Every day, Wall Street analysts upgrade some stocks, downgrade others, and “initiate coverage” on a few more. But do these analysts even know what they’re talking about? Today, we’re taking one high-profile Wall Street pick and putting it under the microscope…
How bad is the Chinese solar market this year? Let me count the ways:
Shares of Hanwha Q Cells Co (NASDAQ: HQCL) are down more than 4% so far this year — and that’s the good news. Canadian Solar is off 20% while JinkoSolar Holding is down a whopping 43%. The cost of Chinese solar modules, which make up one-third the cost of a deployed solar power system, are expected to decline 35% this year, then fall another 10% to 15% next year, according to Bloomberg.
Fearing that prospects for the solar industry are dimming, yesterday analysts at Roth Capital bailed on the solar industry wholesale, downgrading shares of Hanwha Q Cells, JA Solar Holdings (NASDAQ: JASO), and ReneSola to sell. This morning, Merrill Lynch showed signs it’s planning to join the rush to the exits as well, downgrading American solar manufacturer First Solar (NASDAQ: FSLR) to neutral.
Here’s what you need to know.
What’s going on in solar right now — here
Why are solar stocks so very not hot this year? Part of the blame has to be laid at the feet of the Trump administration, which in January announced plans to impose tariffs on solar cells and panels manufactured abroad and imported into the U.S. This threatens to raise the cost of new solar projects and decrease demand for solar panels.
Those tariffs shouldn’t affect First Solar, however, which is exempt from the tariffs. They should also hurt foreign manufacturers less and less over time, because tariffs initially set at 30% in their first year in effect will gradually be cut in half over four years. Also, the first 2.5 gigawatts’ worth of solar equipment will be exempt from the tariffs.
What’s going on in solar right now — abroad
More recently, the bad news for solar has been foreign in origin. Last week, the Chinese government announced it will cut the number of permits it issues for utility-scale solar projects in the country, and also reduce the feed-in tariff it pays solar power providers for their electricity — reducing the incentive to produce solar power, and thus reducing utilities’ demand to buy solar panels.
China’s South China Morning Post has the details: On Friday, “the National Development and Reform Commission, Ministry of Finance and National Energy Administration said the allocation of quotas for new projects had been halted until further notice.” Subsidized installations of “distributed solar farms” will be capped at 10 gigawatts (GW) this year.
Furthermore, “tariffs on electricity generated from clean energy will be lowered by 0.05 yuan per kilowatt hour, a cut of 6.7 to 9 per cent depending on the region, effective June 1.”
That abrupt, effective-immediately change in particular seems to have shocked the market. Analysts are predicting a “painful reshuffle” of the industry that could last for as long as a year, and responding by cutting their forecast for solar power installations in China to as little as 30 GW this year — a 43% reduction from 2017 levels.
What it means for solar stocks
Here in the U.S., analysts are also cutting ratings on Chinese solar stocks. Roth Capital in particular comments that China’s “new solar policy” is “much worse-than-expected,” in a note covered on StreetInsider.com (subscription required).
Average selling prices for solar modules are expected to plunge — not just this year, but in 2019 as well. The analyst is responding by setting new target prices of just $5.80 per share on JA Solar (18% below today’s price), $5.50 per share on Hanwha Q Cells (20% below), and just $2 a share on ReneSola stock (a fall of 17%).
Is Roth right to panic, however, or could this sell-off be an opportunity to buy in? Let’s look at the numbers.
According to data from S&P Global Market Intelligence, two of the three companies that Roth downgraded today — ReneSola and JA Solar — are GAAP profitable. None of the three, however, is generating positive free cash flow from its business at last report. JA Solar burned through $189 million in cash over the last 12 months, ReneSola nearly $60 million, and Hanwha (for which up-to-date financials are not available) almost $160 million.
Unsurprisingly, unable to generate cash to cover their investments, all three companies carry heavy debt loads relative to their respective market capitalizations — in fact, each firm has more debt on its balance sheet than it has value in its equity.
In contrast, First Solar — the solar stock that Merrill Lynch downgraded today — is both free-cash-flow positive (generating $223 million in cash profit over the past year) and has been so in three of the past five years. First Solar also boasts a robust balance sheet with $2.4 billion more cash than debt, and a market capitalization of only $6.5 billion. At an enterprise value of $4.1 billion, First Solar is valued at about 18.4 times free cash flow, and projected to grow earnings at about 14.4% annually over the next five years.
I wouldn’t call First Solar stock cheap, exactly — but it’s a whole lot healthier than its competition. That alone may argue in favor of First Solar being one of the stocks likely to exit this solar crisis in better shape than it went into it.
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