Alternative Energy Daily: When Solar Stocks Look Like Value Stocks (FSLR, SPWRA, ESLR, JASO, TSL, STP, LDK)

Our “Alternative Energy Daily” focuses on some of the key solar stocks with an eye on evaluating these as “value stocks” with growth potential out into 2012.  Those under review are First Solar, Inc. (NASDAQ: FSLR), SunPower Corp. (NASDAQ: SPWRA), Evergreen Solar, Inc. (NASDAQ: ESLR), JA Solar Holdings Co., Ltd. (NASDAQ: JASO), Trina Solar Ltd. (NYSE: TSL), Suntech Power Holdings Co., Ltd. (NYSE: STP), and LDK Solar Co. Inc. (NYSE: LDK).

Before the tragic earthquake and tsunami that hit Japan on March 11th,  many of these stocks had already seen big gains. LDK shares were up about 70%, JA Solar shares were up about 40%, First Solar shares were up about 35%, and Trina shares were up about 25%. The others were trading down, with Evergreen down more than -80%.

The damaged nuclear reactors will not be back in service for at least two or three years, and very likely never. That means that Japan will need to replace the lost baseload capacity. Because solar PV is cheap compared to nuclear and easy to install, investors jumped on solar shares and boosted prices by as much as 20% in a couple of days. Enthusiasm has cooled a bit since March 17th, but for the most part the shares have held about half their gains.

Before the Japanese disaster, the outlook for solar makers was definitely mixed for 2011. Production is expected to outstrip demand, primarily due to incentives changes in Europe. The US, China, and India are expected to pick up almost all the slack. That’s great, but with supply exceeding demand overall, prices will fall and the low-cost makers should be able to withstand the price drop better.  We took a look at forward year estimates to imply the growth and forward P/E ratios to see which of these make for “value stocks” for investors.

First Solar has the largest market cap of any solar PV maker, at nearly $13 billion. Because of its thin-film process, First Solar is the low-cost per kilowatt leader and, as such, it is better prepared than any of its competitors to adjust its prices. If prices do soften, First Solar won’t have to reduce pricing much if at all. This is a very strong position going forward. The company’s forward P/E ratio for the year ending in December 2012 is 13.58. First Solar’s mean share price target is $163.42, and the stock is trading at $150.18, in a 52-week range of $100.19-$175.45.

SunPower has a market cap of $1.51 billion. It’s forward P/E ratio for its fiscal year ending January 2013 is 6.92. The company makes the most efficient solar PV cells around, but it is heavily exposed in Italy. The good news for SunPower is that its margins for its most recent quarter grew year-over-year from 20.3% to 25.4%. SunPower’s mean price target is $18.58, and the shares are trading at $16.40, in a range of $9.61-$19.88.

Evergreen Solar is not included because it is a strong company, but because it is so weak. Its market cap is just $46 million and it’s lost money for years. Being one of the first solar stocks has failed to yield much here. Evergreen failed to complete a debt exchange offer in February, and the company closed a plant in Massachusetts. As a standalone company, it looks to have no future, but a sale is not out of the question because the company has some unique technology and solid intellectual property. The mean price target is $2.36, and the shares are trading at $1.35, in a 52-week range of $1.18-$7.62.

JA Solar was either tied for first place or a very close second to Suntech for 2010 shipments. The company’s market cap is just $1.1 billion and its forward P/E for the year ending in December 2012 is 4.98. JA Solar can make a lot of solar PV, but its margins are tight and margins are going to make the difference in 2011. In its most recent quarter, JA Solar’s margins fell sequentially from 22.5% to 19.2%. The mean price target for the stock is $9.32, and shares are trading at $6.57, in a 52-week range of $4.22-$10.24.

Trina Solar sports a market cap of $1.95 billion and a forward P/E ratio for the year ending December 2012 of 6.27. The company was among the top 10 manufacturers in 2010, but like JA Solar may get stung by margin compression in 2011 due to all the new manufacturing capacity that is coming online. The company’s mean price target is $36.66, and the stock is trading at $27.72, in a 52-week range of $14.85-$31.89.

Suntech Power’s story is very similar to JA Solar’s. The company’s market cap is about $1.6 billion and its forward P/E for the year ending December 2011 is 7.65. Suntech’s mean price target is $9.82, and the stock currently trades at $8.87, in a 52-week range of $7.05-$15.55.

LDK has a market cap of about $1.7 billion and a forward P/E ratio for the year ending December 2011 of 4.27. LDK’s strength is its vertical integration — it makes everything from wafers to modules. The company’s mean price target is $14.00, and it currently trades at $11.44, in a 52-week range of $4.97-$15.10.

Most investors think of solar as being growth stocks rather than value stocks.  Value stocks often have juicy dividends, yet there is almost no dividend to be found in the solar sector for investors.  Sometimes companies can offer both growth and value and sometimes they can simply be value traps. Maybe these are GARP stocks, indicating “growth at a reasonable price.”  Will we all one day say that solar stocks should be evaluated in the same way as traditional utility stocks?  Another consideration that we feel is not truly reflected in these names is the potential end of subsidies in the years ahead (and some current austerity cuts) as governments around the world will be forced to cut spending whether there is a social benefit or not.

In every case, the forward P/E for these stocks is substantially lower than the trailing P/E, indicating that growth is slowing. The immediate reaction to the Japanese disaster pushed share prices up, but upon a bit of reflection share prices came back down, indicating that a significant increase in solar PV shipments to Japan is not likely. For 2011, the fortunes of the solar PV makers is down to margins, and the leader there is First Solar.

Paul Ausick