Four Reasons to Expect a Solar Boom

Since I wrote "Three Reasons Solar Sell-off May Be in Early Innings" back on September 3rd, the solar sector had a massive selloff. My reasoning was based on the fact that oil peaked at $147 per barrel and also the solar energy demand may have peaked in Europe.

Since then,  the solar sector has been absolutely smashed by the market turmoil. First Solar (FSLR) was down over 70% from peak $330 to $95 a week ago. Suntech power (STP) was down from $90 to $11 during the same period of time. The same story for Sunpower Corp (SPWRA), some other small names are even worse, such as Solarfun (SOLF), Renesola (SOL), Canadian Solar (CSIQ), Yingli Green (YGE), and China Sunergy (CSUN).

With stock prices continue to slide, analysts started to downgrade the sector, citing the same theory over and over, i.e. demand is slowing, the credit market is tightening. Ironically, solar stocks are ignoring the warnings from these analysts and are climbing back steadily, partly because solar companies such as FSLR and SPWRA reported great earnings in Q3, and also because the outlook for Q4 is bright.

FSLR rose from its 52 week low to its current $150 per share. SPWRA also gained momentum from one week ago. From the current estimates, most of the solar companies will likely post very good earnings for Q3. LDK Solar (LDK) came out boosting Q3 and 2008 earnings two weeks ago. Renesola yesterday boosted Q3 and 2008 earnings. Both YGE and SOL secured credit lines with rich Chinese banks. Suntech Power is entering the US solar market through a joint company in US, boosting sales in the US to 100MW in 2009. Investors knew that Suntech Power is already the No.1 globally in terms of sales. However the stock became a victim of hedge fund redemptions in the last few days. Serious investors should look into the fundamentals beyond the market turmoil and may soon find true value in this sector.

Truth No.1 - The solar sector is among the best in terms of earnings compared to other sectors.

Solar companies have reported astonishing earnings in previous quarters, yet the stock price has been beaten down in the same magnitude of other sectors, trading at historical lows. Suntech Power reported 1st quarter 2008 earnings of USD .33 per share on 5/22/08, beat the consensus of USD 0.276 by USD 0.054, and reported 2nd quarter 2008 earnings of USD .38 per share on 8/20/08. This beat the consensus of USD 0.316 by USD 0.064, and is a consistent 19% earning surprise on the upside.

First Solar reported 3rd quarter 2008 earnings of USD 1.20 per share on 10/29/08, and beat the consensus of USD 1.01 by USD 0.188, which is also 19% upside surprise. For some other small players, LDK Solar and Renesola recently raised their earnings of Q3 and year 2008. This will send a signal to investors that solar companies are going strong despite the credit crunch. The hedge fund redemptions in October provide great opportunity for investors to get in at historically low prices for STP and FSLR.

Truth No.2 - The credit crunch has little impact on solar companies’ funding in 2009 and beyond.

Companies like First Solar and Suntech Power are self-funded companies that have been making money all the time, and these two companies have sufficient funds to expand their businesses. However, some small companies such as Yingli Green and Renesola announced they have acquired additional credit lines from Chinese banks, which are not affected by the US financial crisis. LDK solar also said it has no need to raise capital in the next 2 years. It seems to me the solar sector has no difficulty attracting more investment even in this environment.

Truth No.3 - Polysilicon prices will continue to slide, further boosting PV module margins.

According to a Collins Stewart report on Monday, polysilicon prices have declined about 20%-30% over the past three weeks. In a research note, Dan Ries says that prices for high purity polysilicon are down about $100/kg to about $300/kg. This decline is a welcome relief for module makers as it will help to offset the sharp reduction in ASPs expected in the quarters ahead due to the Euro. Among the companies who will benefit from the low price are Suntech Power, Canadian Solar and Sunpower, to name a few. 

Truth No.4 - Both US presidential candidates vowed to boost solar power.

This is a monumental event for the solar industry as this may reform the world’s largest economy into the largest solar energy market. The US has created a base for the solar industry by passing an 8 year solar tax credit last month. With  leadership from Obama or McCain, solar is set to grow in the coming decade.

In summary, we are facing a once in a lifetime opportunity to invest in the solar sector. Among the top companies are Suntech Power, First Solar, and Sunpower Corp. If Obama takes office in January 2009, solar and other renewable energy sectors will start a serious run. The next 10 years are well braced for a solar boom.

Disclosure: Author long FSLR, STP.

Comments

[borisb:]

Truth #2 the funding for the customers to start projects has all but dried up.

