5/29/08

Bought Evergreen Solar

I bought about half of my intended position of Evergreen Solar (ESLR) today for $10.40 a share. If the stock falls to around $8.60, I'll buy the other half.

There are so many solar stocks, and analysts say you shouldn't buy solar shares right now. So why ESLR?

1. It's least affected by potential changes to Germany's laws (the reason most solar stocks are down today), which currently aid the solar sector.

2. ESLR uses String Ribon silicon processing, allowing it to use around 30% less silicon (five less grams per watt) than its competitors in manufacturing photovoltaic modules. Its newer quad ribbon wafer technology should reduce costs even more.

3. ESLR has sales agreements with several different companies worth around $1 billion.

4. Last week, it announced two big contracts, worth about $1 billion, which represents about 35% of its new plant's capacity.

5. ESLR has secured all of its expected silicon supply through 2012.

6. Sales are projected to grow by over 200% next year.

7. Earnings per share estimates range from $0.18 to $0.80 for next year. Taking the low end, I bought the stock at around 58 times projected 2009 earnings. Its projected earnings growth, however, from -0.15 (this year's EPS) to 0.18 is over 100%. If ESLR earns the concensus $0.46 a share for 2009, I bought it for 22.6 times its 2009 earnings. I'd say that's a bargain.

There are big risks, though:

1. If the prices for other sources of energy, like oil, natural gas, ethanol, nuclear, etc fall, demand for solar cells could fall as well. Government subsidies could be reduced or eliminated for the same reason. Less demand and less subsidies isn't a good combination.

2. Technological innovation in the solar energy industry is extremely fast. Just because ESLR has a cost advantage right now, it does mean it will in the future.

3. Related to lack of long lasting competitive advantage, the solar industry has pretty much no barriers to entry. This can be seen from the many new solar companies coming into existence. They won't all survive, and it's hard to tell whether ESLR will be a winner.

4. ESLR needs financing to fuel its expansion. This may dilute share value. It may also force the company to take on more debt.

5. Production delays (triggered by factors such as something going wrong at the plant or with the silicon supplier, etc) would almost certainly harm the share price and earnings.

6. The stock is extremely volatile: Yesterday it was up around 7%. Today I bought when it was down around 7%. Last week it was trading around $9 (I regret being too fearful to buy it then). In March it traded around $7.50. Its 52 week high is $18.85.

Still, I think in the next couple of years the stock will break new highs. (I don't know if I'll hold it that long. I find that I'm always tempted to sell when my investment is 20% higher, and often regret it when I don't). But, as noted, I only bought half of my intended position to lower my risk.

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