First Solar shares are up 31% this month. For First Solar to be worth more than a 10 times multiple -- at $44 it is currently trading at about 11 times the mid-point of its 2012 guidance -- the top line has to grow considerably from this year's expectation and the cost equation has to drop in a way that improves the bottom line considerably more than can currently be assumed. First Solar's earnings power today is still based on power purchase agreements with utilities that won't be replicated in terms of profitability, as well as Department of Energy loan guarantee economics, making it difficult to frame the financial equation in 2014 and beyond. "Once you get past 2012, First Solar has to remain low cost and grow at a double-digit rate. First Solar is worth more than $40 if they can get their cost structure down to the 50-cent per watt range, and make balance of systems cost reductions," Simko said. "There are black holes in that road map, and right now with a risk adjusted outlook for the stock, it doesn't seem great given the challenges and the market." If First Solar grows at 15% a year in the next 5 years that implies it is at an 8 gigawatts to 9 gigawatts market share a year, and that could lead to operating leverage and expense reduction, and an earnings scenario that is much higher than the $3 annual earnings which is now the bottom line view for the company. However, Simko said, "The greater than $40 scenario is not one I would advocate here." He wants to first see the company reach the 65-cent per watt cost target by the end of 2012 and bring manufacturing to 100% capacity. On the other hand, "It doesn't scream overvalued to me at $43 compared to other names, and based on the pipeline and positive income statement. There is much less cash flow than before but it's still there, so to me that makes it less of a screaming short than other names," Simko said.
Suntech Power shares are up 55% this month. Suntech's Chinese solar peer LDK Solar ( LDK) is usually held up as the poster child for excessive debt and bankruptcy risk in solar, and Simko agrees, but thinks that it will be important to watch Suntech income in the coming quarters to monitor its balance sheet situation. "Suntech is the second worst," Simko said. The Morningstar analyst said that there is widespread belief that the national prominence of Suntech's CEO Dr. Zhengrong Shi will keep the company in the good graces of the government. Something similar is said about LDK: that it has created so many jobs in China it can't be allowed to go bankrupt. While these arguments may be true, they don't ensure that the government and banks in China won't take over the companies and wipe out equity shareholders. It's impossible to assess that risk, so Simko says an investor has to focus on what Suntech has promised in regards to its balance sheet when it reports in 2012. The analyst noted that Suntech has talked up its ability to monetize its Global Solar Fund pipeline and reduce working capital and expenses, all of which could lead to $400 million or more in improved cash flow. If that's true, then no matter what happens in solar, Suntech net debt stabilizes, at least. "I'm skeptical that's how it plays out, but it will be a tell," Simko said. He added that Suntech could get an extension of credit facilities from existing Chinese bank partners if it's able to stabilize its balance sheet. Suntech had approximately $946 million in cash and $3 billion in debt as of its last quarterly earnings report in November.
SunPower shares are up 16.5% this month. Unlike First Solar, Simko has little hope for this company. "SunPower is in a horrible situation. To me, it's a huge problem and a Total executive recently pegged it right when he said it would be bankrupt without the investment by Total." Total ( TOT)
Shares of Energy Conversion Devices are up 469% this year. Yeah, you read that right. Of course, for a stock that began the year trading at 20 cents, a big swing on the heels of solar's rally isn't surprising. Yet the question remains, will Energy Conversion Devices even exist as a company a year from now? Energy Conversion Devices continues to lose money on every panel it sells and while the company has done a good job of limiting cash burn, it's got a big financial High Noon still on the horizon in 2013, when holders of convertible notes come calling. The fact that the convertibles aren't due until 2013 means that the company can probably survive 2012, but that's still not a whole lot of breathing room. "You can make a credible case they can make it through 2012, but the problem is if they can't refinance the converts," Simko said. Energy Conversion Devices has a $1.50+ per watt cost structure in a world of sub-$1 pricing per watt. Simko said the company is in a bit of a Catch-22, and its executives have said so. "To get where they are cost competitive requires investment and to invest they need to refinance the converts, but the bond holders aren't going to let equity holders off the hook," Simko said. "Energy Conversion is about as volatile a solar stock as you get, and the stock quadrupling in value is a little crazy with no positive outlook," the analyst said.
Daqo New Energy shares are up 58% this year. Simko has a different view of the Chinese polysilicon producer. "This is another company in big trouble," the analyst said. The problem for Daqo is, like the panel makers that are struggling, about cost structure. However, in the case of Daqo it is about the market price for polysilicon versus its production price. Polysilicon prices -- which once upon a time were as high as $300 per kilogram -- recently stabilized at around the $30 range thanks to the German demand pickup. Polysilicon prices were below $30 per kilogram just a month ago. Daqo New Energy can't do enough to reduce its cost structure. As Collins Stewart analyst Dan Ries recently wrote, "While Daqo is expanding and retrofitting its polysilicon product facilities to reduce costs...the polysilicon industry is facing a multi-year period of excess capacity. DQ's attempt to reduce its dependence on polysilicon with expansion into wafers and modules seems unlikey to payoff, as those business are extremely challenging even for vendors with brand and scale. If all goes well (production cost reduce to $21/kg from $29-30/kg today), DQ may return to profitability in CY13, but even then, earnings would be minor and its debt load high. We see little value in DQ's equity." Daqo had cash of $60 million and debt of $269 million as of its last quarterly report in November. Simko said it's hard to see how the Daqo story pans outs. "To me, it's one more solar company where we don't know what happens, and it's better to stick with bigger companies with better financial statements." Overall, Simko's outlook is to proceed with caution. "Solar could become like wind turbine manufacturers. Everyone uses the same technology and wind turbine margins disappear. When supply and demand is out of whack, it's a brutal business and there are very few companies left at the end of the day," he said. >>To see these stocks in action, visit the Solar Stocks That May Not Survive to 2014 portfolio on Stockpickr. -- Written by Eric Rosenbaum from New York.
Eric Rosenbaum. >To follow the writer on Twitter, go to Eric Rosenbaum. Follow TheStreet on Twitter and become a fan on Facebook.