On April 17, Evergreen Solar (ESLR – Last trade $10.72) announced a polysilicon supply contract with Korean company DC Chemical. Some analysts have been skeptical about the true costs and benefits of the supply contract and, with earnings from the supply contract not expected to have an impact until 2009, impatient traders have dumped the stock. ESLR's stock price plummeted from a high of $13.21 on April 17 to a low of $10.26 on April 23. Is this a time for bargain hunters to look at ESLR?
Under the terms of the contract, ESLR would receive polysilicon for 1GW worth of modules through 2014, with shipment beginning at the end of 2008. DC Chemical was able to successfully negotiate a $130M prepayment in the form of restricted stock, and as a result now own approximately 14% of ESLR. The consensus among the analyst community is that the contract provides polysilicon at prices that should yield at least 30% gross margin for ESLR, one of the company's stated goals.
In addition to the supply pact, ESLR also announced plans to build a new 70MW manufacturing facility in Massachusetts, which should be operational by the end of 2008. In order to fund the facility, ESLR will probably issue equity towards the end of the year, which will further dilute shareholdings.
In a previous note on ESLR, I discussed chatter that Q-Cells (QCE.DE – Last trade €53.13) might acquire ESLR. I pointed out that ESLR seems more focused on the EverQ project, a joint venture with Q-Cells, than their own 100% owned Marlboro plant. The solar market is entering a period of intense competition in the next few years, so you’ve either got to get bought or get bigger. I still believe that ESLR is a company that is not going to get bought, and that is why I am optimistic about their plans to expand independently of the EverQ joint venture.
By expanding operations independently of EverQ, ESLR is showing that it is serious about becoming a major player in the solar market. This might be good news, but not good enough to change my view on the stock.
My biggest problem with ESLR is that its trump card technology – the ability to use less polysilicon to make solar cells – could become less valuable if the polysilicon supply problems are eventually solved. To read more about the polysilicon supply problems, click here and here. I don't see many catalysts that will drive upside for the share price going forward, and it wouldn't surprise me if most of the news has already been priced into the stock.
I would never have touched ESLR as long as its value was being tied solely to the EverQ joint venture. With the new developments I might consider buying, but why would I buy ESLR when there are so many better options to gain exposure to the solar story?
When investing in an emerging technology like solar, it makes sense to get into stable companies with ample cash and profitable operations. It still doesn't make sense to invest into ESLR, a company running at a loss, when their technology is expected to depreciate once short-term supply imbalances are adjusted.
Disclaimer: I do not own any stocks mentioned above. I do not give investment advice. Do your own research. Do not rely on anything in this blog to make investment decisions. Consult an investment professional familiar with your specific financial situation before buying or selling any security