Update Yingli Green Energy (YGE)

Yingli Green Energy Holding (YGE) announced ugly third quarter results on November 23—and then topped them with even uglier forecasts for the fourth quarter. Shipments will be down 20% in the fourth quarter from those in the third quarter and average-selling prices will fall by 13% to 19%.

But investors expected that. What they want to know about Yingli Green Energy-and about all of the world’s solar companies—is Do they have the cash to survive until the solar market turns? and “When is that turn likely? (To see my take on the solar sector as a whole see my post http://jubakpicks.com/2011/11/15/what-solar-companies-will-survive-the-solar-winter-to-profit-from-the-solar-spring-and-when-do-you-want-to-own-them/ )

Yingli looks like a survivor of the shakeout in the industry but that’s not guaranteed. Read more

It would be a plot worthy of Bond villains Auric Goldfinger, Ernst Blofeld or Francisco Scaramanga—destroy the world’s solar industry by providing cheap capital and demand-creating subsidies so that solar companies over expand, and then pull the plug on capital and subsidies so that the industry goes bankrupt.

Except that this is the real world and nobody needs Scaramanga to steal the Solex Agitator, the MacGuffin essential to solar energy production in the fictional world of The Man with the Golden Gun. In the real world well-meaning governments, financial markets, and the solar industry can do the damage all by themselves.

The price of polysilicon, the raw material for conventional solar sells, has dropped by 56% this year to level not seen since 2003 and by 93% since 2008.

And yet, if all the factories now under construction or on the drawing boards get built, global supply of polysilicon will climb to 500,000 tons by 2014 from 266,000 tons in 2011.

The average margin at the companies that turn polysilicon into solar cells (or that use other technologies for producing photovoltaics) fell to 0.1% in the third quarter of 2011 from 13.7% in the third quarter of 2010.

And yet, the 10 largest makers of silicon panels doubled their manufacturing capacity last year.

It’s no wonder that Jifan Gao, CEO of Trina Solar, China’s third-largest producer of solar panels, said in a recent interview with Bloomberg that two-thirds of the players in the industry will go bust or be acquired between now and 2015. A recent report from Australia’s Macquarie Securities gave a similar number: 66% of polysilicon producers would fall victim to the shakeout that has just begun. For example, in China the sector would be reduced to as few as four players over the next three years from 35 known producers today. Further down the supply chain, the companies that manufacture solar panels are facing a similarly disastrous near-term future. The spot price of solar panels has tumbled 40% this year. Q-Cells, once the world’s biggest maker of solar cells, has said it’s open to a takeover.

And yet—this looks like the solar winter that comes before the solar spring. The drop in the price of polysilicon—which makes up about 25% of the cost of a finished solar panel—intense price competition among solar companies, and improving efficiencies in manufacturing and in the efficiency with which solar panels convert sunlight to electricity all say that the elusive goal of price parity between solar-generated electricity and electricity from coal, oil, natural gas, and uranium is in sight without the need for a high-powered telescope. Exactly when is a matter of intense argument and speculation, but in some place—those with lots of sunshine and higher costs for electricity from other sources—price parity could come as early as 2015.

Installed global solar capacity was 36 gigawatts at the end of 2010, according to the U.S. Energy Information Agency. By the end of 2020 global capacity will be 20 to 40 times that level—or 720 to 1,440 gigawatts, consultants McKinsey &Co project. Investment banker Piper Jaffray expects growth to a global installed capacity of 800 gigawatts by 2020.

Whoever gets through this winter will make a lot of money come solar spring.

So how do you want to play this as an investor? Read more

Sell Ormat Technologies (ORA)

It’s increasingly hard to figure out how much risk there is in owning shares of Ormat Technologies (ORA). There’s no doubt in my mind that the company is the best global pure play on the expansion of power production from geothermal sources.

But how much potential return do I need to see before the risks in that pure play are worth taking?

Especially since the risks in the stock keep rising.

