How to Play the Solar Revival
Tom Konrad CFA
A new report from GTM research, “PV Technology, Production and Cost Outlook: 2012-2016” predicts continued contraction in PV manufacturing. While recent price declines have driven record-breaking installations, it has also driven most manufacturers’ margins into the red. You can’t make up for negative margins on volume.
For a stock market investor, the best approach to a cut-throat industry is to stay away until competition and lower prices remove or absorb the excess capacity, and to buy the remaining players just before the industry’s prospects revive.
As you can see from the chart above, the current price leaders are First Solar (NASD:FSLR), Renesola (NYSE:SOL), Trina Solar (NASD:TSL), Yingli Green Energy (NYSE:YGE), and Jinko Solar (NYSE:JKS). First Solar, Trina, and Yingli have an advantage over the other two because their products are “Tier 1″ bankable, meaning projects using their modules are easier (and cheaper) to finance.
The most important thing for an investor trying to get in on the solar bottom to know is not the most efficient manufacturers today, but the most efficient when the market begins to revive, and when solar manufacturers will return to profitability. The report puts the year the leading solar manufacturers will return to positive margins at 2014. If they are right, the best time to buy these stocks will probably come in late 2013 or during 2014.
Based on the chart above, GTM expects Trina to retain positive gross margin for the whole period, while Renesola, JA Solar (NASD:JASO), Sharp (OTC:SHCAY), and Gintech (Tiawan:3514) will regain positive margins in 2014. If Trina maintains positive margins, First Solar and perhaps Yingli will probably keep positive margins as well.
Hence First Solar, Trina, and Yingli are likely to be the safest ways to play a turnaround, while Renesola looks like the stock most likely to give outsized returns in 2013 and 2014.
With margin pressure continuing in 2012, and GTM forcasting 21 Gigawatts of existing capacity to be retired by 2015, now is probably still too early to get back into solar stocks. When playing a turn around, getting in too early can make you as broke as Evergreen Solar.
Images from PV
Technology, Production and Cost Outlook: 2012-2016, GTM
Disclosure: No positions.
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Forecasts, estimates, and certain information contained herein
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