Flying into the Sun
by Debra Fiakas CFA
Shares of two solar panel producers appeared on one of our favorite stock screens the other day - energy stocks that have traded downward to a point they appear oversold. Trina Solar, Ltd. (TSL: NYSE) recently closed at $11.22, down 39% from its 52-week high set in early March this year, but well above where the stock was trading a year ago. RenaSola, Ltd. (SOL: NYSE) has followed a similar track, recently closing at $2.61 well above its 52-week low.
The question for investors is whether investors should take advantage of the current price weakness to pick up shares of long-term winners in the solar power race…..or not!
Neither company has reported a recent profit. RenaSola lost $258.9 million on $1.52 billion in sales in the last twelve months. Trina Solar reported higher sales of$1.8 billion in the same period, but managed to keep its net loss at a more modest level of $72 million. The losses came amidst a global shakeout in the industry, allegedly triggered by dumping by China’s numerous solar panel producers.
The half dozen or so analysts who follow these companies seem to think the worst is over. The consensus estimate for Trina Solar is $0.86 earnings per share in 2014, followed by $1.52 in 2015. Those estimates are the results of upward adjustments to published estimates made within the last couple of weeks. Only one analyst has published estimates for RenaSola, but this brave soul also thinks RenaSola is going to report a net profit in 2014 and 2015.
If these solar companies are about to round the corner, it makes sense to load up for long positions at relatively cheap prices. Or does it?
It is not hard to find viewpoints the solar industry. For example, industry analysts at the sell-side firm Credit Suisse recently issued a warning on slowing growth in the solar sector. If they are correct that means the competitive battle is about to go from bloody to gory. There are hundreds of solar panel producers still operating around the world, with a good share of them located in China. I believe some will not survive. I think the ones that are more likely to survive will the among those that 1) have the most efficient and therefore most marketable solar panels and 2) have strong balance sheets with low debt and ample cash.
SunPower (SWPR: Nasdaq) is widely hailed as the developer with the most efficient solar power technology, that is how well the solar cells convert the incoming solar rays into electricity. While most solar panels deliver efficiency in the range of 11% to 15%, SunPower has developed panels that have tested at 20% conversion. What is more SunPower has come up with a multi-junction concentrator that converts a whopping 44% of the solar energy they receive to energy. When these two modules come into the market place, I would wager it will result in capture of significant market share.
Trina Solar offers solar cells with efficiencies in a range of 12.9% to 16.7%, while Renasola’s efficiency range is 13.5% to 16.0%. Trina spent $131.7 million on research and development over the last three years or 4.1% of sales during that period. Over the last three years RenaSola has spent $90.5 million on research and development or 1.8% of sales.
Interestingly, SunPower spent $179.4 million over the last three years, or just 2.5% of its sales to deliver those industry leading efficiency ranges. It appears both Trina Solar and Renasola will need to step up their respective R&D games to keep apace.
Performance superiority has paid off for Sunpower, which has converted 1.3% of its sales to operating cash flow over the past three years. Consequently, the company has managed to keep its debt level to a respectable level and its debt-to-equity ratio to 0.74. Trina has been a net user of cash over the past three years, so it should be no surprise that its debt levels and are higher. Its debt-to-equity ratio is 1.56. RenaSola managed to squeeze out positive cash flow in the last three years, but its conversion ratio is less than 1.0%. RenaSola’s tepid cash flow generation is probably why the company has racked up some debt to the point its debt has built up to 2.48 times is equity.
From these few data points, it might be premature to count RenaSola or Trina Solar out of the solar panel market despite that they do not compare favorably with the industry leader. Both companies still have ample cash balances. Coupled with an improving profit picture, some might conclude both have a chance to remain viable competitors in the solar industry. In the meantime, traders appear skeptical and both TSL and SOL are trading as if the companies are about to fly into the sun and burn.
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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