Government price subsidies and financing programs for geothermal power are shakier than they were a year ago. (And they were pretty shaky back then too.) The financial markets haven’t become projects a lot more forgiving for projects like these. National goals for alternative energy production remain on the books but they aren’t exactly top of mind for global leaders still fighting off a recession. And that has all shifted more of the risk in exploring for, developing, and financing geothermal plants to Ormat. The company is getting an increasing large percentage of its revenue from building and operating geothermal plants rather than from the less risky manufacturing of geothermal equipment for sale to other power producers.

The problem for an investor is summed up very nicely in Wall Street’s consensus earnings estimates for 2010 and 2011. This year Wall Street says that the company will earn 41 cents a share. That’s a huge drop from $1.35 per share in 2009. And it makes a stock that trades for roughly $30 a share rather pricy. That’s a price-to-earnings ratio of 71 on projected 2010 earnings.

What really supports that price is the consensus estimate of $1.02 for 2011.

I’ve got two questions, though, about that estimate. First, how likely is it? Second, if that’s a rebound 150% growth rate off the depressed 2010 earnings, then what’s the company’s earnings growth after that bounce? Wall Street projects a five-year average growth rate of 29% for the next five years—which, of course, includes that 150% bounce in 2011.

I just don’t like the odds that I’m seeing here. Counting on a company facing as many risk factors—and all of them growing—as Ormat is to achieve a 150% growth rate when margins are under pressure and capital costs are uncertain just doesn’t seem attractive

In my calculations of a one-year target price I just can’t get much above $33 a share. That’s just 10% higher from here. (And from recent action the stock doesn’t seem to respond to a rally in the rest of the market with a move of it own so I don’t see the upside to waiting for a rally that will lift all boats.)

As of September 28, 2010 I’m selling Ormat Technologies out of Jubak’s Picks with a 29% loss since I added it to the portfolio on November 17, 2009.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

Update Maxwell Technologies (MXWL)

2010 marks a very important transition for Maxwell Technologies (MXWL), one that unfortunately, won’t make life easy for the company given the state of the auto and alternative energy industries. You can see the results of that transition in the company’s somewhat disappointing earnings for the first quarter of 2010.

Maxwell really runs two businesses.

One business is composed of the older microelectronics (radiation hardened components and computers for use in space) and transmission (capacitors used in high-voltage electrical transmission lines) product lines. Back in 2006 these product lines accounted for two-thirds of the company’s sales.

The other business is composed of the company’s newer ultracapacitor BOOSTCap products. These fast-charge, fast-discharge energy storage devices are gradually winning design competitions and getting built into products from auto, truck, and bus electrical systems to wind turbines. In the first quarter of 2010 sales from the BOOSTCAP business finally exceeded sales from the microelectronics and transmission business. And, according to estimates from Needham & Co., BOOSTCap will account for 55% of sales in 2010.

In the long-term this trend is exactly what investors want to see. Needham estimates that BOOSTCap revenues will grow by 52% from 2010 to 2011.

In the short-term, however, this trend is a problem for Maxwell Technologies for two reasons. Read more

You knew this was coming once BP (BP) admitted that the top kill effort to stop the flow of oil in the Gulf of Mexico had failed.

On Tuesday June 1 U.S. Attorney General announced that the Justice Department has opened a civil and criminal investigation into BP and other companies involved in the Deepwater Horizon disaster. Holder’s announcement came just hours after President Barack Obama promised in a 10-minute White House address to prosecute any parties found to have broken the law.

What comes next? More politicians who can tell which way the wind is blowing and feel that they need to do something before the storm blows them away. I think the need to be seen doing something might even result in action in Washington to move the country away, even if only so slightly, from its dependence on oil.

Stranger things have happened when politicians are running scared.

There’s no quick end in sight to the flow into the Gulf. BP doesn’t have a real solution—the oil company is next going to try a new version of the containment dome that failed to work before the top kill failed to work. And the truth is that the federal government is completely dependent on the oil company and its service and drilling contractors for any equipment that might stop the flow.

But that hasn’t stopped the buildup of political pressure on the Obama administration and other elected officials in Washington to do something—or at least to sound like it is doing something. So an angry President Obama, sounding like a prosecutor himself, said “My solemn pledge is that we will bring those responsible to justice.”

The potential consequences for BP are huge. Read more