Solar Energy: What You Need to Know

From TSC Ratings' Updates: Pactiv:

LDK Solar has been upgraded from sell to hold. LDK Solar, through its subsidiaries, engages in the manufacture and sale of multicrystalline solar wafers to the manufacturers of solar cells and solar modules in the People's Republic of China and internationally.

LDK's very impressive revenue growth greatly exceeded the industry average of 11.5%. Since the same quarter one year prior, revenue leaped by 345.9%. Growth in the company's revenue appears to have helped boost the earnings per share.

The gross profit margin for LDK is currently lower than what is desirable, coming in at 25.40%.

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From Energy Bill a Step Back for Clean Power, Foes Say:

The [California] ballot measure calls for utilities -- both investor- and government-owned -- to get at least 20 percent of their electricity from renewable sources by 2010. The quota would increase to 40 percent by 2020 and 50 percent by 2025.

Currently, state law requires only investor-owned utilities to meet a 20 percent level by 2010. State regulators also are considering a 33 percent requirement by 2020 as part of the effort to implement a comprehensive plan to reduce greenhouse-gas emissions.

The 20 percent mandate has prompted utilities such as PG&E (PCG Quote) and SCE to sign large contracts to buy solar and wind energy over the past year. Last week, SCE said it had agreed to buy up to 909 megawatts of electricity from a wind farm in Oregon, to be built and operated by New York City-based Caithness Energy.

Government mandates that force utilities to buy renewable energy through long-term contracts at prices higher than conventional power aren't new. Those policies have made countries such as Germany and Spain booming markets for solar companies, for example.

But those regulations don't exclude small power plants. In fact, many homeowners and farmers in Germany have installed solar panels on their roofs and properties in order to profit from the policy.

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China Watch Mail Bag: Solar vs. Wind (Video, Aug. 23)

Alternative energy is all the rage, but how do you know whether to invest in solar power or wind? Get the lowdown from energy reporter Chuck Marvin.

To watch the video, click the player below:

Plus, don't miss these related videos on TheStreet.com TV: China Watch: If You Go Solar, Go SunPower (Aug. 22: Marvin says if you go solar, SunPower's (SPWR Quote) your best bet.) and China Watch: S&P's Top Two Tech Trends (Aug. 13: Standard and Poor's equity analyst Scott Kessler says solar power and online gaming are the two hot spots to bank on right now in China.)

From Cypress Soars on Solar Power Deal:

Shares of Cypress Semiconductor (CY Quote) soared on Friday [Aug. 15], spurred by the company's announcement to buyback a large chunk of its convertible debt and by a blockbuster deal by Cypress's majority-owned solar power subsidiary.

On Thursday, Pacific Gas & Electric announced it had signed contracts to buy electricity from a pair of yet-to-be-built photovoltaic power plants, which would reportedly represent the largest such commercial installation of photovoltaic technology. PG&E signed the deal with subsidiaries of Optisolar, a private firm, and with SunPower, a former unit of Cypress Semiconductor.

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From Solar Plays Starting to Shine, Part 1:

Over the past two years, solar stocks have blossomed from idealistic but unprofitable speculative plays into revenue growth powerhouses. While we curse crude oil prices and their effect on the economy and gasoline prices, solar investors can only smile and thank these high prices for making solar power economically viable.

Years ago, when these solar names were just starting to gain traction, there wasn't much on the fundamental side for investors to compare. Most companies were focused on improving their efficiency profiles, trying to improve the percentage of solar energy that their panels could convert into electrical power. It made sense at the time, because investors were buying into compelling stories rather than companies with attractive fundamentals and useful valuation metrics.

With the exponential increase in demand for solar panels that has occurred alongside rising prices for traditional energy sources, we can now focus on recent quarterly revenue, earnings and margins. I have included a number of charts on five of the most interesting solar names.

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From Five Hot Solar Plays: The Fundamentals:

Looking at valuation on a price/sales basis, you can see how wide the range is among these names. I used consensus estimates for full-year 2008 and 2009 for these calculations. Remember, historical data is useful for painting the backdrop, but when doing valuation on a stock, we need to use forward estimates.

The lesson here is that price/sales appears to be of limited use in valuing these solar plays. If nothing else, we can see how the thin-film names (First Solar (FSLR Quote) and Energy Conversion Devices (ENER Quote)) are well ahead of their polysilicon peers in terms of earnings and higher price/sales multiple. The numbers also suggest that Trina (TSL Quote) is extremely cheap, but I'm still doubtful that this metric is useful in making decisions over whether any of these names should be bought here.

Since I'm not satisfied with the valuations generated by price/sales, let's move on to the tried-and-true price/earnings ratios.

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