Evergreen Solar, Inc. (ESLR)

ESLR is probably the most overlooked (and possibly underrated) solar company in the industry. There are several reasons to believe this company could bring in very significant earnings a few years down the road and I believe this is a value below $8! Despite that, it's now selling in the $3 to $4 range, which means the level of risk is extremely diminished. So what are the reasons to like ESLR?

First off, the book value of equity is around $4.2/share and the stock is actually selling for less than that! They have a working capital ratio of 2.6 and even if we discount their "restricted cash", they have a quick ratio of 1.6. Even if I discount their slightly negative cash flows from operations, you still end up with a 1.24 ratio. Total debt-to-value is 30%, so they look to be in fairly solid financial shape.

They lost 8 cents per share the previous quarter and broke even the quarter before that. This seems unimpressive, but ignores the nature of their industry and the own business operations. Their margins have improved as they increased production and as they have found ways to increase efficiencies.

At the time of their annual report in 2008 and for the results of their two most recent quarterlies, they had a production capacity of 15 MW. However, they are slated to ramp up capacity to 80 MW over the latter part of this year. By late 2009, they are hoping to further increase capacity to 160 MW. While it's possible that the latter development might have to be delayed due to the current credit crisis, even the current upgrade should help increase their operating margins. When I ran a forecast back in August, I estimated that they could earn around 15-20 cents per share each quarter given the current market. That might decline in the near-term due to the economic events, but the potential is there and I think it will eventually be realized.

My forecasts look even better once they fully ramp up the 160 MW in Devins, MA. At that point, they could earn somewhere between 40 - 50 cents per share based on fairly conservative cost estimations (mind you --- revenues might drop in the current climate). There are further plans to expand operations in the future, potentially up to around 850 MW --- if those plans are successful and come to fruition, there's potential to make around $1.75 - $2 per share in each quarter (or about $7-8 annually). Trading at a P/E of 10, then, this stock would seem to have an upside around $80. But don't get too caught up on that; even if the long-term potential is never reached, the outlook is fairly good simply based on their current production plans.

While the forecasts look good and ESLR's financial position looks healthy, there's actually a much greater reason I like this company. There are two predominant forces in the solar industry right now --- on one side, you have the thin-film manufacturers. The advantage for them is that they are able to produce at a much cheaper price. On the other end, we have the more tradition silicon-based manufacturers. The advantage on that front is that the use of silicon in solar products has been much more thoroughly studied. The one big uncertainty in this situation to me is whether or not the thin-film and "low cost" manufacturers' products will hold up in the long-term. That might not be an issue now, but it may very well be 5-10 years down the road. Since the market has put a premium on the low-cost producers, you might be able to find a high-quality crystalline silicon that will be much stronger in the long-run at a lower price. Or in essence, I'm suggesting that people are looking for the Wal-Marts of solar companies when they should be looking for the Hondas, as a solar module is a very big investment.

What I like about ESLR is that they are a crystalline silicon manufacturer, but they have a unique technology called "String Ribbon" that helps reduce the consumption of silicon in their process. Long-term I think this could be a big advantage of their competitors. Moreover, my own research of the company makes me feel more comfortable that this isn't some fly-by-night operation. I think they are very committed to the quality of their products; more so than companies like FSLR and most of the Chinese manufacturers.

On the downside, some of the analysts have recently downgraded the entire solar sector due to "oversupply concerns". There might be some validity to that and there might not. The US recently extended and expanded the solar tax credits. Even if the economy sucks, I think people will still continue to invest in alternative energies given the current environment. There's also the fact that while revenues might drop a bit in the next year, crystalline silicon prices are expected to drop in 2009 as well (as the supply crunch is eased) and that might offset any potential revenue decline.

In sum, I think this is a very solid company and a potential high-reward stock if you plan to stick with it for the long-term (2 - 5 years at the least). If you're buying in right now, you're actually getting it under book value which is about as good as it's going to get. There are definitely a lot of uncertainties in the solar industry not present in other industries, which makes all solar stocks a bit riskier than the general market, but given the potential reward, I think this is well worth the bet for someone with the risk tolerance.


Disclosure: I am long on ESLR