Friday, July 30, 2010

First Solar Shows Utility Type Growth, Does it Deserve a Utility Type Multiple? A VERY Important Article for Solar Investors (FSLR; SPWRA; STP; TSL)

In early trade the stock is down $5.63 at $129.87.
Top line growth of 11.8% year-over-year and 4% sequentially from Q1 does not a growth stock make.
Here's a repost of a very solid bit of analysis done in late January:

A VERY Important Article for Solar Investors (I'm Talking to You First Solar, Trina Solar, Suntech and Sunpower) FSLR; SPWRA, SPWRB; STP; TSL; YGE
This is a few days old but worth the read if you have money in the sector. I sat on it because the group seemed to be bottoming.
I've been hearing similar rumblings (particularly on R&D) but The pulls it all together. A major piece by Eric Rosenbaum.
From TSCM:

Brave New Solar, or Grave New Solar?

There has been a debate within solar circles over the past year concerning the fate of the solar industry's bellwether stock, First Solar(FSLR Quote), and that debate boils down to this: Is First Solar still a growth stock? In May of 2008, First Solar was trading at over $311. On Wednesday, First Solar closed at $114.
While the specific solar industry dynamics that have driven First Solar down do not define the solar industry -- it has been the rise of low-cost Chinese solar players that have been instrumental in changing First Solar's fortunes -- the question about First Solar's growth prospects may be one solar investors are forced to extrapolate onto the entire solar space, given recent political events in Germany and Italy.
By most accounts, Germany is still planning to move ahead with a bigger and faster feed-in tariff reduction than the solar industry expected, and Italy is planning to implement an 8 gigawatt (GW) cap on its solar industry by 2020 that would position it -- one of the the biggest growth markets for solar -- with a less-than-expected growth scenario.
Thus, are we in fact headed into a brave new world of solar, or do the political currents in Europe that are seeking to wipe out the lucrative feed-in tariffs -- which have served as a form of solar welfare -- spell doom for photovoltaic solar before it has a chance to evolve into a more mature industry?
Burt Chao, an analyst with energy firm Simmons & Company, doesn't view the public solar companies, first and foremost, as growth stocks with a high risk-high profit opportunity -- though many investors and capital markets players have acted as if that is the solar end-game. Chao, rather, thinks it is high time for solar to actually begin acting like a long-term energy play. The solar industry needs to reinvent itself to finally be a part of the renewable energy future.
"The fact that all of these companies are still alive and kicking is because of government subsidies," Chao said bluntly, adding, "There has been undisciplined, irrational growth for too long, and a pace of growth less frenzied is better for solar."
The solar industry has known that the reductions in feed-in tariffs would be coming, and solar executives have said all the right things in the past about the need to move past tariffs as a way of growing the solar industry. Still, the solar industry hasn't exactly walked the walked of evolving itself while the getting has been good on lucrative feed-in tariffs, which generate high rates of return for solar projects. 
Case in point: analysts note that while solar stocks are considered technology growth stocks, there is virtually no research and development in the big public solar companies. There hasn't needed to be any.
Chao's hope is that the next outcome -- after what he thinks will be a painful period in solar, especially if China and the U.S. don't pick up the slack from the declining tariff regimes in Europe -- will be a more civilized and rational period of healthy growth for solar.
The potential implications of "Brave New Solar" are many: For one, a potential reclassification of the stocks away from their high-growth profile to a classification that better reflects long-term energy production and power purchase agreements. Steady, utility-like returns, which are pretty far from the current solar profile to which investors have become accustomed. Some analysts have even hypothesized about an era in which solar stocks are defensive plays, which, given the solar sector profile today, is not easy to imagine.
Secondly, there will be a period of protracted mergers and acquisitions as second-tier solar companies are absorbed or go bankrupt. Mehdi Hosseini, an analyst at FBR Capital Markets, said he doesn't expect the big public solar companies to go bankrupt -- particularly with the Chinese government unlikely to allow its solar cadre to fail -- but there will be many private solar players unable to make it, and that may mean the once-lucrative IPO market for solar -- which hasn't come back since the market downturn -- may never return to its former glory days.
On the other hand, there is the potential that new solar technologies emerge -- the industry equivalent of a disruptive technology that improves efficiency at a cost-effective level -- and pushes the current slate of big public solar companies to a position of weakness.
To that point, another big issue for solar is the potential need to ramp up the non-existent research and development among the public photovoltaic players, to improve efficiency and, as a result, increase returns in an era of declining feed-in tariffs and solar project returns.
These are all big "ifs" for solar, though, and there are skeptics who see the lack of current research and development as the doomsday indicator: the sector, they argue, has been acting like Nero, playing the feed-in tariff fiddle while the once-vast tariff empire burned.
Gordon Johnson, an analyst at Hapoalim Securities well-known for his bearish outlook on most photovoltaic players, believes that the recent political turn against solar is setting up the industry to be the next ethanol. "People assume you have to have photovoltaic solar, but that's not the case," Johnson said.  
Johnson's point is not that investment in renewable energy will slow, but that the solar industry that has grown up on lucrative feed-in tariffs may not be entrenched enough within the global economy to ensure its survival.
"The cheapest renewable energy technology that emerges will be the most preferred, and right now, solar photovoltaic energy is the most expensive," Johnson said. Solar has received the most attention because it is one of the easiest forms of alternative energy to get up and running quickly, with low costs to build solar plants and low barriers to entry....MUCH MORE