Three Plays on Solar Strength This Summer

What’s the story lately with alternative energy stocks in this ragged market? Is big growth making this group a good option for diversification these days? Zacks senior analyst Jon Kolb was on-hand to let us know.

Ahead of second-quarter earnings season, what sorts of alternative energy stocks would you recommend?

Just a couple weeks back I initiated coverage on ReneSola, Ltd. (SOL) as a Buy. The China-based company, incorporated in March 2006, is engaged in the manufacture and sale of solar wafers and related products. In April 2006, the company discontinued the sale of solar modules and concentrated on the production and sale of solar wafers.

Are you positive on the company mostly because you see strength in the solar energy industry?

Through its short history, ReneSola regularly adapted to changing market dynamics. The company is aggressively ramping up its polysilicon and solar wafer production capacities.

Going forward, increased captive generation of polysilicon will improve its cost structure and enable wafer capacity expansions. Globally, rising solar wafer sales, along with escalating crude and long-term supply agreements, should collectively generate significant earnings growth. That said, SOL is a play on growth in the solar industry. ReneSola’s customers include global manufacturers of solar cells and modules, such as JA Solar (JASO), Motech Industries, Solarfun Power (SOLF), Suntech Power (STP) and Topco Technologies.

Can you tell us about another solar panel company that you have covered a longer time?

Well, First Solar (FSLR) was upgraded to a Buy recommendation back in mid-April. And as I said in my latest research report, FSLR’s recent bullishness is buoyed due to the steep rise in the price of oil.

Earlier, after climbing as high as $280.91 a share in December 2007, FSLR plummeted to a low of $165.60 in February 2008. Subsequent to that, FSLR recovered greatly and is currently trading near its yearly high.

Sounds like these shares might be mighty risky.

FSLR’s reliance on low cost thin-film cells helped the company avert a silicon shortage which ravaged the bottom lines of other solar peers. As a result, the company was able to register consistent improvement in its bottom line in stark contrast to its silicon cell peers.

Accordingly, we maintain our Buy recommendation on FSLR with a six-month target price of $333. Price appreciation to our near-term valuation target represents 15.6% upside potential.

What would you call your biggest success story among your solar industry coverage this year?

We first put a Buy on Energy Conversion Devices (ENER) back when it was trading around $30 per share. Of course, this was before the latest “oil-shock,” or whatever one wants to call it.

Energy Conversion’s operating segment, United Solar Ovonics, has a total annual production capacity of 118MW [megawatts]. Ongoing expansion plans will increase United Solar’s manufacturing capacity to 178MW by the first half of 2009 and to over 300MW per annum by the end of fiscal 2010.

You don’t worry that the share price will level-off significantly?

We remain optimistic about the company’s long-term potential success in the high growth alternative energy industry, given increased activity in solar power projects, and progress toward sustainable profitability in ENER’s current fiscal year 2008.

Any final words on this sector at this time?

The investment outlook for the alternative energy industry is bullish, with significant growth potential over the next 5-10 years. As with any burgeoning industry segment, there will likely continue to be rapid changes within individual names as new technologies continue to evolve, although the longer-term trend is favorable for diversified long-term investors.

Those investors seeking to capitalize on the on-going efforts to reduce both domestic and global dependence upon the dominant oil and natural gas producing regions of the globe may wish to focus on emerging and established firms engaged in wind power, solar/photovoltaic, solar thermal, geo-thermal, hydro, marine and biomass-based energy sources. Dozens of such companies exist within the US and many more internationally, ranging from micro-cap ventures to large-cap multinationals.

Jon Kolb is a senior analyst covering the alternative energy and utilities industries for Zacks Equity Research.

Comments

[Stockguy456:]

100% correct:"The investment outlook for the alternative energy industry is bullish, with significant growth potential over the next 5-10 years. As with any burgeoning industry segment, there will likely continue to be rapid changes within individual names as new technologies continue to evolve, although the longer-term trend is favorable for diversified long-term investors."

