2 Solar Stocks in a Sorry State

American investors tend to root for the home team. In the solar space, that's proven painful for shareholders of Evergreen Solar (Nasdaq: ESLR  ) and Energy Conversion Devices (Nasdaq: ENER  ) . These companies are just not keeping up.

Evergreen tried to put its best foot forward, highlighting shipment levels, improved gross margins, and cash generation for the fourth quarter. Overwhelming these points was the gigantic non-cash writedown that Evergreen took on its investment in the Sovello joint venture with Q-Cells and REC. That European venture, formerly known as EverQ, once appeared to foretell Evergreen's bright future. The company has long been in breach of its loan covenants and is now facing possible insolvency.

I was right about the foretelling at least: Evergreen, too, has been in violation of a loan covenant since last year's first-quarter report. That said, with $112 million on the balance sheet as of the end of the fourth quarter, the company appears to have more than enough liquidity to build out its 100-megawatt Chinese facility. It's just not clear to me that the company will produce a product that's competitive with offerings by the likes of Trina Solar (NYSE: TSL  ) and Suntech Power (NYSE: STP  ) , which have been pretty aggressive price cutters.

As for ECD, the CEO's prepared remarks in the quarterly press release were all sunshine, as he spoke of "progress," "traction," and "momentum." The stock certainly has momentum, unfortunately it is downward. ECD shares haven't traded at these depths since 2004!

In the quarter, revenue was around half the prior year level, at $52.9 million. Inventories, meanwhile, ballooned to $120.8 million. Even with all the steps the company has taken to tackle underutilization and overhead, it appears that demand for ECD's thin-film laminates is still far short of the company's lowered expectations.

I'm all for cruising the 52-week low list for value stocks, but in a sector this competitive, a solar turnaround is a tall order. Mean reversion can be a key ally when it comes to contrarian investing, but I wouldn't bet on it in this case. SunPower (Nasdaq: SPWRA  ) (Nasdaq: SPWRB  ) and First Solar (Nasdaq: FSLR  ) are also trading down these days, and I'd direct your attention to those more entrenched American solar sluggers instead.

First Solar and Suntech Power Holdings are Motley Fool Rule Breakers picks. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (28)

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  • Report this Comment On February 10, 2010, at 2:20 PM, RogueAccountant wrote:

    I'd have to say that I've been a huge booster for ESLR (I clearly disclaimed my ownership of shares in the company back in January. However, as of 2/5 I have closed my long position).

    I still think that ESLR could be a good addition to a well diversified portfolio, but not at this price, a quick technical analysis shows downward momentum. I anticipate this stock to hit $1, and that is a good price.

    Prior to the 4Q financials being released I made a huge bet on the company based on different factors (e.g. moving operations to China, new contracts such as Patriot Place, and cost cutting across the board, and increased shipments), however, the whole Sovello issue came out of nowhere.

    After taking a substantial loss, I sold at $1.34 (my avg was $1.71), I really thought that my initial analysis was completely off and misguided. I took another look at their BS and IS, then I realized that most of ESLR's problems, and reasons the stock to a huge hit, for the MOST part boil down to three factors: 1) The $56.3M impairment charge on their Sovello investment. If we back out this charge, ESLR's loss would come to $41.8M vs $53.8M a year ago, and well within analysts estimates. 2)ESLR's management is concerned, and should be, about decreasing product's premiums and perhaps lower margins for 2010. The company actually increased margins in the 4Q by 11%, but the issue is that these margins may not be sustainable due to increased price competition. 3)The possibility of an equity offering in the coming months will definitely have a dilutive effect on earnings per share and the value of the stock.

    As Ardour Capital analyst Adam Krop said, regarding ESLR's capital requirements and operations, "I'd say 2010 is going to be a challenging year". A challenging year indeed, but at $1/share I'd be willing to be on ESLR again.

  • Report this Comment On February 10, 2010, at 5:29 PM, greenwave3 wrote:

    ENER has been badly neglected for some time, but considering liquidation value and the potential Obama effect on alternative energy providers, this one may be worth buying. Plus, the 33% shares short means that a lot of buying will take place in time.

  • Report this Comment On February 10, 2010, at 6:09 PM, brickcityman wrote:

    I've been in and out of ESLR over the past year. I presently hold a small stake and am looking to add to it once this knife gets done falling.

