.46 -- extremely inexpensive for a company with its fundamentals. CSIQ is the very definition of a "value" stock. Shorting any company this cheap, that's this fundamentally solid, is not something a prudent money manager should be doing.
Yes, there are earnings surprises and outright failures in the solar industry. For investors, the approach should be careful due diligence to pick the profitable, growing, best-managed companies, to own more than one (preferably a basket of the best ones), and to look for buying opportunities on dips.
Disclosure: Green Alpha Advisors is long CSIQ, FSLR, JKS, LDK, WFR, and YGE. We never did hold Solyndra and have not held ESLR since July 2009.
Garvin Jabusch is the co-founder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.
This article was first published on his blog Green Alpha's First Economy on 9/6/11.
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