A new day has dawned for investors in solar power plays First Solar (FSLR +2.51%), SolarCity (SCTY +0.00%), and SunEdison (SUNE +0.00%). Thanks to new legislation from Congress, all of these stocks are about to leap higher in the New Year.
Or so says Cowen & Co.
New dawn
In a wide-ranging report published Wednesday (and brought to our attention by our friends at StreetInsider.com), investment banker Cowen laid out its thoughts on Congress's recent decision to renew the solar power investment tax credit, or ITC.
This is the law that, since about 2005, grants folks who install solar panels on their houses a credit on their income taxes, worth up to 30% of the cost of the installation. And it's a law that over the past decade has helped to produce 50% annual growth in residential solar installations, while dropping the cost of such systems by more than 70%.
Now, Cowen thinks ITC is ready to save the industry once again. With Congress deciding to extend the ITC at its full 30% level through 2019 before gradually phasing it out (26% in 2020, 21% in 2021, and 10% thereafter), U.S. solar power companies can look forward to at least another five years of beaucoup business -- rather than seeing their customer base evaporate almost immediately.
Accordingly, Cowen has announced price target hikes for solar thin-film specialist First Solar and solar lessor Solarcity -- now expected to sell for $75 and $55, respectively, a year from now. The analyst shaved its price target on wafer-maker SunEdison down to $19 -- but even so, it's projecting a near-300% profit on the shares from their recent share price of $5.
The question for investors today is: Does Cowen know what it's talking about?
Let's go to the tape
At first glance, you might think that it does. After all, according to our stats on Motley Fool CAPS, where we've been tracking Cowen's performance for close to a decade now, this banker ranks in the top 10% of investors we track.
Problem is, though, Cowen earned this reputation primarily on the back of its stellar record picking stocks in the biotech and pharmaceuticals arena. In semiconductors (the home sector for many solar stocks), Cowen has never been more than a so-so stock picker, getting about as many picks right as it got wrong, and scoring only 50% for accuracy. A few examples:
|
Company
|
Cowen Said: |
CAPS Says: |
Cowen's Picks Beating (Lagging) S&P By: |
|---|---|---|---|
|
First Solar |
Outperform |
*** |
80 points |
|
Trina Solar |
Outperform |
** |
(74 points) |
|
SunEdison |
Outperform |
** |
(81 points) |
Even Cowen's past success in recommending First Solar encourages you into thinking the banker may be right about the stock again this time, though, its poor performance on SunEdison may give you pause. The more so when you consider that the valuations Cowen is assigning these stocks seem ... optimistic, to say the least.
Valuing the solars
Take First Solar, for example. Priced at $66 and change today, this stock sports the not-unreasonable-sounding valuation of just 11.7 times trailing earnings. For a growing business, that would be pretty cheap. Problem is, according to analysts quoted on S&P Capital IQ, First Solar's business is not growing.
To the contrary, GAAP profits are expected to decline by about 6% on average every year for the next five years. And with First Solar already generating far less free cash flow (about $301 million) than it reports as net income ($576 million), I'd say that FCF seems to be acting as a leading indicator on profits trends -- and it's indicating that profits are trending down.
The story with SolarCity is even worse. Here we have a stock with no trailing profits whatsoever (no profits at all for the last four years, according to Capital IQ), and burning more than $1.3 billion in cash annually. Like First Solar, estimates appear to be calling for things to get worse, with Yahoo! Finance projecting a 2% annualized decline in (already negative) profitability over the next five years.
And SunEdison? That's perhaps the saddest story of all. Cowen is calling for the stock price to grow fourfold in 12 months. But SunEdison reported losses of $1.16 billion over the past year, and is on pace to report its fifth straight money-losing year. With free cash flow currently clocked at nearly $4.5 billion annually, and the stock saddled with nearly $6 billion in net debt already -- it's questionable whether SunEdison will even last long enough to still be around losing money in 2017.
The upshot for investors
Could Cowen be right about these stocks and their prospects to grow in 2016? Indubitably. But it would have to be right in spite of the evidence, rather than because of it. Given Cowen's own iffy record of success in picking solar stocks, and the extremely unattractive valuations of the stocks it's picked, I'd say the odds are much greater that Cowen is wrong.
