North Coast Solar Stocks

March 31, 2008

New Solar ETFs: Here Come the Suns

Filed under: AMAT, ESLR, FSLR, KWT, LDK, SPWR, STP, TAN, WFR — Tags: , , , — Jason @ 2:25 am

Monday March 31, 2:25 am ET
Seeking Alpha

Hard Assets Investor submits: With the tremendous interest in all things “green” and “clean,” it was just a matter of time before ETF and index companies would start to carve out thinner slices of the clean tech universe. In fact, there are two ETFs in registration that target a fast-growing segment of the clean tech market: solar energy.

This month, Claymore and Van Eck registered solar energy ETFs. Claymore’s Global Solar Energy ETF will track an index developed by Chicago-based Melvin & Company. The index will be composed of approximately 25 stocks selected “based on the relative importance of solar power within the company’s business model.” The stocks in the index are involved in some aspect of the solar power business, from gathering raw materials to manufacturing equipment to selling solar energy. Components will be weighted based in part on the importance of solar energy to their business model, so that pure-play companies get more weight than conglomerates that dabble in solar energy.

Van Eck’s Market Vectors-Solar Energy ETF will track the Ardour Solar Energy Index. Expected to launch in April 2008, the ETF will contain approximately 25 stocks, selected depending on the companies’ revenues, liquidity and market cap. The list of companies isn’t available, but the roughly 25 stocks will be taken from Ardour’s Global Composite Index, an alternative energy index comprised of 118 stocks. Both ETFs will likely have familiar names, such as major solar energy companies like First Solar (FSLR), Sun Power (SPWR), Evergreen Solar (ESLR) and LDK Solar (LDK).

Van Eck and Claymore are counting on solar to generate strong investor interest in the coming years, and for good reason. There seems little doubt that the solar-power industry has a “sunny” future. In January’s Scientific American, “A Solar Grand Plan” proposes a way for the U.S. to generate 69% of its electricity and 35% of its total energy from solar power by 2050. Noted technologist and inventor Ray Kurzweil is even more bullish, forecasting that solar will meet 100% of our energy needs in 20 years. Solar currently generates far less than 1% of our energy needs.

Investor interest in solar is strong. Venture capital investment in the industry grew from $150 million in 2005 to more than $1 billion in 2007, according to Greentech Media Research. More money may also come from the government. A bill currently before the Senate could shift about $18 billion of subsidies for oil companies into wind and solar energy. The bill, approved by the House of Representatives, would extend the 30 percent investment tax credit for solar projects.

That’s the bullish case. The near-term outlook is a bit cloudier for solar companies. Industry fundamentals are increasingly difficult. At issue is the worldwide shortage of polysilicon, a vital ingredient in photovoltaic cells, which has hounded the industry by pushing spot prices of the material sky high. A turning point will come when capacity exceeds demand, as polysilicon makers have been ramping up production. In a recent report, Citigroup says that could happen as early as the second half of 2009: Citigroup analysts expect the industry to be 33 percent oversupplied in 2010. Another dark cloud for solar is slowing demand in Spain and Germany, both considered key markets because of government incentives that have sped solar development.

With ETF companies now introducing solar funds, fund investors are wondering if there is really any “there there.” Are solar companies actually making money? The stock market is certainly signaling that the industry got ahead of itself. After a stellar 2007, solar stocks have recently taken it on the chin. SunPower is down 49 percent in 2008, Evergreen Solar 55 percent, and Solarfun 65 percent.

Amidst the carnage in solar stocks, there are companies with real live revenues, such as China’s Suntech Power Holdings (STP). The company’s problem is that it’s not generating enough revenue to satisfy Wall Street expectations. Analysts expected revenue of $455 million next quarter, but Suntech projected sales to be only between $370 million and $380 million. Suntech is expected to pass Japan’s Sharp Corp. this year to become the world’s largest maker of solar cells. With polysilicon prices on the rise, Suntech is focusing on preserving its bottom line rather than on expanding production. The company has shifted more production to the second half of the year in hopes that prices for polysilicon will fall.

Given the bottleneck in polysilicon supply, another company to watch is MEMC Electronic Materials , a leading supplier of silicon wafers to the solar and semiconductor industries. As one of the few companies that make silicon wafers, MEMC has actually benefited from the silicon shortage. MEMC generated over $1.9 billion in revenues in 2007.

As further proof of the viability of solar’s business model, there are big tech companies that have offer exposure to solar, such as Applied Materials (AMAT). The company recently announced that it had signed a $1.9 billion deal to supply and install equipment for “multiple solar factories” for a private company based outside of the United States.

Notwithstanding the recent pullback in stock prices, solar does indeed have a sunny future. Solar is still very early in its growth stage, and solar companies, particularly the producers of solar silicon and integrated modules, will experience more volatility as they navigate roadblocks such as supply constraints and market demand. Most of today’s existing solar technologies are becoming more efficient and more affordable, and emerging technologies and manufacturing methods promise to keep the sector going strong. Even though solar stocks have taken a serious hit, that isn’t a sufficient reason to sour on the long-term potential of the sector. The Van Eck and Claymore ETFs are certainly coming at an opportune time.

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