Sell First Solar (FSLR) out of my long-term Jubak Picks 50 portfolio

I dropped First Solar (FLSR) from my Jubak Picks 50 long-term portfolio  http://jubakpicks.com/jubak-picks-50/ on Friday, January 13 (See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ on January 13 for all the changes to the portfolio.)

Why?  Because the kind of good news that First Solar announced on December 15 simply doesn’t count in the current solar energy market.

That day, in a conference call, First Solar announced new targets for manufacturing costs and solar panel efficiency that would put the company significantly in front of solar cell manufacturers that use silicon-based technology. Costs would drop, the maker of thin-film panels projected, to 50 cents to 54 cents a watt by 2015, from an earlier target of 52 cents to 63 cents a watt, and the efficiency at which the company’s panels convert sunlight to electricity would climb to 14.5% to 15% from an earlier target of 13.5% to 14.5%. According to First Solar that would mean that silicon solar companies would need to hit a cost target of 57 cents a watt to be competitive in 2015. Currently, again according to First Solar, silicon solar companies are guiding to 72 cents a watt by 2015.

Great news for First Solar, right?

Except that in the current market for solar power I’m afraid it just doesn’t matter. Read more

Last year—on January 18, 2011 to be precise—I replaced Sun Tech Power Holdings (STP) with Yingli Green Energy Holdings (YGE) in my long-term Jubak Picks 50 portfolio. (See my post on http://jubakpicks.com/2011/01/18/6215/ for last year’s revisions. The revisions for 2012 will be coming next week. My apologies for messy bookkeeping. While I deleted Sun tech from the portfolio I didn’t add Yingli. Today’s blurb fixes that error.)

The best that can be said for that switch is that Yingli Green Energy was slightly less terrible a pick in 2011 than Sun Tech Power. Shares of Yingli Green Energy were down 61.5% for 2011 while shares of Sun Tech Power were down 72.4%.

I replaced Sun Tech Power with Yingli Green Energy because Yingli had a significantly lower cost structure and I figured that would be important in what looked like a tough year for solar power companies—even in China.

But 2011 didn’t turn out to be just a tough year—it turned out of the part of the worst downturn ever for the solar industry. 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

Doing some catch up on this stock. I dropped Suntech Power Holdings (STP) from the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this first opportunity I’ve had the time to explain why in detail or to actually remove it from the portfolio. I’m working on explaining the other sells and buys from that group over the next week or so. (See the January 18 post at http://jubakam.com/2011/01/10-stocks-for-10-years-my-annual-update-to-the-long-term-jubak-picks-50-portfolio/ )

What worries me about Suntech Power Holdings (STP) in the long-term?

A new generation of investment in solar manufacturing that is likely to put Suntech even further behind on cost just when the company thinks it has caught up to competitors

At the moment Suntech has a cost problem. Read more

Yingli Green Energy (YGE)

While the United State has dithered over how, when, and whether to invest in the energy industries of the future, solar cells and panels have become a commodity business. And that gives a huge edge to China’s solar manufacturers with their significantly lower labor costs. Morningstar estimates that it costs 20% to 30% less to produce a solar panel using traditional solar panel technology in China than in Europe. (Notice, please, the word “traditional.” Thin-film solar technologies are an entirely different ballgame.)

That has led to a global price war at a time of an uncertain level of demand for solar panels as companies try to grab or maintain market share. For investors, price wars over market share always present the danger that competitors will cut their prices so far that they sacrifice profit margins in an effort to grow market share. That’s not a formula that investors want to buy into.

So the best news from China’s Yingli Green Energy Holding’s (YGE) third quarter earnings report Friday, November 19, was that gross margin stayed extraordinarily healthy at 33.3%. Gross margin beat the company’s guidance for 31% to 32% for the quarter. Gross margin in the second quarter of 2010 was 33.5% and in the third quarter of 2009 22.5%. Operating margin came in at 22.4%.

Guidance for the first half of 2011 was not as downbeat as that from other solar panel producers—that’s either a reflection of Yingli’s strong market position or a bit of wishful thinking. (My suspicion is some of both.) The company forecast that average selling prices would be flat in the first half of 2011 and show a slight decline in quarters three and four. It would surprise me if prices were that strong in 2011. Germany, the world’s largest market for solar panels because of generous government support, has said it will cut subsidies by 13%. Spain and the United States, other big solar markets, are under extreme budget pressure. All this as the global solar industry, including Chinese solar producers, is expanding capacity.

This is where a second Yingli advantage comes into play. Read more