The solar industry has become extremely competitive over the last few years. The primary reason was a decline in polysilicon prices that led to Chinese solar manufacturers adding to their production capacities (to benefit from declining raw material prices). The result was an excess supply of solar cells that led to a massive decline in solar ASPs and hitting the bottom line of solar companies. In this scenario, we are recommending investors to take long positions in MEMC Electronic (WFR) and SunPower Corporation (SPWR) based upon the respective following key points:
- MEMC has shown impressive revenue growth of 78% in the second quarter, led by strong demand from uncertain European markets.
- The stock has shown an upward movement of 30% over the course of the last three months, and has significant potential to show a further upside.
- The drastic increase of 120% in the PV Industry in 1H2012 makes it a good prospect to take advantage of ongoing increasing demand in the United States.
- The stock is trading at low valuations, as compared to its peers in the industry.
- Its earnings will grow by 280% by the end of FY2013, according to 16 analyst estimates.
- The company has significant potential to capture growing demand in emerging solar markets in the U.S., India and China.
- SPWR is undervalued. The stock is trading at EV/Revenue of 0.58x, in contrast to the industry average of 0.68x.
- The company's 3-year expected PEG ratio of 0.78 depicts that investors can buy growth cheaply.
- The company's financing of $325 million for its solar leasing program will substantially help SPWR increase its sales.
- It is taking advantage of U.S. tariffs, as reflected in its revenue increase of 20% in Q2.
- The SunShot program of the U.S. Department of Energy, aimed at producing 15%-to-18% of electricity from solar power, will enhance its future sales prospects.
Despite the European headwinds and the 55% decline in sales from fiscal year 2010 to 2011, the company managed to increase its revenues by 78% from 1Q2012 to 2Q2012. The company's recent contracts in Bulgaria and Italy to sell four projects worth 98MW will bring more revenue growth. WFR can sustain this vibrant sales growth by focusing on emerging markets like India, China and the U.S. The stock is trading at a P/S of 0.21x, at a discount when compared to First Solar, Inc's (FSLR) P/S of 0.65x. The stock showed an upside of 30% over the last three months, and has considerable prospects to show a further upward trend. Therefore, we suggest a long position on the stock.
WFR beat high analyst estimates of $805 million by posting revenues of $933.4 million in 2Q2102. The company's revenue increased at a rate of 78% over the last quarter due to its high demand. The majority of the company's revenue comes from European markets, due to the increasing government subsidies in the continent, aimed at promoting the alternative form of energy.
The U.S. photovoltaic (PV) industry rose by 120% in 1H2012, with the company having significantly contributed to this growth. The company's semiconductor wafer segment has grown, but the real growth came from its solar energy business. Due to the increase in subsidies by European governments in July, the company's sales considerably increased in the region. MEMC's research and development expenditure increased by 15.7% in the last quarter. The company is highly leveraged, with debt-to-equity of 3 times.
The company's polysilicon competitors declared that they were not going to manufacture any more polysilicon in order to reduce excess inventory levels. This will work as a positive catalyst for the company, as it bridges the supply and demand gap. The company's subsidiary, SunEdison, is engaged in the solar panel business. It recently sold a 20MW solar plant to Turner Renewable Energy and Southern Company.
According to analyst estimates, its earnings will grow up to 280% till the end of 2013. Going forward, we believe the company will take advantage of the surrounding high demand through its strong liquidity position, and continuous innovation in the renewable energy field.
Due to the U.S. import tariffs on Chinese panels, a 20% increase in SunPower sales, and its cheap valuations, we recommend investors to take long position in the stock. The company's sales, through a leasing model, will bring strong growth in the future. Moreover, U.S. solar power installations reached a new height of 1.7GW this year, as compared to 750MW in 1H2011. The SunShot initiative of the U.S. Department of Energy will improve its profitability in both the short and long run.
The company is trying to achieve lower grid parity by increasing its R&D expenditure. SPWR is working to cut its costs, but margins are not improving significantly. The company's gross margin increased from 12.7% to 15.1% from 1Q2012 to 2Q2012. The company's revenue has increased from $580 million to $650 million over the last quarter. 68% of SPWR's revenues are coming from the U.S. market, and the market's growth potential will bring growth for the company as well. Its CAPEX will be $25 million-$30 million, according to the company's Q3 guidance. Negative net income of $84 million in the last quarter will be improved upon with the prevalent increasing demand.
The stock, which is trading at its 52-week low, showed an upward trend of 28% over the last three months. SunPower is seeking $325 million from Credit Suisse and Citigroup Inc. to lease homeowner solar projects. This program will help the company attract more customers who are not willing to spend thousands of dollars on this alternative energy. Therefore, we believe the stock will substantially move upwards because of this leasing option.
The stock is currently trading at EV/Revenue of 0.5x, at a discount when compared to those of Suntech Power Holdings Co. Ltd. (STP), Sharp Corporation (SHCAY.PK) and Yingli Green Energy Hold. Co. Ltd. (YGE) (0.7x, 0.6x and 0.61x, respectively). The stock is trading at cheap valuations, as its 3-year expected PEG ratio is 0.78. We have a bullish stance on the stock based upon its restructuring efforts, cost-cutting programs, and the increasing market demand in emerging markets (the U.S., China and India).