On Wednesday, JPMorgan maintained its Overweight rating and $23.00 price target on shares of Daqo New Energy (NYSE:DQ), a leading manufacturer of polysilicon for the global solar PV industry. Despite the year-to-date underperformance of Daqo's stock, which has seen a 34% decline compared to the MXCN index's 9% gain, institutional investor holdings have increased significantly.
From the end of fiscal year 2023 to the end of the second quarter of 2024, the top 15 institutional investors' stake in Daqo rose from approximately 30% to nearly 50%.
The analyst at JPMorgan highlighted that while some might consider their valuation call premature, the current state of the polysilicon industry cycle suggests it cannot deteriorate further, as the sector is already experiencing cash losses across the board. The timing of a market turnaround is uncertain and could either be imminent if higher-cost producers exit the market or could be delayed for several quarters until more companies face cash shortages.
Daqo, with its industry-leading net cash position of $2.4 billion and status as a cost leader, is well-positioned to weather the current industry downturn. The company's stock is currently trading at a price-to-book value (P/BV) multiple of 0.2x, which is significantly below the historical mid-cycle multiple of 0.8x, not including the exceptional super cycle in 2021/22. According to the JPMorgan analyst, this suggests that Daqo's share price has the potential to double or even triple in the next three years.
Furthermore, given the substantial market capitalization of Daqo's operating company, which is 5.3 times that of Daqo itself, the analyst did not dismiss the possibility of the company being taken private. The reaffirmation of the Overweight rating indicates a positive outlook on the stock's future performance.
In other recent news, Daqo New Energy has been in the spotlight due to several significant developments. The company reported a net loss of $120 million in its second-quarter earnings for 2024, a result of falling market prices and a substantial non-cash inventory impairment expense. Despite this, Daqo New Energy has maintained a robust financial position, with a cash balance of nearly $1 billion and a combined cash and bank note receivable balance of $1.1 billion.
In addition to these financial figures, Roth/MKM adjusted its outlook on Daqo New Energy, reducing the price target from $23.00 to $15.00, but maintaining a neutral rating on the stock. This adjustment comes in the wake of the reported earnings miss and a downward revision of the company's 2024 guidance.
On a positive note, Daqo New Energy has commenced initial production at its Phase 5B polysilicon project, exceeding production volume expectations for the quarter. However, current polysilicon prices are reported to be below cash costs, which might delay the company's return to breakeven levels until mid-2025.
InvestingPro Insights
Recent metrics from InvestingPro offer a nuanced view of Daqo New Energy's financial health and market performance. With a market capitalization of $1.08 billion, Daqo is trading at a low Price/Book multiple of 0.25, which aligns with JPMorgan's assessment of the stock's potential for significant appreciation.
The company's revenue has seen a sharp decline of over 53% in the last twelve months as of Q2 2024, reflecting the challenges faced in the polysilicon industry. Despite this, Daqo maintains a strong liquidity position, holding more cash than debt on its balance sheet, an InvestingPro Tip that underscores its ability to navigate the downturn.
InvestingPro Data also reveals that Daqo's gross profit margin stands at 4.26%, which may be a concern considering the industry's cash losses mentioned by JPMorgan. The company's net income is expected to drop this year, and analysts do not anticipate Daqo will be profitable within the year, which are InvestingPro Tips that could be crucial for investors weighing the risks. However, the recent price total return over the last month shows a strong rebound of 15.59%, suggesting a potential shift in investor sentiment.
For those looking to delve deeper into Daqo's financials and future outlook, InvestingPro provides additional tips to help investors make informed decisions. There are 13 more InvestingPro Tips available for Daqo, which can be accessed for further analysis and insights to complement the information provided by JPMorgan.
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