2008 Nov 04 08:54 AM

[User 290556:]

this is funny, I've just read Barclay’s solar analyst Vishal Shah downgraded STP and put a price target of 11 buck (tinyurl.com/6yfg3q). It is too much for common Joe to invest in this pump and dump game! LOL.

2008 Nov 04 09:10 AM

[vitamin_j:]

Look, I own STP and think the company's real good. However, your assertion

"Companies like First Solar and Suntech Power are self-funded companies that have been making money all the time, and these two companies have sufficient funds to expand their businesses."

is not true. Suntech has been partially funding its Capex through debt issues, most recently this past March. First Solar does indeed fund its expansion entirely through free cash flow. This makes it almost singular among solars. Suntech is one of the best of the silicon-based companies, and unlike most goes in and out of positive free cash flow. Also unlike most other Chinese solars, it is sitting on quite a money pile at the moment, which should give investors greater confidence for near-term headwinds. However, to imply that it funds itself solely through retained earnings like First Solar is misleading.

2008 Nov 04 11:52 AM

[frflyer:]

Lets pray for an Obama win, because McCain just gives lip service to solar and wind.

2008 Nov 04 12:33 PM

[sugarfree:]

Kevin: according to fidelity "compare stocks" screen STP has long term debt / equity ration (of the last fiscal year) of 58%. I own it and am thinking about buying more, but tis stat seems to contradict what you wrote. Can you address this and the comment from vitamin_j ? Thanks , John

2008 Nov 05 07:45 AM

[jbde:]

borisb - what facts can you cite? If you make a statment at least have some facts to go with it, otherwise it is useless [this is a fact in itself].

European [and now even US and China] mandates for renewable energy are real and large utilities have no problem with funding projects.

www.getsolar.com/blog/.../

www.spacemart.com/repo...

www.matternetwork.com/...

2008 Nov 05 08:41 AM

[Bob55:]

Change is what America voted for last night and it is with great hope that change comes quick. Change in how Wall St. works and making the country financially strong again. Equally important, if not more so, is change in America's environmental policy and solar and wind is expected to be at the forefront. Having Obama and Congress push solar, wind, and other forms of alternative energy with real concrete projects perhaps as early as the rollout of the next stimulus package if not sooner would be a significant boost. We should find out soon enough.

2008 Nov 05 09:30 AM

[Fred W:]

This is truly a misleading piece and the author should at least attempt to understand the solar industry before writing about it.
If you can't get a construction loan, very few solar projects will get built...as is currently the case. The fact that the U.S. commercial market is driven almost exclusively by tax benefits is a big problem...no profits = no tax liability = no ability to monetize ITC and MACRS.

2008 Nov 05 12:02 PM

[billp37:]

I spent over a year listening to PNM employees and others comment on electric energy future.

I learned enough to ask questions about CAPACITY FACTOR and HEAT RATE.

Both the above caps may [should] cause solar [and wind] serious problems.

seekingalpha.com/artic...

Laws of thermodynamics, however, may not deter solar and wind salespersons?

Or non-science educated investors?

2008 Nov 05 06:40 PM

[User 135840:]

solars finally moving up--

2008 Nov 05 07:44 PM

[User 135840:]

finally moving past bottom-now up hopefully

2008 Nov 05 07:46 PM

[w707:]

In an April Report, analysts at Raymond James estimated that solar power in residential applications costs $0.37 per kilowat hour, which is nearly four times as musch as conventional sources. These costs are due primarily to the manufacturing of photovoltic panels.
Solar power cannot ramp up fast enough to provide significant amounts of electricity. If solar grew at a rate of 25% per year from now unitl 2020, it would still only provide 1% of global electricity demand.
Of course one of the biggest problems with solar is intermittency (lower power output on cloudy days and none at night) requires solar to be paired with conventional power plants or expensive bateries. Without a significant breakthrough in high density electric storage solar will never provide large quantities of base load power.

2008 Nov 06 10:16 AM

[Bob55:]

Cutting greenhouse gas emissions will be a major goal in the U.S. and other countries going forward and solar will provide us a means, a very proven means, to do that cleanly using the unlimited power of the sun. Sometimes we can't look at things using dollar and cents when our future and that of our children are at stake. It goes well beyond that, and I'm hoping that mentality starts to sink in.

2008 Nov 06 11:16 AM

[solar panels:]

FSLR just lost 20% of it's value to day, down to 107. The problem for the stocks (over supply and plunging prices) ends up being good for the consumer. Strange market for the solar stocks. www.dasolar.com/solar-...

Feb 25 05:15 PM