2008 Jul 11 09:11 AM

[Wayfarer:]

I just don't get the interest in thinfilms like FSLR and ENER. Their solar efficiencies are less than half that of SPWR or STP. Solar panels are less than half the cost of a solar system. For a solar system of a given energy output the thinfilms require twice as much of all this other stuff; land, labor, concrete or roof, wire, inverters, junction boxes, maintenance, ... I am putting my investments on the solid crystalline manufacturers.

2008 Jul 11 09:18 AM

[Consider_this:]

Solar demand is going be strong, no doubt. But the current Solar stocks have all taken that into account (and then some!)

All the potential growth has been priced in, along with a whopping serving of astronomical growth. This could mean the holding period to be profitable on these could be 5+ years, and then only if the "happy case" scenarios all pan out.

Whether there's any value left in this sector right now is the key question. It's been overplayed.

2008 Jul 11 09:20 AM

[Stockaccumu...:]

GREAT ARTICLE... WE BELIEVE SOL IS THE BEST SOLAR PLAY AND PLAN TO HOLD IT TO $60 IN SUMMER 09' NOT WORRIED ABOUT THE DIPS TILL THEN... BUT MAY SELL AT $36 WHICH SHOULD OCCUR IN AUGUST AFTER THE EXPECTED AMAZING EARNINGS REPORT... PIPER JAFFRAY ALSO FIND SOL TO BE AN AMAZING COMPANY TO INVEST IN... OTHERS HAVE BEEN COMMENTING SIMILAR TO THE ABOVE POINTS WORLDWIDE... VERY VALID ARTICLE... UNLIKE SOME OF THE UNRESEARCHED NONSENSE WE SAW AT MOTLEY FOOL 3 WEEKS AGO...

2008 Jul 11 11:08 AM

[tech man:]

glad to see sol is doing what my research suggested. thanks stockaccumulator for your apparent research also. love sol, that is why i am long. t.m.

2008 Jul 11 01:29 PM

[Learning Curve:]

Wayfarer,
Here is the assumption I’ve been making: that thin film -–as in United Solar Ovonics-- can be formed around objects such as roof tiles and that the thin film technology may combine with other solar technologies to make a hybrid product.
I’d appreciate any discussion about whether this line of thinking about thin film has merit.
Meanwhile, I have deliberately diversified into a range of alternative energy stocks, in different points in the value chain and into diverse approaches to technical solutions ---which, then, includes ENER and FSLR.
In Fort Collins, Colorado, there is a little start-up company -AVA- that is developing ways to use window glass in this context. If/when it becomes public, I'll want to own a piece. (Although it will use cadmium telluride, and that is controversial!)

www.avasolar.com

2008 Jul 11 02:04 PM

[Wayfarer:]

@ Learning Curve

Yes I would like to discuss thinfilm vs crystalline, thank you. You mention that ovionic's thinfilm can be formed around something such as a roof tile. Physically, maybe it could but to what advantage I don't see. Solar cells or thinfilm must be oriented toward the sun. Better to leave energy gathering surface flat. Also, SPWR makes a flat roof tile. STP has panels that actually form the roof.

Ovionic's (ENER) efficiency is some where around 8%. SPWR's new lines are at 23%. That is almost three to one. Show me any sort of math that makes that work for a solar farm. Now on a metal roof where ENER can just be rolled out and glued on then maybe it would be the best choice if the roof was pitched and oriented correctly. Other than that I don't see how ENER can compete in the long run.

Pretty much the same story for FSLR. Now FSLR does perform better in low light conditions. That plus the fact that demand has outstripped supply in the solar panel industry pretty well explains FSLR's success in low light Germany. FSLR doesn't compete at all in the U.S. sunbelt nor will ENER for most applications.

As I have said many times you must consider the total cost of installation with solar. The panel is less than half the cost and dropping. Unless the thinfilms can improve efficiencies greatly I don't see how they can compete. Also, I don't want to hold those extemely high P/Es. The math tells me they are going to drop like a rock someday soon.

