From The Average Joe Investor
Suntech (NYSE: STP) has been a fun ride over the last year since it came public and there’s still likely a lot more to come. For those that are really excited about the solar PV cell business, or the growth in China, or both together Goldman’s upcoming IPO for Solarfun Power Holdings (Nasdaq: SOLF) could be of interest.
The company’s tagline in the picture leading off the prospectus is straight-forward enough: "Make the Earth Cleaner." I haven’t really dug much into Solarfun’s technology, and probably won’t, but they’re along the same lines as Suntech – selling PV cells and modules. Financial performance has been impressive so far with revenue growing from $21m in 2005 (their first full year of operation) to $49m in the first nine months of this year. The company is already profitable and gross margins of 31% and operating margins of 20% are certainly respectable.
I’m taking a pass on this one though. There are a couple reasons:
1) I’m not typically a high-multiple growth/story stock investor. Typically I like to stick to value-oriented picks where I can wrap my head around the numbers. In the case of Suntech, it was just hearing that there was a Chinese solar cell company coming public that was profitable. It was just good/lucky timing (sometimes luck is better).
2) This is a really young company. Suntech was young for sure when it came public, but it had a few years behind it at the time, and had nine months and $137m in revenue behind it for 2005. Solarfun was just started in August 2004 – it didn’t produce any revenue for fiscal 2004 – and it has about a 1/3 of the revenue that Suntech did when it came public this time last year.
3) Pricey, pricey. Suntech was pricey at the IPO – I think if you assumed moderate sequential EPS growth for Q4 of 2005 it was pricing at 60x 2005 EPS. If you assume the same moderate sequential growth for Solarfun, you’re looking at a 2006 EPS multiple still well over 100. If it double EPS in 2007 you’ve still got a forward multiple in the nosebleed section – assuming, of course that the price doesn’t go up any more.
4) No more secrets. The secret is out on solar and, even more so, the secret is out on China. Suntech is more than double its IPO price right now, what more do you need to get excited about another Suntech-esque offering? There’s a pretty high probability that plenty of people will be excited and that the first day of trading will see Solarfun have some real fun with the markets.
I think at the end of the day the company will probably do really well. Though it’s extremely young that may just mean that it has more years ahead of sky-high growth. Investors that can actually get the stock at the offering price will probably do pretty well too. Who knows, maybe even retail investors that get in early enough will do pretty well. I’m still staying on the sidelines. Once something gets too exciting, it just smells too much of mispricing to me.
Oh well, curmudgeon for now.
-AvgJoe
http://theaveragejoeinvestor.blogspot.com/
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