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Solar shock from Goldman Sachs

October 7th, 2008 · 1 Comment

We were very puzzled that right from the moment the US tax incentives finally (after many tries) were extended last Friday a tremendous sell-off ensued that gripped the whole solar sector. These incentives have been a big deal all year, with stock prices of solar companies gyrating wildly with the chances of their extension, so perhaps you can forgive us for being slightly bemused at the big sell-off. Now we know why..

As so often in Wallstreet, big brokers tip their largest, and most important clients first. Apparently big parties must have known that Goldman Sachs was coming out with negative stuff about the solar sector, and these big parties saw fit to sell into the good news of the extensions of the tax incentives.

It’s the way the world works, we’re afraid. Here is the article:

  • NEW YORK (MarketWatch) — Goldman Sachs on Tuesday slapped sell ratings on the two largest publicly traded U.S. solar power firms, with the broker flagging the possibility of oversupply as overseas subsidies dry up in the face of the global economic meltdown.
  • Goldman analyst Michael Molnar forecast “strong headwinds for valuation” as he downgraded shares of First Solar (FSLR) to conviction sell from buy and SunPower (SPWRA) to sell from buy.
  • The risk of oversupply in the solar market will soon become a reality as considerably less generous demand subsidies take hold just as a wave of supply and tight financing hit the market,” Molnar said in a note to clients. “We believe that liberal subsidies of the past in markets like Germany and Spain are unlikely to be replicated in the future given fears of their ultimate cost in a bad world economy.”
  • As supply continues to come on line in a less favorable subsidy environment, prices will have to come down, putting pressure on profit margins.
  • Goldman set a new price target of $103 a share for First Solar, well below its close of $159.71 a share on Monday.
  • “(We) see multiples contracting as valuation implies more growth than will come even for one of the best solar companies in the world,” Molnar said.
  • SunPower’s new price target is $43 a share, compared to its closing price of $66.34 on Monday.
  • “Their installation business may perform well, but we see a consistent drag from the module business given lower industry pricing,” he said.

It’s somewhat curious to reason generous tax incentives will go a couple of days after the US has just extended them for eight years, no less. In the meantime, valuations of some of these solars are getting quite ridiculous.

You might be surprised to know that Trina Solar (TSL) now sprouts an expected 2008 p/e (hardly forward looking) of.. 5. We would say, with some kind of understatement, that most of the bad news must be priced in already at these kind of valuations.

Only if alternative energy goes completely out of fashion will this make sense. We can only see that happening if oil prices collapse to something like $40-50 per barrel or so, not impossible but quite unlikely. But would that kill of the alternative energy sector?

It will certainly dent it, but there are many governments wedded to policies to reduce greenhouse gasses, and there might even be a few governments out there with a longer term horizon, and these will realize that the world economy will come out of its present funk and oil prices will increase again, as middle classes will swell in large numbers in very populous countries like China, India, and Brazil.

We also know that solar energy still has much room for gradual improvement and more fundamental innovation, making it ever more efficient and hence cheaper over time.

Although from a month ago, you might want to re-read the following article:

The solar outlook is getting a bit brighter.

