Description

I recommend shorting Meyer Burger.  I think the stock is worth in the neighborhood of CHF100.  I am very bearish on the solar industry.  Meyer sells capital equipment to the solar industry, so it's my belief that Meyer's results will get very ugly and stay ugly for some time while the industry works through a potentially multi-year excess capacity situation.  Meyer hasn't printed an ugly interim report yet, so I don't think bulls fully appreciate the looming ugliness.

The Industry

When I wrote up Suntech in May I laid out my thesis for why I thought the solar industry was in a massive oversupply position.  Below is a table that tracks the last six quarters of revenue, receivables and inventory for the biggest five module manufacturers that have reported Q2, which together make up 52% of 2009E shipments (as estimated by Credit Suisse).

                        Q209   Q109   Q408   Q308   Q208   Q108

Revenue         1,203   1,023   1,513   1,680   1,342   999

Receivables    988      802      594      581      546      437

DSO                75        71        36        31        37        40

Inventory         984      980      794      736      661      515

So we can see that 1H reported revenue is only down 5%, while ASPs are down about 25%, so we're lead to believe that volume is up 20%ish.  The balance sheet tells a different story.  Q2 receivables ballooned $186 million sequentially in order to produce a $180 million sequential increase in revenue.  In Q1 earnings season, analysts let out a collective sigh of relief that we'd reached the bottom for shipments, now we see that this was made possible only through accounting games.  There is no sequential improvement in Q2 sell-through if we adjust for channel stuffing.  If we say 35 days is a normalized level of DSO, then we can strip out $400m from 1H revenue, producing a 24% YOY decline from 1H '08, suggesting that volume was flattish.  This jives with my prediction in the Suntech writeup that volumes would be flat at best versus 2008.  2H will be a much harder compare as you can see in the table, unless there's a sequential improvement in Q3 '09.  It's my belief that the module manufacturers are cramming inventory down to the distributors with extremely generous credit terms in order to meet revenue estimates.

Even with all the channel stuffing, inventory is building at the manufacturer level as well.  It's impossible for prices to bottom until production drops below demand and excess inventory at the distributor and manufacturer level is purged.  Also keep in mind that those inventories have been heavily written-down due to ASP declines.  Units in inventory are obviously up more than the reported dollar numbers.

On a macro level, I would also point out trends in non-residential construction spending, which showed the first YOY decline in Q2, and has yet to really break.  It seems pretty clear to me that commercial construction will implode given the trend in vacancies.  In the last recession vacancies peaked at nearly 15%, 28 months after the recession ended.  In 1992 vacancies peaked at 18%, 21 months after the recession ended.  I think it's reasonable to assume that commercial construction activity will lag vacancies.  Two-thirds of solar installations are on commercial buildings.  Note that residential construction has declined over 60% from peak to today, and it's still in an excess inventory situation.

                                                            Q209   Q109   Q408   Q308   Q208   Q108

Non-Residential Construction             2,134   2,100   2,151   2,164   2,147   2,097

YOY                                                    -1%      0%       4%       8%       13%     16%

Office Vacancies                                            12.3%  11.6%  10.9%  10.7%  10.4%

Last week iSuppli estimated that 2009 industry shipments might be 7.5GW, but installations might only be 3.9GW.  Meanwhile, industry capacity stands at about 17GW.  If installations have to quadruple, it'll be a long time before solar capital spending rebounds.

Comparables

                     SOLR  Manz   Meyer

Market Cap     734      208      600

Cash              160      50        30

EV                  574      158      570

2008 EBIT       144      33        58

EV/EBIT          4.0x     4.8x     9.8x

So Meyer appears over-valued relative to its peers.  On an absolute basis, 14x peak after-tax is high but not spectacularly so, but I'm of the opinion that 2008 will be the peak in solar manufacturing capacity additions for a number of years.  I think it should probably trade at 14x mid-cycle earnings, which are probably somewhere between 2008 levels and zero.  Not only do we have to achieve some reasonable utilization level, but we'll have to move to a supply constraint situation before capacity begins to grow again.  So I think a solar capital spending recovery will lag solar manufacturing substantially.  Only 5% of revenue is from recurring consumables sales.

A recent conversation with an industry consultant confirmed this thesis.  Despite being the most bullish solar industry consultant I've found, he believes that capacity additions will be depressed for a long time.  When asked to ballpark how much Meyer's revenue would be down in 2009 he guessed 50%.  When asked how 2010 orders would compare with 2009 for Meyer, he said it'd be worse.  Completion of many projects that began at the peak in 2008 fell into 2009. 

Also note that GT Solar's Q2 revenue was 65% below the Q4 '08 peak.  Manz reported Q2 revenue 85% below the Q4 '08 peak.  Meyer reports 1H on 9/3.  It's possible that the 1H P&L might not implode, as most companies in the space have resorted to using their balance sheet to meet earnings estimates.  I do believe that results will eventually get ugly however.

Catalyst

-1H earnings report on 9/3

-Continued bad solar customer news