Solar Power Research: Energy Conversion and SunPower are Buys, Evergreen a Hold

by: Eric Savitz

There were two interesting notes yesterday on the solar power industry that are worth a look.

Deutsche Bank’s Steve O’Rourke started coverge yesterday of the solar cell business, and launched ratings on three stocks. He issued Buy ratings on Energy Conversion Devices (NASDAQ:ENER) and SunPower (NASDAQ:SPWR), and a Hold rating on Evergreen Solar (ESLR). “We are bullish on the solar PV industry over the long term,” he wrote. “However, we do expect near term choppiness for the industry, companies and stocks, driven by regional forces.”

O’Rourke says he sees three drivers for the solar growth in the coming years: government incentives, industry progress at reducing the costs of delivering solar, and public and private investment targted at accelerating improvements.

Here are a couple of soundbites from O’Rourke’s research on the three solar stocks he wrote about yesterday.

  • Energy Conversion Devices: A deep technology company that has finally begun to commercialize long-held IP and expertise…comparatively strong technology and market positions, strong revenue growth and profitability potential from technologies/IP that are approaching maturity, offset partially by a comparatively weaker financial history and the uncertainty of technology adoption timing.
  • Evergreen Solar: Despite an aggressive revenue ramp through 2007, we project Evergreen is still at least several quarters from profitability, with ongoing negative [free cash flow], significant additional potential dilution, and the potential need for more capital to fund EverQ [the company’s joint venture with the German solar company Q-Cells] capacity expansions.
  • SunPower: We believe that industry-leading conversion efficiency, strong technology development, and low cost region manufacturing can reduce cost per watt…industry technology leader with a developing brand, and emerging operational strength, offset somewhat by the company’s realtively small size and potential polysilicon procurement challenges, we believe the company can command a premium to peers.
  • Meanwhile, Doug Freedman, an analyst at American Technology Research, theorized yesterday in a research note that Cypress Semiconductor (NASDAQ:CY) might choose to distribute its 52 million shares of SunPower as a way to focus investors on the low valuation being placed on the rest of Cypress. He calculates that the company owns SunPower shares worth more than $9 a share; he figures the rest of Cypress is worth about $11.76 a share, for a total value of about $21, which is nicely above today’s price.

    Freedman notes that Cypress in its latest 10-Q says that it continues to look at ways to “more fully realize” the value of its SunPower investment for the benefit of shareholders.

    In yesterday's trading:

    • Energy Conversion Devices is up $1.88 at $37.04.
    • Evergreen Solar is down 9 cents at $7.93.
    • SunPower is ahead $1.25 at $28.80.
    • Cypress has gained 85 cents to $18.49.

    • SPWR vs. ENER vs. ESLR

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