North Coast Solar Stocks

September 25, 2009

Watch Out: Solar Stocks Might Sink

Filed under: ENER, FSLR, JASO, LDK, SOL, SOLF, STP, YGE — Tags: , , , , , , — Jason @ 8:52 am

By James Altucher

As a financial adviser you have one goal: Don’t lose clients’ money. So even more important than finding stocks that could double or triple over the next year, you want to steer clear of stocks that could collapse.

It’s ugly, it’s painful, and nobody wants to call a client and point out an investment sank 90%.

Over the next two articles I’ll be analyzing a few stocks that fit this category. This is purely my view, of course, and I’d welcome anyone with differing views to use the comments section. (As I say in the comments section, I am not shorting these stocks.)

In general I don’t like the solar industry as an investment opportunity, which includes First Solar (FSLR), Energy Conversion Devices (ENER), JA Solar (JASO), LDK Solar Co. (LDK), Suntech Power (STP), Solarfun Power (SOLF), Yingli Green Energy (YGE), and Rene Sola (SOL).

First Solar, for instance, has been a glam stock for day traders for the past few years as the solar industry had almost as much hype behind it as the dot-com industry back in the heyday.

Let’s look at the macro picture and then the micro picture and you’ll see why this stock could go down 90%.

Macro picture:

Solar power is more expensive than other forms of power: coal, natural gas, nuclear, even wind, so the primary customer for all of the solar companies are the countries where solar power is subsidized with no cap on how high the subsidy could go.

In other words: Germany, which is the only such country. Spain tried it, but it was too expensive, so they began to cap the subsidy and as a result the solar industry is now one-fifth the size in Spain that it was when the subsidy was in place.

In fact, approximately 60% of First Solar’s revenue comes from sales to Germany.

With the price of silicon refined for solar cells down to $100 from $450 a kilo over the past year and a half, there’s been a price war among the manufacturers of solar panels.

First Solar’s primary advantage was that it used a cheaper technology than silicon that it had developed. Now that advantage is no more, particularly since the output of their panels (11% converted to energy vs. 20%) is less than its competitors.

So margins are going to get crushed for the entire solar industry, particularly for First Solar, which no longer enjoys its advantage of using a cheaper technology.

Now for the micro picture:

Receivables. First Solar historically has had a great relationship with its customers, allowing it to collect on receivables after a slim 10-day period. They later extended this to 45 days. The average receivable is now 60 days. Accounts receivables at the end of 2008 was $62 million. Now it’s $351 million. More than a third of its revenue year to date is now owed to it.

Accounting. This is described in another Barron’s article. Basically, an investment that it formerly booked as equity it now switched to “debt” on the balance sheet, allowing it last quarter to book sales to the company it invested in as revenue.

Rebates. In order to keep their German customers (remember: this is the only country that actually has a thriving solar industry because of the subsidies), First Solar announced it would offer rebates to them.

A couple of issues with this. One, it outlines the price war that is going on. Two, given that many of their customers are more than 60 days late on paying them, it could mean that some of these customers will go back and ask for the rebate prices. Heck, why not? And if First Solar wants to keep those customers it will probably have to reduce what it already charged those customers down to the rebate prices. This could be an enormous hit on next quarter’s cash flows.

Oh wait, what cash flows? First Solar had a negative $37 million in cash flows last quarter despite reported positive earnings, primarily because of the issues mentioned here.

I’m down on the whole solar industry right now. But if there were one company in the sector I’d single out it would be First Solar.

Is there some value here? Who knows?

If China were to offer a subsidy, that could provide a lift to the entire industry. China already has a glut of refined silicon, however, so any subsidy would be unlikely to affect First Solar in the short run.

James Altucher is a managing partner of Formula Capital, an alternative asset management firm. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.

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