  • In the recent round of earnings reports, a number of solar industry executives said solar panel demand and prices next year might hold up better than expected.
  • “It feels like things aren’t going to be as bad as originally feared,” says John Hardy, an analyst with American Technology Research.
  • That would be comfort to solar companies, which still are expecting slowing demand at a time when supply is increasing. But where most analysts had been expecting solar panel prices to fall 10% to 20% in 2009, some industry executives and analysts now are expecting a decline of less than 10%, and perhaps less than 5%.
  • The more pessimistic forecasts followed word that Spain, which has fueled much of this year’s solar growth, is all but certain to sharply curtail government financial incentives, a move that would likely slash demand and reduce prices.
  • Other Markets Besides Spain. Observers, though, are more optimistic that other countries will step in to help fill the void.
  • “Even with the decline in Spain there are plenty of other countries that are waiting for solar modules — markets that have been … undersupplied,” said Pavel Molchanov, an analyst with Raymond James.
  • Fears of steep 2009 (price) declines appear overstated,” Robert Stone, an analyst with Cowen and Co., recently wrote in a note to investors.
  • Also helping solar companies prop up profit is a forecast that prices of polysilicon, a key solar panel component, could fall next year as supplies improve. Analyst Hardy says polysilicon prices should fall around 8% to 10% under most contracts.
  • The solar industry is unusual in that sales depend heavily on generous financial incentives from governments around the world looking to help the green energy source compete with traditional energy sources such as coal or natural gas.
  • Spain’s government has spurred growth with uncapped incentives. It’s the world’s No. 2 solar market behind Germany, another country with generous governmental incentives. But this year the Spanish legislature is almost surely turning off the tap. That nation could be looking to generate just 300 megawatts of solar energy next year, down from an expected 1,000 megawatts to 1,100 megawatts this year, says Daniel Ries, of Collins Stewart.
  • That’s a big cloud over the industry, but some industry executives still had a positive outlook when they gave their most recent earnings reports.
  • On Aug. 20, Zhengrong Shi, chief executive of Suntech Power Holdings (NYSE:STP – News), said early prices for 2009 are flat to 5% down compared with 2008. Suntech is one of the world’s 10 largest solar module makers.
  • That same week Andrew Klump, Trina Solar’s (NYSE:TSL – News) vice president of business development, said on the quarterly conference call that the company sees price declines of just 3% to 5% in 2009.
  • “That was somewhat encouraging,” Ries said.
  • JA Solar (NasdaqGM:JASO – News) last month also gave positive indications for pricing in 2009, though it didn’t give a specific forecast.
  • Italy is one key to propping up demand in 2009. Suntech’s Shi says Italy will be a more than 1,000-megawatt market in 2009, enough energy to power 800 average U.S. homes. That’s up from about 200 megawatts this year, Ries said.
  • Ries says Suntech’s estimate is high. He sees a market more like 600 megawatts to 800 megawatts. But he also says Germany likely will up its solar output next year to 2,100 megawatts from an expected 1,600 this year.
  • Overall, he sees the global market growing from 4,500 megawatts to nearly 6,000 megawatts.
  • Analysts point 15 strength in some other countries as well, including France, Greece and Portugal. Asia, Japan and South Korea could be strong, while Australia also should add to demand.
  • Then there’s the U.S., which has been a “rounding error” in the world market, says Jonathan Hoopes, a ThinkPanmure analyst.
  • Big Deal In S.F. Last month, though, the U.S. caught the industry’s attention when San Francisco-based Pacific Gas & Electric said it entered into solar power contracts to produce 800 megawatts of power.
  • The U.S. market is under pressure, though, as the industry frets over whether key federal tax incentives will be extended beyond 2008. Many analysts say that decision might have to wait until the new president takes office in January.
  • Some analysts continue to see a big drop in prices next year. Ted Sullivan of Lux Research says he fully expects declines of 15% to 20%. He says there’s just too much supply.
  • Paul Clegg of Jefferies & Co. expects prices to fall 15% next year, though he also says the decline might be much less. “We … don’t really know,” Clegg said.
  • Hoopes on Thursday said in a note to clients that solar sources point 15 a 5% to 10% price decline in 2009. But he expects prices to decline further than that by the end of 2009, in the face of growing supplies.
  • Analysts say companies with locked-in contracts for supplies should fare better — including SunPower (NasdaqGS:SPWR – News) and Suntech. In the past month, U.S.-listed solar stocks are up roughly 15%, based on exchange-traded funds that track the sector.

And one has to note that those feared big cuts in Spanish incentives didn’t really materialize, there were cuts, but not nearly as big as feared. On the other hand, a month is a long time in these markets..

Tags: Solar sector

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