Making sense of solar

About 6 weeks ago I was referred to some solar companies: TSL and STP among others. The common denominator being that they are Chinese solar companies. Until now I've been watching SPWR. They also suggested that I look at WFR.

Solar technology is pretty basic. It leverages features of metals to create electron shedding sandwiches under sunlight. Traditional manufacturing uses semiconductor manufacturing processes and silicon. Some newer technologies bypass the silicon and glass substrate (aka thin film).

The manufacturing process matters because all manufacturing follows simple rules of mass production: spread the fixed costs across high volumes. Could be tires, could be paper clips. The secret is high volumes and fixed costs.

With solar cells, volumes have not been high and fixed costs (namely silicon wafers) have risen. The result is that the technology matters much less than the manufacturing. (Ok, to be really fair, technology can change manufacturing costs. That thin film technology I mentioned could reduce manufacturing costs, but it isn't live yet. So we'll stick to traditional manufacturing for now.)

VOLUME
Efforts to boost solar usage have been sporadic. A little corporate, a little military, a little government. And there are basic hurdles with personal solar systems. Solar cells on roofs are unattractive and many cities actually have ordinances banning them outright or banning them because of how they look.

FIXED COSTS
Silicon wafers are in short supply. That won't be changing soon, but it makes WFR (a leading silicon wafer provider) an attractive buy.

I haven't gone for solar because I like growth sectors and there hasn't seemed to be much growth here. Consider a leading US company SPWR:
P/E 145
Forecasted Annual Earnings growth ~100%

Looks great except that, in fact, earnings are flattening out:
Sept '06 $0.16
Dec '06 $0.18
Mar '07 est $0.19
Jun '07 est $0.20

Flat growth is why SPWR hsa not been a pick of mine.

Also, the numbers are very strange. With 22 analysts, the annual forecasted sales range is $411M~$677M. That's a broad range. It feels like a lot of guessing is going on. Which makes the numbers a little suspect.

In fact, the numbers keep getting suspect. Tthe 2007 annual forecast is for $0.97. That means the 1H is $0.39 but 2H estimates are $0.58, a sudden 40% surge after 4 flat quarters.

Maybe there is something cyclical or some high expectations of forward costs. I don't know. Or maybe there is a lot of upside surprise potential.
In any case, they feel fairly valued: 50 P/E for 2007.

If I turn to Chinese companies like TSL, values are even better. But I don't invest in Chinese companies because I don't trust the accounting. They could be wrapping every roof in Beijing with panels or they could be shipping empty boxes. There is no real way to know.