Solar Springs Up Again.

by Natalie Pace.

Solar energy stocks went dormant this winter, but are prepared for another scorching hot summer.

What’s doubling at the speed of light? Solar energy sales.

Suntech Power Holdings annual sales in 2007 was $1.35 billion, more than double 2006’s total of $599 million, which in turn was more than double the prior year’s sales of $226 million (in 2005). LDK Solar has already tripled last year’s sales (at $331 million over $106 million), and they have yet to release the 4th quarter results (due in June 2008). Trina Solar’s annual sales jumped to $302 million, from $115 million a year ago.

You’ll notice that I mention all of the Chinese companies, while overlooking First Solar (based out of Phoenix, Arizona) and Sunpower Solar (based out of San Jose, California). Why? Mostly due to the source material, which has killed profit margins in Sunpower and inflated the profit potential of First Solar. Yes, First Solar and Sunpower saw their sales double in 2007. The question is: "What will be the case in 2008 and 2009?"

Sunpower had a big problem with supply in the last quarter of 2007, which is why we chose Suntech Power Holdings for our Company of the Month in October 2006, over Sunpower. Suntech had secured long-term silicon supply at a more reasonable price with MEMC Electronics, whereas Sunpower was experiencing more difficulty obtaining a clear, uninterrupted channel for silicon at a reasonable price, especially during the second half part of 2007. This problem was foreseeable in October 2006, and is largely responsible for the death of Sunpower’s profits in 2007.

That reality was reflected in the profit margin disparity between Suntech Power Holdings and Sunpower last year. Suntech’s net profit margin was at 12.55% compared to just 1.19% for Sunpower. "In the latter part of 2008 and beyond, we expect our industry's silicon feedstock to become more abundant, leading to lower solar panel prices which will redistribute the power and profit pools in the value chain," according to Sunpower CEO Tom Werner, in his annual report. Even though Sunpower’s profitability was just a hair’s breath above the red, Sunpower remained popular with investors, probably because their solar panels are aesthetically appealing and their energy efficiency is at the top of the marketplace. However, in our view, the better bet, at least for 2008, remains Suntech Power Holdings, which has long-term supply contracts with MEMC Electronics and is partially funding a new silicon manufacturing plant for Hoku Scientific.

In 2007 and the beginning of 2008, First Solar was the most popular solar energy company on Wall Street. First Solar is trading at a lofty price to earnings ratio of 91.60, and is one of the few solar companies that is still trading near its 52-week high. Most solar energy companies experienced an extreme pullback earlier this month (which is when we put Suntech Power Holdings and World Water and Solar back on the Hot News list -- at prices not seen for a year!). However, there are a few factors in First Solar’s powerful past dominance that investors should take note of.

Thin film solar versus silicon panels
First Solar uses cadmium telluride instead of silicon to transfer sunlight into useable energy. This was a huge competitive advantage when silicon was hard to get at a reasonable price. Thus First Solar’s operating margins were the highest in the industry – at 31.42%. That is shifting, however.

As Dr. Harry Atwater advised a crowd at the Green Xchange Conference last December 2007, silicon is an abundant source material, whereas cadmium telluride is rather rare. Once silicon manufacturing heats up, which is expected to happen this year, the desirability of cadmium telluride could diminish rapidly, as the advantage right now is cost, rather than efficiency. Once the costs of using silicon as a source material line up with cadmium telluride, silicon has the edge. Silicon based solar panels produce more energy more efficiently, and with the source material of sand, there is no foreseeable end in supply.



Thus as the market forces that supported First Solar’s lofty share prices shift back down to Earth, don’t be caught clinging to a rare trace element, when you could be walking in miles and miles of sand for years to come! This isn’t to say that there won’t be room for First Solar solar products in the years to come, but rather to say that the scientists, like Professor Atwater, believe that silicon is a better bet as the source material to power renewable energy as the fuel of choice, as we attempt to scale back our reliance on coal and fossil fuels.

So, this year, the solar energy companies that top our hot list include Suntech Power Holdings, Trina Solar, LDK Solar and our perennial favorite – World Water and Solar. Trina Solar is a Chinese company, in direct competition with Suntech Power Holdings. Trina has strong management and board, which is necessary in a highly competitive, rapidly growing industry, that is still very reliant on government subsidies and incentives to achieve market dominance. LDK Solar is a silicon wafer manufacturer that supplies wafers to companies, like Suntech and Trina, which has been tripling it’s sales over the last year.

Suntech Power was added to the Hot News list last week, when it was trading at $30/share. World Water was added at $1.01. Both companies have enjoyed a rally since that time, with Suntech trading at $42 and World Water and Solar trading at $1.23, as of March 31, 2008. In today’s market place of share price mood swings, it’s better to be patient for the lower buy-in price.

I added Trina Solar and LDK Solar to the Hot News list on April Fool's Day (and it wasn't a joke!).

Go to the article in the NataliePace.com, vol. 5, iss. 4 ezine to access the Solar Energy Stock Report Card.



Full Disclosure: Natalie Pace owns shares of World Water and Solar.
Please note: NataliePace.com does not act or operate like a broker. We are a new media website. This article is intended to educate and inform individual investors, and, thus, to give investors a competitive edge in their personal decision-making. The publicly traded companies mentioned in this article are not intended to be buy or sell recommendations. ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies.

Investors should NOT be using the Hot News on Cool Stocks list or the Cooling Off list to trade their nest eggs. Your retirement plan should reflect a long, safe strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.

IMPORTANT DISCLAIMER: Information has been obtained from sources believed to be reliable however NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.