Solar Grid Parity? - Interview With Gordon Johnson - Axiom Capital - Zing Talk (FSLR, STP, TSL)

Welcome to Zing Talk, where Benzinga brings you the biggest names and brightest minds from Silicon Valley to New York City. Today our guest is Gordon Johnson, analyst at Axiom Capital.

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Could you start off by telling us a little bit about yourself and what you do at Axiom Capital?

Sure, I’m heading up the alternative research at Axiom Capital. What I do here is look at solar stocks. We’ve initiated coverage on three solar stocks, First Solar FSLR, Trina Solar TSL, and Suntech STP. We’re looking to broaden our coverage of the solar space as well as other alternatives in the energy spaces.

How did you get involved in the solar energy sector?

Initially I was covering semiconductors at a prior firm, Lehman Brothers, and it was a natural fit given that solar was back then, was seen as similar to the different chip technologies that we were covering at the time. Also we had a strong solar practice at Lehman Brothers so I’ve been looking at the space since 2006. Actually I’ve seen the ups and the downs of the sector.

So how do you feel solar sector stocks will perform in the near and mid-term? Are they a reasonable investment in the current economic climate?

I dont think so. I think that solar stocks are over valued and that there is a broad misconception among the buy side that there is going to be continued growth in solar stocks. The French government came out yesterday and unexpectedly announced a cut in its incentive for solar. The reason why we think that the market is incorrectly modeling demand for solar growth is because demand for solar is contingent on government subsidies.

If you take away the government subsidies there is no demand for solar because its probably 5-10x more expensive than fossil fuel based electricity which you get from your socket. So without the government incentive to do solar you would be paying 5-10x more for your solar power as a consumer. You need the government to enable incentives. The problem is these incentives dissuade these solar companies from investing significantly in R&D because the incentives are basically handouts. When you have a government incentive driving an industry, the goal is to produce as much as possible, not innovate as much as possible. You can see that with respect to R&D as a percent of revenue for these solar companies versus the semi companies. The solar companies are significantly lower on an R&D as a percent of revenue basis versus the semi companies. It’s kind of like a catch 22 and negative catch 22 situation where the incentives are incentivizing the solar companies not to to invest in R&D.

So there is personally no companies that you would recommend in the solar sector?

Not necessarily. I think over the near team the solar cap equipment companies. The guys making the equipment for the solar companies are going to do quite well. The reason that is, for the most part a lot of these solar companies use sell-side analysts notes and projections to plan for what they think the market is going to grow to and out periods. 95% of the sell-side is projecting growth and perpetuity for the solar market. No situations where growth slows or is negative. What happens is you have a massive capacity being ramped in China because China is a low cost region for solar. Basically Chinese companies have taken over the solar industry because its a commodity product and as a result of that, the guy with the lowest cost wins. So if you produce in China, you effectively win. That’s what is happening right now. A lot of the Chinese companies are ramping significant amounts of volume and there’s a lot of new guys coming into the fold as well as known manufacturing bellweathers such as Samsung and TSMC who recently said they’re gonna do some solar as well. The reason why I say that the solar cap equipment companies are going to do well is because with these aggressive capacity ramps you have significant amounts of equipment that are gonna need to be purchased. As a result of that I think the companies that are providing the equipment are pretty well positioned to see revenue growth, at least over the near term.

So how do you mean that the semiconductors were similar to solar stocks?

Not necessarily similar to solar stocks but the manufacturing process associated in manufacturing a solar cell involves the manufacture of poly-silicon and poly-silicon is the key input used to make semi and solar wafers. From a semi wafers you can make semiconductor chips for microprocessors and different kinds of memory technology. There is also solar wafers in which you use to make the solar cells. The difference is the semi wafers need to be more efficient due to the technological properties of a semiconductor chip where as the solar poly-silicon is less pure as the requirements for solar cells, are not as robust as the requirements for semiconductor chips.

So the manufacturing process is similar but not exactly the same?

