Filed Under: ,
Tickers in this Article: FSLR, SPWR, STP
Back in December when Jim Cramer, the host of CNBC's "Mad Money", issued his buy recommendation on solar panel maker First Solar (Nasdaq:FSLR), the stock had already experienced an impressive ninefold increase in its value over the course of the previous year. Buoyed by the strength of his recommendation, the shares quickly added another 6% to their value pushing past the $250 mark on their way to record highs in the $280 range. (For more about Cramer's unpredictable predictions, see Mad Money ... Mad Market?)

Unfortunately, $280 turned out to be peak value for First Solar and the shares quickly sold off during the beginning of 2008. Currently, the stock is about $100 below its peak value, having succumbed to combination of a broader market sell-off and rising concerns that the hot solar power sector could be facing some tough times in the near term despite a widely held view that the long term prospects for the sector remain promising.

First Solar and other high-flying solar stocks like SunPower (Nasdaq:SPWR) and Suntech Power Holdings (NYSE:STP) are now trading at roughly half their peak values. Has the time come for investors to be doing a little bit of bargain hunting in is group?

Excess Valuations Led To Sell-Off
One of the prime catalysts to last month's sell-off in this group had to be the near nose-bleed level valuations that they were trading at. At its peak, First Solar had a forward price-earnings multiple of 140 times 2008's expected earnings per share of $2. SunPower and Suntech, while not hitting that same level of excess, did command well above average forward multiples of 68 and 44 times, respectively. (To learn more, see How To Evaluate The Quality Of EPS.)

Valuations like these were justified by expectations that sales of the photovoltaic solar panels would continue to grow in the range of 30-50% annually for the foreseeable future, and that solar panel prices, and hence company margins, would continue to remain high. Demand has been vigorous enough to allow the solar firms to easily digest the dramatic price increases in the key raw material used to make photovoltaic panels, polysilicon, as supplies of thus key commodity have been tight.

But that could all change dramatically over the next few years.

Coming Solar Supply Glut Could Hurt Profits
Its a simple rule of economics that demand creates supply. This was recently made clear in a recent client note put out by brokers Thomas Weisel Partners LLC. In the note, it was reported that the recent entry of over 100 new polysilicon producers into the market could potentially lead to an oversupply of polysilicon in the 2009-2012 timeframe. That would stimulate a dramatic increase in the production of solar panels themselves, possibly resulting in significantly lower prices.

European markets are now approaching the saturation point with solar installations, so the U.S. market would then be the sole remaining major source of demand to mop up the expected excess supply. Unfortunately, the recently passed U.S. Energy Bill did not include an extension of the 30% investment tax credit available for solar installations beyond October of 2008, which some regard as essential to kick-starting widespread adoption of solar technologies in the U.S. (For more on the green tax incentives, see Building Green For Your House And Wallet.)

Other Solar Alternatives Gaining Momentum
While the photovoltaic solar industry braces for these pending shifts in the playing field, supporters of an alternative approach to harnessing the sun's energy using solar thermal power generation have been gaining momentum. Last September, two of the nation's largest power producers, PG&E (NYSE:PCG) and Florida Power & Light (NYSE:FPL) teamed up with privately held solar thermal power generator Ausra to build the world's largest thermal solar power plant in California. In an interview with Reuters, Ausra's vice president, John O'Donnell, said the 2,000 MW of power to be produced by the plant represents more power than all the photovoltaic solar panels installed in the world last year.

Ausra is funded by venture capitalists Vinod Khosla and Kleiner Perkins Caufield & Byers. Khosla. KPCB is a well known Silicon Valley investor with a focus on alternative energy investments and has always rejected photovoltaic solar power as being too expensive relative to thermal solar. In November, former Vice President Al Gore joined the KPCB Board.

The Bottom Line
If the predicted supply glut does what it's supposed to do and bring down prices, U.S. demand, even without the benefit of a government subsidy, should eventually bring market conditions back to equilibrium. Ideally this would be at a point where the cost of producing a kilowatt hour of power is equivalent to what the average consumers pays their local utility for power. That might not justify the still lofty multiples that the solar panel stocks now command, but it will result in a broadening of the market and produce a sustainable future for the industry in which consumers and suppliers both benefit.

Is it possible to be environmentally friendly and still make money? Read our Green Investing Feature for both sides of the story.

comments powered by Disqus

Trading Center