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Published: September 29, 2010
During the course of 2010, investors have continually
fretted that the solar power industry was headed for severe
slump. They worried that too many new factories were set to
produce far more solar panels than the industry could absorb.
And that supply increase was coming right at a time when demand
was set to fall. European governments had been the key behind
robust global demand in previous years, but massive budget
pressures would likely force them to throttle back incentives.
Despite those dire concerns, 2010 will likely turn out to be a
banner year for the industry, with global solar spending set to
more than double, according to UBS. Firm demand means that
suppliers did not need to embark on profit-sapping price wars,
as many had feared. As a result, the 10 largest publicly-traded
solar plays exceeded sales forecasts in the June quarter, and
all raised guidance for the second half of 2010.
One of the benefits of firm demand is that expected price cuts
haven't materialized. Yet the industry had been preparing for
the worst by enacting steady cost reductions. Lower costs and
firm prices translates into stable or rising profit margins,
which is just what we are seeing in recent industry quarterly
reports. Sector share prices have rebounded from their spring
lows, but they still have more room to run.
To be sure, the industry is in flux. Germany, which had been the
biggest buyer of solar equipment, is likely to start spending
less in coming years. And don't be surprised if a few new growth
markets such as the Czech Republic start to disappoint on the
heels of budget pressures. But elsewhere, especially in the
United States, demand is really kicking into gear. As this table
shows, the U.S. should emerge as the second-leading buyer of
solar equipment by 2012 in terms of GigaWatts (GW) of power.
|
Rank |
2010 |
2012 |
GW in
2012 |
|
1 |
Germany |
Germany |
7,000 |
|
2 |
Italy |
U.S. |
2,260 |
|
3 |
U.S. |
China |
2,180 |
|
4 |
Japan |
Italy |
1,725 |
|
5 |
France |
France |
1,127 |
|
Industry bears will note that Germany is such a strong consumer
of solar power than any change of heart could devastate industry
demand. But Barclay's Vishal Shah predicts those concerns will
eventually abate. In a recent report, he noted that a number of
countries such as Canada, the U.K. and other countries across
Europe, are likely to increase their solar power subsidies in
2011, adding that "we expect demand to exceed supply during this
second growth-phase."
The industry's brightening prospects come at a time when fossil
fuel prices are well off their 2008 highs, when oil exceeded
$140 a barrel, and natural gas prices surged in tandem. Many
thought the solar industry would only thrive if energy prices
were high or carbon emissions were heavily taxed. So if either
of those factors comes into play, then demand for solar could
well be sustained at high levels into the middle of the decade.
The picks
As noted earlier, sector shares have rebounded from their lows
but remain below analyst target prices. Several analysts cite
Yingli Green Energy (NYSE: YGE) as a favorite current pick.
The China-based supplier of solar modules has established a
low-cost manufacturing base that is leading to rising
market share. Sales are expected to rise more than +50% this
year to around $1.6 billion, and consensus forecasts of around
+11% sales growth in 2011 looks too conservative now that
industry prices are no longer falling. Shares trade for about 11
times next year's consensus profit forecast, and that profit
outlook also looks understated.
For many investors, First Solar (Nasdaq: FSLR) represents
the strongest
business model in the sector. The company is the global
leader in the production of thin-film solar, which captures less
of the sun's energy than traditional silicon-based solar panels,
but can be made far more cheaply and also can be deployed in a
wider variety of applications. Over the years the company has
managed to steadily cut production costs, pushing prices below
levels where rivals could make money, even if those rivals'
technological approach yielded more energy from each solar
panel. In 2007, the company was able to build modules for
roughly $1.40 per watt of power. That figure breached the $1
mark late in 2008, and recently hit $0.76. The company now
spends roughly $100 million per year on research and development
to achieve this kind of efficiency.
That leading-edge approach led to fast-rising market share.
Sales doubled or tripled every year from 2003 to 2008, and are
still rising in excess of +20% every year. Moreover, a shift in
the business model toward the development of massive solar power
farms is leading to an apparent reduction in gross margins -- so
per share profits are likely to be flat this year. It's also a
result of
accounting methods, but the company's current major projects
should yield robust
cash flow in a year or two.
Action to Take --> Shares of
First Solar don't likely possess massive upside, but they should
see steady, moderate gains as the solar industry progresses in
coming years. Any major pullback in the stock would represent a
compelling buying opportunity. Shares have had a habit of
bouncing between $100 and $150 during the past year. Right now,
they are at the upper end of that range, so you may want to wait
for a pullback before pouncing.
The bottom line is that this industry's obituary has been
prematurely written. Many of these stocks have moved back toward
their 52-week range, but the next move could be a break-out
through that 52-week range. The key catalyst for this group in
2011 is either a spike in fossil fuel prices or further progress
on carbon tax legislation.
-- David Sterman
Staff Writer
StreetAuthority
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