A New Dawn for Solar Power Stocks
Solar power stocks have weathered their share of storms in recent years.
First, the financial crisis deterred potential customers and cut their sales. Then governments began cutting spending to rein in their deficits—including on solar power subsidies. This all came against a glut of cheap panels—mainly from Chinese manufacturers—that cut prices and profit margins.
But fast-forward to the present, and the industry finds itself in the midst of a recovery. Consider these statistics from the U.S. in the second quarter of 2013:
- The U.S. installed 832 megawatts (MW) of solar power in the quarter. That’s up 15% from the first quarter and represents the second-strongest quarter ever, according to the Solar Energy Industries Association (SEIA).
- Utility sector installations led the way, with 38 projects completed, totaling 452 MW. That’s up 42% over the previous quarter.
- California was ahead of all other states, with installations rising 7% over the first quarter.
- The SEIA sees 4.4 gigawatts (GW) of solar power coming online in the U.S. this year, up 30% from 3.3 GW in 2012.
Part of this growth is the result of cheaper equipment: the average price of a solar panel has declined about 60% in the last two years. At the same time, continued technological advances have improved efficiency.
It’s important to keep in mind that solar still accounts for a small part of U.S. electricity generation, just 0.11% of the total in 2012, compared to coal at 37%, natural gas at 30% and nuclear at 19%, according to the Energy Information Administration (EIA).
However, as Investing Daily managing director John Persinos reported in a comprehensive analysis of the solar power recovery in a just-released issue of our Personal Finance advisory, a new law in California—a long-time environmental trendsetter—bodes well for its prospects.
“In October, solar power scored a major legislative victory when California Governor Jerry Brown signed into law a complex package of incentives and regulations that will facilitate the continued expansion of solar generation in the state,” wrote Persinos. “A central provision sustains so-called ‘net metering,’ which allows renewable energy customers to sell their excess power back to the grid at retail prices.”
Solar power’s brightening prospects reach beyond the U.S. For example, as we reported in a September 24 Investing Daily article, the re-election of German chancellor Angela Merkel likely cements in place that country’s $735-billion plan to shutter all of its nuclear plants by 2022.
By 2050, Germany aims to get 80% of its power from renewable sources. Given that the country is already a solar power leader (last July, it produced 5.1 terawatt hours of solar power—a new world record), solar equipment suppliers can expect to reap the benefits of its long-term shift.
China, too, aims to vastly increase its solar power generation. By 2015, the country is aiming for 35 GW of installed capacity, rising to 50 GW by 2020.
Solar Power Investors: Walking on Sunshine
The improving market conditions have solar stocks on the rise, with the Market Vectors Solar Energy ETF (NYSE: KWT), a reasonable proxy for the industry, surging 110% year-to-date, far ahead of the S&P 500 index’s 24% gain.
Moreover, a number of solar power stocks have reported third-quarter earnings in the past couple weeks, and on the whole, they’ve been reporting higher profits—or at least narrowing losses.
Here at Investing Daily, we’ve been closely following the solar power recovery. In his Personal Finance article, Persinos analyzed three companies that aim to benefit from the industry’s improving prospects, including First Solar (NasdaqGS: FSLR) and Canadian Solar (NasdaqGS: CSIQ).
Each offers a different way to play the solar industry’s gains: First Solar, for example, is a large firm, boasting 5,600 employees and a market cap (or the value of all its outstanding shares) of $6.14 billion.
The company started up as a photovoltaic module manufacturer in 1999, but in late 2011 it began to shift toward building solar facilities and selling them to utilities and investors. First Solar also provides construction, operation and maintenance expertise, in addition to a wide array of other related services.
First Solar shares have been among the most stable in the solar power industry, though stability is a relative term in this always-unpredictable business. The stock sports a beta rating of 2.38, meaning it is more than twice as volatile as the overall market, but that’s lower than Canadian Solar at 2.79, SunPower (NasdaqGS: SPWR) at 2.87, and SolarCity (NasdaqGS: SCTY) at 3.74 (or nearly four times as volatile as the market).
SolarCity is a name you may recognize: the company is a leading residential solar system provider, with 68,000 clients in 14 states. Its chairman is Elon Musk, CEO of electric car maker Tesla Motors (NasdaqGS: TSLA), and Musk’s cousin, Lyndon Rive, is CEO.
The company’s business model makes it unique among solar power stocks: it installs panels on customers’ roofs for free, and its clients then pay for the power they generate at a monthly rate that is competitive with their current utility. Rates are locked in for the duration of the contract, so they also save money as regular power prices rise.
The stock is up 346% since its IPO last December. However, it recently plunged 17% after it forecast a larger-than-expected loss for the fourth quarter.
First Solar Profits Eclipse Expectations
But back to First Solar: in the third quarter, the company’s earnings jumped 121.8%, to $195.0 million from $87.9 million a year ago. On a per-share basis, profits gained 94%, to $1.94 from $1.00, on more shares outstanding. Excluding unusual items, First Solar earned $2.28 a share, blowing past the Street’s forecast of $0.99.
Revenue rose 50.8%, to $1.27 billion, also well ahead of the $989 million that analysts were expecting. The company ended the quarter with cash and marketable securities of $1.5 billion, compared to $1.0 billion a year ago.
First Solar now expects earnings of $4.25 to $4.50 for all of 2013, up from its previous forecast of $3.75 to $4.25.
“First Solar is the largest and least risky play on the industry’s rise,” writes Persinos. The stock has gained 100.0% year-to-date and sports a price-to-earnings ratio of 12.8.
Smaller Player Goes Global
A more aggressive play is Canadian Solar, a much smaller company than First Solar, with a market cap of just $1.24 billion.
Canadian Solar supplies solar equipment, including ingots, wafers, cells, modules and complete power systems. This gear is used in everything from large-scale solar facilities to individual homes. The company is based in Canada, but its plants are mainly in China, creating “a dual presence that reaps low-cost manufacturing but also obviates some of the hassles of investing in a China-based company,” notes Persinos.
The company boasts a customer base of over 1,000 in 70 nations. Its largest markets are Canada, the U.S., Japan, China, Germany and India.
Canadian Solar reported its latest results this morning. In the third quarter, the company earned $33.6 million, or $0.56 a share, compared to a year-earlier loss of $7.9 million, or $0.29. Revenue gained 29.1%, to $490.9 million. That beat the consensus forecast of $0.36 a share in earnings on $480.1 million of revenue.
The stock has surged 730% year-to-date.