Basking in Solar’s Comeback

03/25/2008 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith, founder and chairman of ChangeWave Research, says the recent sell-off in shares of solar energy companies gives investors a buying opportunity.

The recent meltdown in solar share prices is due to a wide range of things: the overall market malaise, slowing economic growth, and simple profit-taking. Unsurprisingly, investors have been fleeing emerging industries such as solar and moving into more mature, less volatile areas.

At the industry level, concerns about solar tax credits in the United States, accounting and environmental practices in China, and supply and demand issues for polysilicon are weighing heavily on the short-term outlook for solar companies.

[Yet] in ChangeWave Alliance's most-recent alternative energy survey, solar by far topped all other technologies and was the only industry to show momentum going forward. Most importantly, Solar [is] also moving closer to becoming commercially competitive with conventional energy sources.

Despite the market turmoil, the solar industry has a tremendous future—as well as in our portfolio. The current valuation correction will give [investors] a great opportunity to establish positions, or add to current ones, at truly great prices.

LDK Solar (NYSE: LDK)’s management said that based upon its current backlog of contracts, it has sold out almost 100% of its solar wafer capacity for 2008 and has sold more than 90% of its solar wafer capacity for 2009. The long-term nature of its contracts improves visibility, which has been lacking.

LDK [also] said it's committed to building and operating safe and environmentally friendly polysilicon plants. In its polysilicon plants under construction, LDK is using the latest proven Western technology for recycling. Once completed, the plants will have a fully closed loop system where the majority of the potential waste will be recycled.

LDK's roller-coaster ride goes on. Though the shares bounced back the past few days, they are still way down from this year's high. Thus, we're lowering our Buy Under price to $28. (The ADRs closed Monday above $24—Editor.)  

Suntech Power (NYSE: STP) is taking a minority interest in Nitol Solar, an independent polysilicon producer, for up to $100 million. STP entered into a multiyear agreement with Nitol in August 2007 for the supply of polysilicon to STP from 2009 to 2015. Suntech's silicon supply deals will diminish exposure to spot-market purchases, improving visibility and potentially raising gross margins.

Suntech will also offer $425 million in convertible senior notes in a private offering. The company expects to use about $300 million of the offering's net proceeds for upstream supplies and the rest for production capacity expansion and new technology commercialization.

Suntech's shares are down 60% from their 52-week high and drastically oversold. At today's price, STP's fundamentals—particularly its scale of production and industry leadership—are in no way fully reflected.

We're lowering our Buy Under for STP to $35 to reflect the recent fall in its price, but of all our solar plays, Suntech is the best buy today. (It closed below $34.50 Monday—Editor.)

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