Solar-energy stock prices have been falling for about two years.
Once viewed as the newest and greenest energy source, solar power has become less popular with investors. They gradually realized that it is far from competitive with conventional energy sources on price, and that it accounts for less than 1 percent of U.S. electricity generation.
Now, with investors deserting these stocks, and with analysts downgrading them, I am starting to get interested.
One solar stock, STR Holdings (STRI), is already a good buy, in my opinion. A few more of them could be worth buying if their prices keep falling.
Nurtured by government subsidies in Germany, Japan and the United States, the solar industry was shocked when Germany announced it will reduce the level of its assistance this year. Making matters worse, there is an ample supply of solar panels in the United States to meet current demand.
Nonetheless, solar-power companies have gone from so-called concept stocks to solid enterprises with substantial sales and earnings. I think the industry has the potential to rekindle the rapid expansion it showed from 2005 to 2008.
STR, located in Enfield, Conn., has been a public company for only four months. Unlike many of its rivals, it doesn’t make photovoltaic cells, which convert the sun’s rays into electricity. It makes capsules that hold the cells together, protect them from the weather, and control the flow of electricity from the panel to a power line.
Five of the six analysts who follow STR rate it a “buy.” As a contrarian, I usually don’t like to side with the majority, though I suspect these analysts have it right.
There is no glamour premium associated with the stock, as there was for so many solar companies two or three years ago. STR shares go for 11 times earnings and 1.4 times book value (corporate net worth per share).
I am a cheapskate investor. In a normal market, I’m willing to pay 15 times earnings, two times book value and two times revenue to buy a stock.
In the current market, I expect to pay less. After the carnage of the 2008 bear market, there are a lot of bargains around. Therefore, to set a “buy” price for some of the largest solar companies, I used a simple methodology. I took each company’s earnings per share and multiplied by 12.
Then I multiplied both the book value and revenue per share by 1.5. Finally, I took the three resulting numbers and averaged them together. Using this method, I figure STR is worth buying at up to $21, and the stock trades for about $18 now.
SunPower (SPWRA), based in San Jose, Calif., is a “buy” at $19 or less under my formula, a whisker less than its current price.
In 2005, when SunPower went public, the company’s revenue was $79 million. By 2008, sales had increased to $1.4 billion.
For that kind of growth, you would normally expect to pay up. However, SunPower’s shares have plummeted from a late 2007 high closing price of more than $133 to about $20. At this price, they fetch only 1.5 times book value and 1.3 times sales.
The rub is that SunPower is trading at 31 times earnings, a lot more than I like to pay. Estimated earnings for 2009 were about 50 cents a share compared with $1.09 a share in 2008, hence the high price-earnings ratio.
What are the chances that SunPower will bounce back? If you listen to analysts, you might be dubious. Only 15 of the 39 people covering the stock rate it a “buy.” Some of the company’s executives, though, seem much more optimistic. Four insiders have purchased shares this year, and another six bought shares in 2009.
Tempe, Ariz.-based First Solar (FSLR), the largest U.S. company in this field by market value, had revenue of $2.07 billion last year, up from almost $135 million in 2006.
I estimate First Solar’s “buy” price at $58, far below the current price of about $109. It isn’t impossible for the shares to fall to $58 this year or next. The stock has already descended from about $311 in May 2008.
One thing that would make me hesitate to buy First Solar is that Michael Ahearn, its chairman and former chief executive, sold more than 40 percent of his stake in February. He received about $142 million for his shares.
While I am warming up to solar shares, there are some negatives to consider, besides those already mentioned.
The recession reduced electricity use, and it is unclear how soon it will bounce back. Oil and gas are selling for moderate prices, compared with their highs of mid-2008. That means there is less incentive for the government to push solar-energy devices, or for individuals to use them.
Disclosure note: I do not currently own any of the stocks discussed in this week’s column, either personally or for clients.
Via Bloomberg News