Is The Largest Solar Manufacturer a Bargain?

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by Debra Fiakas CFA
 
Yingli logoIn the previous post on Canadian Solar (CSIQ:  Nasdaq) I suggested a multiple of 10 times the consensus estimate for earnings in 2014 might be a compelling value for the solar module producer.  Putting a value on is competitor Yingli Green Energy Holding (YGE:  NYSE) is not so easy given the string of losses reported by Yingli.  The usual price to earnings multiple cannot be used to value a company swimming in red ink.  That leaves the multiple of price to sales.  Yingli trades at 0.5 times sales compared to the one-to-one multiple that is the average for the solar industry. Call that difference the ‘red ink’ discount.

Yingli should have profits.  It lays claim to being the world’s largest producer of photovoltaic cells and modules.  The company shipped 2,300 megawatts of solar modules in the year 2012.  First Solar (FSLR:  Nasdaq) was a distance second.   The installed base of Yingli solar panels exceeds seven gigawatts and has spread over forty countries around the world.  Sales in the most recently reported twelve months were $1.8 billion, down from $2.3 billion in the year 2011, when prices were higher.

As depressing as are continued reported losses, the really bad news for Yingli is its spotty record in generating cash flow from operations.  There is an unsteady flow of inventory levels and collections on accounts receivable appear to run in fits and starts.  The results are a dwindling supply of cash resources, mushrooming current liabilities and rising long-term debt.

All this gloom and doom took its toll on the YGE price, with the stock setting a long-term low of $1.25 a year ago.  Since then the stock has been a dramatic ascent, rising by five times over in the last year.  As the solar industry re-establishes itself at a lower, more cost-efficient production capacity, more than just a few competitors are likely to wash out.  Indeed, there have been a number of acquisitions and bankruptcies in the sector over the past three years.  Suntech Power Holdings (STP:  NYSE) is the most recent casualty to a Chapter 7 bankruptcy filing by bond holders and the assets of Twin Creeks Technologies have now been tucked into GT Advanced Technologies (GTAT:  Nasdaq).

Nonetheless, Yingli is expected to be among the survivors.  That makes the stock worth looking at even though it is no longer trading at a bargain basement price.  Indeed, a review of historic trading patterns in YGE suggests the pullback in recent weeks might have left the stock in oversold territory  –  at least in the near-term.  It is a compelling opportunity for investors with long-term investment horizons and a bullish interest in the solar sector.
 
Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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