North Coast Solar Stocks

June 20, 2009

Partial Eclipse for Solar Shares?

Filed under: CSIQ, CSUN, DUK, ENER, ESLR, EXC, FPL, FSLR, JASO, LDK, SOLF, SPWR, STP, TSL, YGE — Tags: , , , , , — Jason @ 6:00 pm


Mostly sunny skies for solar — but tread carefully.

INVESTORS IN SOLAR STOCKS TEND TO LOOK on the bright side of things. The result: some industry shares have risen to dizzying heights.

Share prices of Trina Solar (TSL), Canadian Solar (CSIQ), Yingli Green Energy (YGE), Suntech Power (STP), Solarfun (SOLF), JA Solar (JASO) and China Sunergy (CSUN) have logged triple-digit percentage gains over the past quarter, according to Barclays Capital ( LDK Solar (LDK), First Solar (FSLR) and Evergreen Solar (ESLR) have posted high-double-digit returns.

We will get to what we would do with the shares in a minute, but first let’s see how this relatively small industry came back after crashing harder than most when the bottom fell out of the stock market. One propellant has been resurgent oil prices, which tend to reinforce the need for alternatives. Of course, the overall market’s revival has helped a lot, too.

Also important, solar stocks have a halo of political favor that helped them avoid a capital-deprivation-induced coma a few months ago. Instead, they will spend the next eight years protected by the government with a generous allowance of federal, state and local tax incentives, reports the Solar Energy Industries Association ( This protection comes courtesy of the American Recovery and Reinvestment Act of 2009.

SUBSIDIES ARE REQUIRED — for the time being, at least — because even with a free supply of sunshine, solar is the costliest way to generate electricity by a sizable margin, notes global energy researcher New Energy Finance ( It faces significant technology hurdles before it can take its place alongside baseload energy sources on the national power grid. On the other hand, solar is uniquely equipped to be a low-cost answer to the peak-demand problems that bedevil utilities.

“We feel that, within three years, solar will achieve price parity with natural gas and other sources during afternoon and summer peak-load hours,” says Barclays Capital Analyst Vishal Shah.

Delivering a fraction of 1% of America’s electricity at present, solar won’t command much more than a couple of percentage points 20 years from now, says the U.S. Energy Information Administration (

But of more relevance to investors is that this narrow slice of a very large energy pie is growing at an astounding rate, says Merrill Lynch researcher Steven Milunovich. Pre-eminent energy auditor British Petroleum ( reported a 69% increase in solar installations in 2008, of which the U.S. has about one gigawatt of the world’s 14 gigawatt capacity ( A megawatt (MW) is one million watts and a gigawatt (GW) is 1,000 megawatts.

By Shah’s count, projects already in the pipeline should add more than three GW of new generating capacity by 2012 to each of two relatively untapped markets — utilities and large-scale commercial businesses. The recovery and reinvestment legislation lets businesses get cash back from the U.S. Treasury Department for 30% of the cost of a solar project ( That and low-interest loan guarantees, notes Shah, are adding jumbo solar arrays to the roofs of big-box stores like Wal-mart (WMT) ( 9100.aspx) and multi-megawatt solar farms to the portfolios of utilities that need to offset carbon emissions.

Major coal user Duke Energy (DUK) will buy all 16 MW of capacity from a new SunEdison ( facility, and build 10 MW of its own capacity ( Florida Power & Light (FPL), the nation’s largest solar operator, plans another 110 MW, including a 10 MW solar array at NASA’s Kennedy Space Center ( 2009/52709.shtml). Even nuclear powerhouse Exelon (EXC) is developing a new 10 MW facility with SunPower ( in downtown Chicago ( 04232009_1Q+Earnings.htm).

The new tax regime helps defray what can be $30,000 in up-front costs for residential solar systems that now account for most American capacity ( EIA anticipates another 1.6 million installations by 2016 ( from consumers who can find which local, state and federal programs apply to their locales in the National Renewable Energy Laboratory ( database at DSIRE (

The real catalysts for share appreciation, though, will be the megawatt-sized utility and commercial installations, says Shah. Government pump priming has restarted the flow of private capital, adds New Energy Finance ( “Already in the second quarter, investment in clean energy companies via the public markets has rallied sharply with well over $2 billion of completed secondary issues.”

SO WHAT SHOULD INVESTORS DO? Chinese solar companies sell at a median multiple of 55 times 2009 earnings, a heady bounce from their median nine times just before China announced its stimulus plans in March. Meanwhile, their American cousins have climbed to a median multiple of 27 times — led by a 74% run-up in U.S. technology leader First Solar.

Depending on the price you paid, Shah suggests you might want to lighten up on Canadian Solar and Solarfun based on valuation. But don’t abandon the sector altogether. As high as they are, valuations aren’t that rich in terms of projected 2010 earnings, says Shah. He and Milunovich agree this could be a breakout year, in which select companies — leading Chinese crystalline-silicon panel makers like Yingli, JA and Suntech, and U.S. thin-film innovators like First Solar, SunPower (SPWRA, SPWRB) and Energy Conversion Devices (ENER) — will be able to support a 20-plus multiple.

While small solar companies have more headroom for share-price gains than do larger energy companies, their shares come with more risk and volatility. Don’t be blind to the downside.

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