Yesterday, in part 1 of this article, Larsen Kusick overviewed the top five solar power plays, including First Solar (FSLR), Energy Conversion Devices (ENER), SunPower (SPWR), SunTech Power (STP) and Trina Solar (TSL). In part 2, he looks at the companies on a valuation basis.

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 and Energy Conversion Devices) are well ahead of their polysilicon peers in terms of earnings and higher price/sales multiple. The numbers also suggest that Trina 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.

Now -- these numbers look more useful. In the column all the way to the right I added the expected annual growth rate on the basis of 2008/2009 earnings estimates. ENER stands out as the most expensive of the group, according to 2009 P/E, but as I said before, we can attribute this partially to the likelihood that analysts are still playing catch-up with respect to the company's improved business prospects (i.e., the market believes current estimates are too low).

We can't say for sure that the market is right, but ENER's amazing run since January should serve as an indication that the company has made a lot of progress, and the expectations are quite high.

First Solar, on the other hand, is trading at almost 50 times 2009 expectations. This multiple may seem attractive relative to the high rate of expected earnings growth of over 96%, but I'm more concerned with the sustainable five-year earnings growth rate. Can FSLR sustain a 50% growth rate, so that a PEG ratio (P/E divided by five-year earnings growth) would be around 1.0? I'm not quite sold on the health of the solar industry over that long of a period, and although you can make a case that the market leader deserves a premium multiple, it looks awfully steep to me. I also have to agree with Jim Cramer's concerns over the large insider sales by CEO Michael Ahearn.

Annual EPS Estimates
Ticker Recent Price Market Cap* 2008 2009 Price/Earnings
2008
2009 2009
earnings growth
SPWR 81.39 $6.36 $2.16 $3.37 37.7 24.2 56.0%
STP 41.55 $6.89 $1.58 $2.57 26.3 16.2 62.7%
ENER 79.19 $3.21 $0.01 $1.48 NM* 53.5 NM*
FSLR 288.22 $23.0 $2.96 $5.82 97.4 49.5 96.6%
TSL 36.74 $0.92 $3.15 $4.17 11.7 8.8 32.4%
* ENER's P/E ratio and earnings growth are not meaningful based on an earnings estimate of 1 cent in 2008

SunPower and Suntech both look inexpensive relative to their thin-film counterparts. The reason: Profits at both companies are influenced so heavily by the supply of polysilicon. A case can be made that China-based Suntech looks like an interesting play on the basis of a more attractive multiple and better earnings growth outlook in 2009. However, in looking at quarterly numbers, I noticed that California-based SunPower has done the best job out of all these names in keeping operating expenses low while growing revenue, and even though sequential sales growth was flat-ish in the most recent quarter, I believe SunPower's expense control provides more confidence for investors in the event of a pullback in solar demand.

Trina stands out as a fundamentally cheap stock; this is particularly surprising when looking back at the revenue growth expectations for the coming two quarters. As I mentioned earlier, there is a surprisingly large variance in analysts' estimates for the company, leading me to believe that Wall Street as a whole is uncertain about Trina's prospects. The large discount in price/earnings valuation leads me to believe that Trina's story is highly contingent on the success of its vertically-integrated business model.

In April of this year, the company scrapped plans to build its own polysilicon plant -- which was cheered by the market, sending shares higher. However, the ongoing low valuation makes me think that TSL is simply bringing up the rear in what is a very crowded solar space.

Larsen Kusick manages TheStreet.com Breakout Stocks service and regularly writes about equities that are poised for large growth, such as Akamai Technologies (AKAM), GameStop (GME) and Perfect World (PWRD), for TheStreet.com.
In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Kusick is a research associate at TheStreet.com, where he works closely with Jim Cramer and works on TheStreet.com Stocks Under $10. Prior to joining TheStreet.com, he worked in options trading and management consulting. He appreciates your feedback; click here to send him an email.

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