Cherrypicking Solar Stocks Could Be Rewarding

samso.jpgAnalysts ganging up on solar stocks are worried about the insecurity of demand in the wake of cheaper conventional energy prices. Reduced government subsidies for the photovoltaic solar industry in Germany and Spain are also frequently cited as a reason to downgrade solar stocks. But it’s not all doom and gloom. There still are exceptional companies to be found.
Research house iSuppli recently put out a report estimating that worldwide turnover of solar PV panels will decline by 20% this year. Turnover of solar panel sales will dip from over $15 billion in 2008 to $13 billion in 2009 – marking the sector’s first ever contraction. The reason they say? Overproduction in 2008. Solar panel manufacturers produced 7.7 Gigawatts of solar capacity last year but only half of that production was actually connected.

In light of the iSuppli information, it seems that analysts are right to downgrade solar stocks due to softening demand. But what what to make of the warnings that (especially European) subsidies will be halted? It’s true that the governments of Germany and Spain, which were the first to stimulate the solar energy markets, are now retreating somewhat. But there are plenty of other governments who have begun similar stimulation packages recently, including the US, France, Portugal, the Netherlands, Belgium and Italy.
France’s energy minister, Jean-Louis Borloo, announced late last year that France will embark on a plan to supply 23% of its energy with renewables by 2020, an annual growth of 39% which is theoretically guaranteed. The country’s 2009 subsidies to the solar industry will be even more generous than those of Germany, which ranks as the world leader in solar projects largely because of similar government grants!
Before you get too enthusiastic about the French prospects, read these calculations of the scale of the French solar project involved to get a sense of timing.
What should investors look out for when picking exceptional solar stocks? Those companies that finance their expansion from cash flows rather than by issuing new shares or debt are well worth anyone’s time. The enormous growth that solar companies have experienced in recent years has been very capital intensive. All solar companies required hefty capital investments to achieve rather meager production capacity levels. But the only time when this becomes a risk factor is when demand softens. Then “expensive” capital becomes a moot point. It’s what analysts loath.
An example of a company that navigates a safe course in this respect is LDK Solar (nyse: LDK), a US company which produces multi-crystalline wafers used in solar cells. It’s also faced with stagnating demand and has put out an earnings warning but on the longer horizon LDK Solar’s prospects look bright because of its financials. The company has lots of cash and has instant access to an even bigger pool of short term loans from banks.
Another exception to the doom and gloom of solar PV companies are the firms which beat expectations. SunPower is a good example here. It released upbeat fourth-quarter results last week and pushed up many other solar stocks because of it. SunPower’s earnings were better than anticipated and analysts conceded that the company’s earnings forecast for this year (a healthy $2.20-$2.80 per share) is credible.
Other good plays will be companies that stand to benefit from the new European solar markets. An example is EDF Energies Nouvelles, a French power giant, which recently announced the commissioning and official opening of a photovoltaic solar power plant in the Aude region of France. The company collaborated with US firm First Solar to build the plant which has a capacity of 7 MW.
At the moment there are plenty of other projects in the pipeline in France. The backlog of projects amounts to over 12,000 systems waiting to be installed, representing 400 MW worth of solar power.
Finally, a French company to keep an eye out for is LepercqSolaire Direct in Paris. It’s a solar operator raising EUR100 million ($132 million) in the next few weeks, to partially finance a EUR1.2 billion 300 MW pipeline of utility-scale photovoltaic solar projects.