Exactly! The manufacturing process is virtually the same but for solar grade poly-silicon to get the efficiency you need out of solar cells you need 99 and 6-7/9 poly. Where as with semiconductor technology you need 99-10/9 poly which means it needs to be a much purer form and thus its more costly to make the poly-silicon.

You say that you feel solar energy is much more expensive than regular fossil fuel energy but its a rapidly changing technology. Do you think there are any breakthroughs that might shift the market in a meaningful way or do you think that all sorts of investment is hindered by the government intervention?

We haven't seen anything of late, that I think you need to get efficiencies of significantly. The problem is that a lot of the solar industry pundits talk about grid parity and what that idea is, is when solar is the same cost as fossil fuel based electricity. A lot of people say that will happen in 2012 etc. The problem with that argument is that when you talk about grid parity with respect to solar, they’re comparing production costs of solar to the retail costs of fossil fuel based electricity. So when you’re comparing production to retail costs its not in like for like comparison. What I mean by that is the production costs for solar to get to retail, you need to factor in the margin for the guy who is selling the solar panels.

You need to factor in the transmission infrastructure which is almost as expensive as solar. We’re talking about millions if not billions of dollars to build out the transmission infrastructure necessary to get solar to where it needs to be. We’re talking about the cost of the natural gas turbine that gonna need to run when the solar power isn't working. Solar doesn’t work day and night. So for every solar plant there is a natural gas turbine or some type of turbine driven plant that sits next to the solar plant so when the solar plant goes down you can have additional forms of energy.

When people talk about grid parity its not a fair comparison. Again, we’re talking about production costs vs. retail costs. When you factor in the added cost associated with truly having an economy that is fully dependent on solar, grid parity is tens if not hundreds of years away. To get there you need much more efficient solar panels. People are talking about 25% or 26% efficiency. I think we need to see leaps and bounds like 50% 60% 70% efficient panels to really get to an area where we’re talking about grid parity.

Alright, now that we’ve got the tough ones out of the way, here are a few less hard-hitting questions. What was your first, and what was your worst job?

My first job was working a White Castle and that was my worst job. Not that White Castle is a bad organization but I just remember it being extremely tedious and extremely tough every day I was there. My mother was a very strong woman and believed in hard work and at the time I didn't have a car. I was working at White Castle to save up $1000 to buy my first car. I had to walk about two miles to work everyday and while I was in high school. It was not a fun time. Most of my buddies had cars. My parents could have gotten me a car but they wanted me to get it myself. That was my first and worst job.

What do you like to do outside of your work with Axiom Capital?

I love to workout. I love to stay abreast of not only whats going on in the solar market but also other markets. I like to study macroeconomics and things of that nature. I love to play basketball and spend time with friends and family.

What is your favorite restaurant you’ve ever been to?

My favorite restaurant is, I gotta say it’s not my favorite restaurant I’ve been to today but when I was a kid I was always amazed by the pizzas at the Olive Garden. My birthday from age 8-17 was spent at the Olive Garden eating the pizza. The point is we didn’t get to go out to eat that much. My parents wanted to teach me the art of hard work and the value of money. So when we did go out to eat I cherished it. The pizzas at Olive Garden always struck me as delicious

Did you have a favorite pizza?

Of course! Pepperoni with tomato and onion.

Okay, this last one is Benzinga’s trademark question: What was the best, and what was the worst investment decision you’ve ever made?

I’ll start off with the worst. I just bought a condo in New York City and I’m very afraid about the housing market. Particularly if we have a hyper-inflationary type environment which I know a lot of people think is ridiculous. But given some of the Fed actions, should there be a run on treasury bonds we could see something like that happen. So I’m thinking that could end up being my worst investment.

The best investment I ever made wasn’t an investment from a financial perspective or monetary perspective. My little brother Cameron, I spent a lot of time with him throughout his early childhood and into his high school years, he’s really developed quite well into a young man and I’m very proud of that.