At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the worst ...
As the sun rises over a new trading week, investment banker extraordinaire Goldman Sachs has deigned to illuminate us on a whole range of solar stocks this morning. Initiating coverage of the Chinese and U.S. solar sectors simultaneously, Goldman offered up the following advice:
- Buy First Solar
(Nasdaq: FSLR)and JA Solar (Nasdaq: JASO)
- Hold SunPower
(Nasdaq: SPWRA), Yingli Green Energy (NYSE: YGE)and Trina Solar (NYSE: TSL)
- Sell MEMC Electronic Materials
(NYSE: WFR)and Suntech Power (NYSE: STP)
How does Goldman go about separating the winners from losers? Let's examine the banker's least and most favorite picks, and see if we can find a theme: First, Goldman trashes Suntech as a producer of "lower cash margin" bearing a "stretched balance sheet." Similarly, MEMC struggles with a capital-intensive business as well as an "elevated valuation."
In contrast, Goldman cites improving "cash returns" alongside a stronger balance sheet than competitors have, when naming JA Solar its "top pick" in the solar sector. It also likes the scalability of First Solar's business model through the company's relationships with U.S. "utility scale" solar power projects, saying these "strengthen visibility" into how things will play out in the future.
So it seems to me that Goldman is seeking three key items in the solar space:
- Size (bigger being better)
- Balance sheet strength (debt is bad)
- And last but not least, "cash margin" (aka free cash flow)
Great minds think alike ...
If all of this sounds a lot like what I've been saying about the solar stocks in recent months -- well, it is. In fact, one of the reasons I've turned against Wall Street's pessimistic grain on First Solar is that the company possesses all three of the attributes that have green-lit the stock at Goldman. With $2.2 billion in annual sales, First Solar's the big dog in this industry. With more than $710 million in cash-in-the-bank, and less than $170 million in debt, its balance sheet strength is unassailable. And after generating more than $340 million in free cash flow over the past 12 months, First Solar's now one of the few solar players generating substantial, sustainable cash profits from its business.
... until they don't
That said, recent reports of an environmental risk at First Solar have me rethinking my position on the stock -- and leaning toward JA Solar as a somewhat "safer" pick. According to reports that began issuing from the solar stars at Hapoalim Securities earlier this month, the European Union is currently considering legislation which could tighten environmental controls on companies such as First Solar, which use thin film "CdTe" coatings to produce solar power.
Briefly, the concern here is that safety studies are suggesting that if damaged in a hailstorm or other unexpected accident, the kinds of panels First Solar produces could leach cadmium into the groundwater, posing health risks to humans. This raises the twin concerns of: (1) Tighter regulation of and higher costs for First Solar's products, and (2) the even scarier bugaboo of potential lawsuits against First Solar if any leaching, and consequent environmental damage, come to pass.
JA Solar should remain free of these two new risks that have appeared for First Solar. Meanwhile, as a cash-rich, free cash flow-producing company, JA offers many of the same advantages attendant on a First Solar investment.
At last report, JA was generating roughly $75 million in annual free cash flow, giving the stock a price-to-free cash flow ratio of less than 11. With more cash than debt on its balance sheet, and analysts on average projecting 16% long-term growth, the stock looks easily as attractive as First Solar from a valuation perspective -- and without the environmental risk.
Conclusion: Score one (outta two) for Goldman. JA Solar's a winner.
First Solar and Suntech Power are Motley Fool Rule Breakers picks, but Fool contributor Rich Smith has no position in any of the stocks named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 472 out of more than 165,000 members. The Motley Fool has a disclosure policy.