Axiom Capital's Gordon Johnson Discusses Solar Stocks, U.S. Steel
Gordon Johnson is the Managing Director and Senior Equity Research Analyst at Axiom Capital Management. He covers the clean technology sector, which includes companies in sectors such as clean coal, solar and fuel cell. He was recently ranked by Bloomberg among the top stock pickers in the solar space.
Johnson noted that First Solar failed to live up to investor expectations with a slashing of its 2014 EPS guidance, but 2015 and 2016 guidance proved to be enough to drive shares higher. He isn't excited about the company's prospects moving forward.
“I think there are major issues with this company,” said Johnson. “They are guiding in 2017 there efficiency to be up to 17 percent from roughly 13 percent now. If you go four years back, the company was at 12 percent efficiency and they have a new CTO, so somehow they are going to make leap and bounds gains.”
Johnson also noted that the company is guiding for their costs to be $0.40 a watt, which looks unfavorably to Sun Edison's (NYSE: SUNE), whose guidance for technology will have 21 percent efficiency at $0.40 a watt by 2016.
“Investors are believing anything the company says, and forgetting about what their competitors are saying who are killing them from a competitive standpoint,” Johnson argued. “People are getting ahead of themselves in this stock, I think people are giving them credit for something that hasn't been proven.”
Johnson believes there is “significant” downside for the stock and noted that the company could be hiding behind its “safe harbor comment” saying that the company doesn't have to hit its target. He added that none of their competitors have been as direct with their operational targets as First Solar is. How significant? Johnson has a $29 price target on the stock by using a 2015 EBIT value with a 6.5 time multiple (which includes credit for their cash).
Johnson is also not impressed with SolarCity (NASDAQ: SCTY), a company that just “put solar panels on roofs.”
SolarCity is another company that investors are getting excited with the idea of a solar yield co that creates a lower cost of capital for a solar project. To achieve this lower cost of capital, however, a company would need to spend around $1 billion in projects and 500MW of projects that are generating cash flow.
Sun Edison is the only company that has an established pure-play solar yield co.
As for the other names in the solar group, “all they have to do is say ‘yield co' and the stock is up 10 percent.”
JA Solar (NASDAQ: JASO) is a stock that Johnson prefers based on its superior balance sheet relative to its Chinese peers. Additionally, JA Solar has been underperforming its peers including Yingli Green Energy (NYSE: YGE) who is losing money, while JA Solar is profitable.
JA Solar is now in a position to benefit from its operations in Japan, which could maintain margins in the mid-teens level.
“The stock has been a massive under-performer of the rest of the solar stock, but fundamentally it is probably the best,” said Johnson, before adding that shares could play “catch-up” and move closer to his Buy-rated $16 price target.
Johnson further argued that there are hundreds of years' worth of natural gas; with fracking, there is even more. Nuclear energy is also a renewable source that is easily accessible.
“Solar power cannot replace natural gas,” said Johnson, debunking the claim that solar is the "future" of energy, especially when considering that solar power reliance poses issues when the sun is down.
Moving away from the always interesting solar space, Johnson was asked to comment on his rating on U.S. Steel (NYSE: X).
According to Johnson, shares have risen from $24 to $28 because HRC (hot rolled coil) spot prices have gone from $680 to $620. Steel mills have come out and announced price hikes in their products that investors find attractive, despite the fact that several of U.S. Steel's competitors have missed their earnings numbers.
“People don't care about missing numbers,” Johnson claimed. “These price hike announcements from U.S. steel mills, as well as companies missing numbers and people buying the dips is why the stock is higher.”
Johnson thinks that U.S. steel will miss its quarterly estimates for at least the next two quarters and added that it is cheaper to buy steel from international sources than it is from a U.S. maker.
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