Solar energy, on the far-out fringes of the power grid for eons, is about to come into its own. Solar as a subject for the 2008 political debate is a no-brainer, as the drive to decrease dependence on foreign energy sources looms large as an issue. Even as government incentives here and abroad plump up demand, production costs are falling, and the solar industry is figuring out pricing options that will finally bring the photovoltaic phenomenon mainstream. Rising fossil fuel prices boost solar's appeal daily. Bank of America, for one, expects solar energy production to increase at a compound annual growth rate of 35% through 2010.
So as an investment theme, solar energy stocks are no-brainers, too, right? Well, hardly. Even the experts who analyze these companies for a living can't agree on which ones to buy. Consider the crossed swords in recent days: On March 26, Bank of America Securities initiated coverage of Evergreen Solar with a sell recommendation, while on the same day Zacks Equity Research rated the stock a buy. On the same day, BofA rated First Solar a buy, but on March 27 American Technology Research called it a sell. American Technology meanwhile gave Suntech Power a buy rating, while BofA mustered only a neutral call.
The lack of consensus is telling. This is a dicey, volatile sector. Yes, the outlook for solar energy is undeniably bright. But barriers that kept new entrants from the industry are falling, indicating fierce competition and maybe even lower prices ahead. One hurdle has been a shortage of polysilicon -- a key ingredient for solar cells as well as for semiconductors. That shortage is now abating, while other technologies for conducting solar energy are emerging.
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Meanwhile, unbridled investment in alternative energy has invited newcomers and inflated stock prices. In the past two years seven manufacturers have listed shares on U.S. markets. The solar energy stocks that BofA covers trade at an average of 72 times estimated 2008 earnings, compared with about 14.5 for Standard & Poor's 500-stock index.
But the beauty of any particular solar stock is all in the eye of the beholder, apparently. Take a look.
First Solar (symbol FSLR). BofA's Eric Brown says First Solar, based in Phoenix, Ariz., enjoys a competitive advantage that will see it through industry-wide pricing pressures. The company's solar technology does not rely on expensive polysilicon, instead using a thin layer of a material called cadmium telluride, which makes First Solar's production costs among the lowest in the industry. Brown thinks earnings could grow at an average annual rate of 80% over the next three years (he expects 91 cents a share next year) and says the stock could trade at $72 a share over the next 12 months. First Solar closed at $55.44 on March 27, down 2.8% for the day.
American Technology's John Hardy thinks the shares are overvalued. He argues that significant spending as the company ramps up production at a number of facilities could squeeze profits and send the stock down to $42 a share.
Evergreen Solar (ESLR). Brown believes that the outlook for Evergreen Solar, headquartered in Marlboro, Mass., isn’t as clear as it is for others in the industry. Its costs are high and its production capacity constrained. The company probably won't even make a full-year profit until 2009 and could sink to $8 a share over the next 12 months. The stock sank nearly 5% on March 27, to $10.08.
Zacks doesn't like the earnings losses either, nor the company's considerable stock-based compensation costs. But Evergreen has a history of technological leadership and a host of new, multi-year sales contracts. Zacks sees the stock at $12 within six months.
Suntech Power (STP). American Technology's Hardy is favorably disposed toward Suntech Power Holdings, which has the distinction of being one of the few companies in the industry to have turned a profit for several years running. The company, although based in China, is geographically diverse, with subsidiaries in the U.S. and Europe. Brown sees earnings of 98 cents a share this year and $1.39 a share next year. At its March 27 close of $35.45 (up 0.6% for the day), the stock trades at a relatively modest price-earnings multiple of 36, based on '07 estimates. Hardy's 12-month target price: $46.
Not surprisingly, BofA's Brown sees things differently. Suntech in particular, because of a lack of distinguishing characteristics, is susceptible to the pricing pressures that BofA sees ahead for the entire solar industry. Prices for the company's products could erode roughly 7.5% from this year through 2010, although the stock could still creep up to $38 over the coming 12 months.
SunPower (SPWR). One stock that a plurality of analysts seems to agree on is SunPower Corp. Analysts at BofA and American Technology agree (finally!), with both rating the stock a buy and both giving 12-month price targets of $57. Lazard Capital Markets is even more bullish. It initiated coverage on March 15 with a buy rating and a $60 price target. SunPower shares jumped 5.4% on March 27 to close at $45.12. The stock trades at about 46 times average estimated earnings of 97 cents a share this year.
Based in San Jose, Cal., SunPower is 70% owned by Cypress Semiconductor -- emblematic of the increasing investment of the one industry in the other. SunPower is a technology leader, boasting the highest-efficiency solar cells in the industry. BofA sees earnings growing at an average annual 40% rate over the next three years.
Much of SunPower's growth is expected to come from homeowners, as the trillion-dollar residential electricity market embraces solar. In January, SunPower announced plans for a 650-home development in Roseville, Cal. Lennar Corp. will build the homes, which will feature SunPower's integrated roof tiles. Lennar estimates that homeowners would save 40% to 60% on their monthly electric bills. But until you get your own solar panel, you just might have to settle for the stock instead.
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