    I am by no means a grizzled and experienced investor, and perhaps this is pollyanish, but I see their technological advantages as more than offsetting their present capacity and financial difficulties. Or at the very least I see the possibility of that being the case as large enough to warrant investing money here.

    That said this companies stock, like many of its type, is not for the faint of heart and must only be handled within the context of a balanced approach. The essence of investing (to me) is to encourage productive protect ones wealth and provide capital for productive uses. Sometimes those things are at odds, you just have to balance it out per your risk tolerance.

  • Report this Comment On February 10, 2010, at 6:09 PM, brickcityman wrote:

    wow that comment made no sense

    should read:

    The essence of investing (to me) is to protect ones wealth and provide capital for productive uses. Sometimes those things are at odds, you just have to balance it out per your risk tolerance.

  • Report this Comment On February 12, 2010, at 9:41 PM, Masabsurdo wrote:

    Dear Fools,

    I don't see a boogyman here; it is not about Big Oil in control. Solar power generation has simply not been competitive unless highly subsidized. That will change now. The Chinese manufacturers are all vertically integrating by adding polysilicon foundries. They will control the process from sand to panels. They will do it all at Chinese infrastructure prices. They will become fiercely competitive with each other. It is not just the labor at $1.30 per hour fully-loaded with fringe benefits, but the land buildings production overhead and management that is driving down the price of the panel. Polysilicon is headed for $25.00 per kilo and the Chinese will processes it into finished product. There is no US-based manufacturer who can survive the low-cost tsunami. Though the US manufacturers will wither, the world will gain PV panels at unbeiveabley low prices. I would stay far away from US solar businesses and I can't see who will win the price war in China either.

  • Report this Comment On February 14, 2010, at 12:37 PM, RanchBurger wrote:

    The solar panel industry in China shows promise of huge expansion. China's solar panel industry has steadily shown 25 percent growth in the number of products exported over the past ten years, and this shows no sign of slowing down. Because of its low-cost manufacturing capabilities and the fact that demand for solar power within China itself is beginning to grow, the industry within China has great potential.

    Both crystalline and amorphous solar panels are produced in China. The crystalline panels make up 90 percent of China’s total output. Amorphous panels are relatively new, but are growing in production because they cost less to make than the crystalline panels.

    China has an enormous amount of manufacturing capability coming up in the next few years. This manufacturing is lower cost than other places for several reasons, including the fact that Chinese workers make an average of $200 per month, and all of the items necessary for making solar panels are now available domestically, with production of those growing as well. Additionally, the cost of doing business in China is much lower. They pay less administrative costs, research and development, peripheral costs, etc, than more developed countries. The machinery necessary for manufacturing solar panels is also being developed domestically, providing much less expensive equipment than could be gotten overseas. Because labor costs are so low, the Chinese assembly lines tend to be much more labor intensive with fewer machines.

    The bottleneck in China’s solar panel production is the same as everywhere else– polysilicon. Although domestic production is growing it will not be enough to address future needs of the solar industry. Chinese producers use a combination of scrap and virgin polysilicon for solar cell production, which lowers cost. Low labor costs allow the viability of hand sorting of silicon wafers that are broken or recycled. Chinese firms are stockpiling polysilicon now to ensure lower costs as polysilicon prices keep increasing.

    The Chinese government initiated programs extensively increase the amount of solar power used in the country, which will probably only benefit domestic suppliers and those foreign countries that are allied with them. The government intends to bring power to extreme rural areas, which are currently off the grid, with renewable energy systems. Areas of China such as Western China are ideal for solar power as it averages 9 to 11 hours of sun per day. Investment in the Chinese solar panel industry is a hot ticket.

    --------------------------------

    www.topinvestintips.com

  • Report this Comment On February 16, 2010, at 5:28 PM, langco1 wrote:

    2? the entire solar industry is a failure...

  • Report this Comment On February 17, 2010, at 9:00 AM, ragedmaximus wrote:

    I would love to go solar with panels on my roof but unfortunately the cost outweighs the gain.by the time i would recoup my envestment the panels would no longer work.

  • Report this Comment On February 17, 2010, at 6:04 PM, mattack2 wrote:

    Highly doubtful. For many the investment recoup is under 10 years.

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