Are Solar Stocks Cheap For A Reason?

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by Debra Fiakas CFA

The last post “Meeting Solar Challenge in the Courtroom” discussed how European solar manufacturers are complaining about China’s exports.  A complaint made by industry association EU ProSun charges China manufacturers of solar cells and panels of circumventing Europe’s anti-dumping measures by channeling their products through Malaysia and other intermediaries in order to disguise the China origin.  A report by released last month by IHS (formerly SolarBuzz) makes clear there is much at stake in the solar industry.  IHS forecasts global solar photovoltaic capacity could reach 498 gigawatts by 2019.  That call is a whopping 177% higher than capacity reported in 2014.  IHS is also projecting a dramatic increase in demand to 75 gigawatts per year by 2019.   That level is 66% higher than demand registered in 2014. 

That sort of growth is usually a call to investors to BUY! BUY! BUY!  What is the best approach to the next stage in the solar power industry?  Bet on a single horse? The long shot or the favorite to win?  Take a position in the industry with an ETF or an indexed solar energy fund?

The China solar module producers that are listed in the U.S. and trade in U.S. dollars are available at bargain valuations.  China’s Trina Solar (TSL:  NYSE) is trading at 21.1 times trailing earnings, but an interesting multiple of 10.2 times the consensus estimate for Trina in 2015.  Another China company, JA Solar Holding (JASO:  Nasdaq), is an even better bargain with a stock that is priced at 7.4 times forward earnings.  The problem is JA Solar does not appear to be growing earnings so it probably deserves a lower valuation.  Renasola (SOL:  NYSE) might be the surprise among the China solar stocks.  The company is expected to return to profitability in 2015 and the stock is trading at 17.6 times projected earnings.  That is not such a compelling valuation metric, but it is interesting given the Rena Solar is on the mend.

Canadian Solar, Inc. (CSIQ:  Nasdaq) should not be overlooked.  This solar module producer is headquartered in Toronto, but has production facilities all over the world, including China.  It’s trailing and forward earnings multiples are 9.1 and 8.4, respectively.  I just cannot quite figure out the connection between solar power and the sheep on Canadian Solar’s corporate web site!

The U.S. is famously bereft of manufacturing talent and capacity, but there are two domestic solar module manufacturers.  First Solar, Inc. (FSLR:  Nasdaq) and Sun Power Corporation (SPWR:  Nasdaq) are both trading at multiples far higher than the rest of the pack.  This is probably due to higher operating profit margins than the profitable China solar module producers.  Only Canadian Solar has a higher operating profit margin.

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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