I am unclear why the solar stocks are not reacting to this $80 crude; I assume there is just a major consternation about the ability for these companies to acquire enough polysilicon to fund their expansion plans in 2008 (right not there is a worldwide shortage of this commodity, driving up prices). This is an overhang on all stocks in the sector which use this raw input. Note: a company such as First Solar (FSLR) uses a different technology, called thin film, which shields it from these current issues with polysilicon.
For all you ever wanted to know about solar cells click here.
The stock had spiked to mid $40s in early August before a free fall to $33 range in late August, which put the stock below both its 200 day ($35ish) and 50 day (mid $36 range). In the past 5 sessions including today's the stock has made higher highs and higher lows in each consecutive session. With a break above the 50 day moving average, I am now going to add to my 2.0% position in the name with 300 more shares - this will bring up my position to 2.9% of the fund.
Suntech Power is not a cheap stock by any means, but keep in mind this is a company growing at >50% year over year pace. Earnings estimates call for $1.01 in 2007 and $1.60 in 2008, giving a forward PE ratio of 37x (2007) and 23x (2008).
Now the key driver in most of the solar stocks is the availability and cost of polysilicon. When the inevitable overproduction of polysilicion does happen (China is ramping up production), gross margins in this sector should improve dramatically. This material makes up 65-75% of the cost of goods for many of these companies!
On a related note, an American competitor SunPower (SPWR) terminated a solar cell contract with a Chinese supplier JA Solar (JASO), due to quality issues. As I have opined before these quality issues are now catching up to the Chinese manufactures across all industries - when new quality standards are increased this leads to higher prices (to customers) and/or lower profit margins (for Chinese companies). I don't think this is 'priced' into the Shanghai market... and yet another reason Big Ben must be careful as the Chinese start exporting 'inflation'....
Long Suntech Power in fund and in personal account
2 comments:
That makes me glad I got out of JASO when I did. I had second thoughts after watching JASO hold a 39.40-40.00 range through several days, but it turned out to be a well-timed move after all (which has rarely happened for me this year).
What I'm curious about is the sentence in the release: "JA Solar said it does not expect to have a material impact on its 2007 or 2008 revenue or earnings due to the termination of the agreement with SunPower."
Does that mean that SPWR is a very small % of JASO's business or what? Probably just that JA had not yet factored in the 3-year contract with SPWR into future earnings, I think.
If this is an isolated incident, I believe JASO will fall quite a bit near term but if it's strong earnings continue, I think this will be forgiven in the longer term. Either way, I'm not buying JASO for a bit. I might look into STP a little more.
Yes I was wondering about you, when I read that this morning. Now on the flipside there is such a worldwide shortage I assume some people will take even junky low quality polysilicon of the hands of JASO but I read in either the conference call of CSUN or TSL that part of their issues was having quality issues with their suppliers so it seems to be a common situation.
As to earnings, first they generally always try to paint any bad news as "it's not a problem" (any company) and second as stated above, I am sure someone else is willing to forgive quality issues... what is an interesting statement is this is a US company which probably has a history of higher quality standards than most Chinese companies so it is interesting to see that relationship. I haven't heard any Chinese companies pushing back at JASO - so hence why I find it interesting.
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