Anybody who has a different take on the numbers between thinfilm and crystalline please explain them to me.

2008 Jul 11 04:53 PM

[Stockaccumu...:]

There was a post here of all solars have their growth already "priced in" ... but this excellent Alpha article above, actually makes clear that such issues are irrelevant...

...and SOL has a forward PE of around 6.... some analysts suggest SOL's forward 09' PE is as low as 4, yes not a typo... 4.

So not sure what point "priced in" even means with respect to SOL which obviously has a forward PE which is rediculously low... so not sure also which solar you are concerned with...

...we thus plan to stay in SOL until we see a major change in this, here at Stockaccumulator. We likely will review whether to sell our large position in summer of 09', when we believe SOL will be bouncing around the $55-60 range.

Low PE was one of the reasons, along with exponential profit growth, why Investors Business Daily's totally neutral computer rating system in early June, rated SOL the 4th best company in the world to invest in (out of 25,000) companies (not just solars) their customers are actually the other growing solars everyone likes... See also Piper Jaffray's long version of their report on SOL. They practically audited the company, and love it.

2008 Jul 12 11:19 AM

[Alphameister:]

I don't get the huge premium for FSLR either, but am happy to see its relative strength make a new high on Friday. Solar stocks generally showed excellent relative strength for the week, especially on Friday. Let's hope that upcoming earnings reports in the sector bring some of the same excitement that followed release of first-quarter earnings. I own efficiency-leader SPWR indirectly through CY, along with a basket of Chinese solar issues, all growing at triple-digit rates and trading at less than 10 times expected '09 earnings.

2008 Jul 12 11:59 AM

[Bob the Bear:]

Wayfarer;
ENER's thin film technology starts to produce earlier in the morning and later in the evening than other products, plus it works on overcast days, which increases its efficiency. There are maqny different ways to describe efficiency. Believe me, GM wouldn't have contracted for 2million sq/ft on their Spanish plant, if the efficiency wasn't provably superior. Bottom line ENER's efficiencys are superior to their competitors.
Add to this the possibility of reducing the cost of the thin film product by up to 80%. This would make it cheaper to produce electric power than any other means, including nuclear, wind, ocean, etc. they applied for the patent on April 17, 2008. They talk about making fresh water almost as cheaply as diverting a stream to you home. Can you imagine what his would do for the billions of poor in the world? I can't think of a better place to put my money. A lot of other people feel the same way, ENER just did an oversubscribed convertible bond for over $350 million. Anyway you get the idea. This is the future.
Good luck

2008 Jul 12 08:54 PM

[joea637:]

All the talk about future p/e's and piper jaffray's raising sol's earnings per share growth to $1.?? something next year. But they forgot to mention that SOL just diluted their stock by almost ten % and took out 325 million in notes that do pay interest. That is almost $3.00 a share, not to mention all the intrest and dilution that will occur when the notes are turned into stock. How soon will it be before they are taking more notes out to cover a few more years of earnings. And with all the companies ramping up their production, who is taking into account the glut of excess that will occur when they have all finished? Kind of reminds me of the build up in the spread of fiber optics, with analysts touting all the companies building up and then it all came crashing down. I hope those that are holding, dump there stocks before the prices come crashing down like all the telco's that went bankrupt because of the massive build up.
Hydrogen fuel cells seems more like a viable answer to alternative energy than solar. If I beleive correctly, a lot of these solar systems need batteries for back up power when the sun dosen't shine. These batteries need to be replaced every so many years. Where do all the old ones go? And how much extra does it cost? Plus, in five years, what new technology will make solar systems of today obsolete? Hopefully, these companies will be able to use their production lines to manufacture those new technologies so they don't incur greater costs to re tool and have to borrow even more money.

2008 Jul 13 12:27 PM

[buystocks:]

So far the best P/E is TSL and CSIQ, I like CSIQ better due to it has the ability to scale up fast and its UMG product which TSL dosn't have yet.

2008 Jul 14 01:32 AM