Hold Hoku Scientific on Valuation

Hoku Scientific, Inc.'s (HOKU) $1.5 billion of poly-silicon order backlog for up to 10 years from four solar companies represents a great growth story. However, its poly-silicon plant will not be operational before 2009, and will not achieve full capacity until 2010.

Until then, the company will have to depend upon its PV [photovoltaic, or solar power] system installation business. This, along with a diminishing significance of fuel cells, increasing O&M [operations & maintenance] expenses leading to higher cost structure, earnings dilutive stock issuance and a strong competitive challenge in the alternative energy industry may present material risks to the company.

Also, prevailing bearish sentiments in the market was not thawed completely, even with the Fed's three-quarter basis-point rate-cut. Based on this, we maintain our Hold recommendation on HOKU common stock. Although the company reported negative earnings for five quarters in a row, and is expected to remain unprofitable through most part of the fiscal 2009, HOKU is expected to achieve significant profitability in fiscal 2010.

As is the case with most stocks engaged in the volatile alternative energy space, HOKU's valuation is based entirely on future profitability potential. On the basis of relative price-to-sales, which varies within a very wide range for its industry peers, HOKU trades well within that range.

However, HOKU's price-to-book value multiple trades at a premium to comparable publicly traded alternative energy peers, while price-to-cash flow multiples in the industry remain predominantly without much meaning. Looking ahead over the next six months and through 2008, a strong competitive challenge and the absence of high-volume production pose ongoing risks to its performance.

With a neutral outlook and relatively expensive valuation, in our view, we maintain our recommendation to Hold on the HOKU common stock with a six-month target price of $10, representing an 8.9% upside potential.

Good Value on Canadian Solar

Canadian Solar, Inc.'s (CSIQ) precipitous decline following its November 2006 IPO reversed course strongly upward as improving fundamentals supported a higher valuation. Going forward, on the back of solar panel sales growth in various global markets, material cost savings through the company's more vertically-integrated production structure, higher captive generation of solar cells, long-term supply agreements and a silicon reclamation program should collectively generate significant earnings growth.