Solar Stocks: Still Shining

Investing Daily Article of the Week

by Chad Fraser, Investing Daily

The solar power industry continued to sparkle in 2013.

That’s according to figures from the Renewables 2014 Global Status Report, recently released by REN21, the Renewable Energy Policy Network for the 21st Century.

Robert Rapier, chief investment strategist at our Energy Strategist advisory, calls REN21’s annual report card

“the most comprehensive report available when it comes to the global renewable energy picture.”

Here’s what the report had to say about the growth of the solar photovoltaic industry:

• Globally, more than 39 gigawatts (GW) of solar PV capacity was installed in 2013, bringing the total to 139 GW;
• In the U.S., installations rose 41 percent from 2012, to nearly 4.8 GW, spurred by declining prices and new financing arrangements, like those offered by rooftop panel provider SolarCity (NASDAQ-GS:SCTY), with low-to-no upfront payments;
• Almost half of all global solar PV capacity currently in operation was added in the past two years; 98 percent has been installed since the beginning of 2004;
• Global solar PV additions gained 32 percent, even as investment in solar PV fell 22 percent, partly due to lower technology costs;
• 2013 marked the first year the world added more solar PV than wind capacity.

Correspondingly, many solar stocks soared in 2013; the Market Vectors Solar Energy ETF (NYSE:KWT), a reasonable proxy for the industry, surged 103.5 percent on the year, far eclipsing the S&P 500’s 31.8 percent climb.

That outperformance has continued into 2014, with the ETF tacking on a 19.9 percent gain year-to-date, compared to 6.8 percent for the S&P 500.

The rebound comes after a tough few years for the solar industry. First, the financial crisis deterred customers and drove down sales. Then governments cut 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 lowered panel prices and profit margins.

Today, solar stocks continue to be volatile, and the industry is still subject to unpredictable swings in supply and demand, as well as constantly shifting political winds.

It’s also dealing with strong competition from natural gas, as higher U.S. production has put downward pressure on prices. Last year in the U.S., for example, gas accounted for just over 50% of new utility-scale generating capacity, according to the Energy Information Administration, with solar accounting for 22% — though that was up from just 6% in 2012.

However, there are signs that solar is making progress on this front. For example, the REN21 report noted that solar power is now competitive with fossil fuels without subsidies in at least 19 markets in 15 countries.

A Large-Scale Solar Developer to Watch

One solar stock that currently carries a buy rating in The Energy Strategist’s Growth Portfolio is First Solar (NASDAQ-GS:FSLR), which focuses on large, utility-scale solar projects.

First Solar started up as a pure photovoltaic module maker in 1999 but in 2011 began shifting toward building, financing, maintaining and selling solar facilities. The company benefits from its vertically integrated structure, because it continues to make the solar modules for its projects using its proprietary cadmium telluride thin-film technology.

To give you a sense of the scale of that shift, solar power systems and related services accounted for 44.9 percent of First Solar’s revenue in 2011, while sales of solar modules to third parties supplied the remaining 55.1 percent. By 2013, solar power system revenue had jumped to 88.5 percent of the total, while third-party module sales had shrunk to just 11.5 percent.

As of the end of 2013, First Solar had installed 8 GW of solar PV capacity around the globe.

With a market cap of $7.0 billion and 4,850 employees worldwide, First Solar continues to be a dominant force in the industry. In addition to the desert areas of Arizona, Nevada and California in the U.S., it has facilities in Africa, Asia and the Middle East.

Declining Costs, Higher Efficiency Help First Solar Compete

In 2013, First Solar cut its per-watt module manufacturing costs by 11 percent, to $0.63 from $0.73 in 2012, continuing an ongoing trend. At the same time, it continues to improve its cadmium telluride panels’ conversion efficiency ratio, or the share of available energy they can convert into usable power.

First Solar’s conversion rate averaged 13.2 percent in 2013, and the company just accelerated its forecast on this front, with expectations that its most advanced line will hit 15.6 percent to 15.8 percent efficiency at the end of 2015, rising to 18.9 percent in 2017, as First Solar aims for a slice of the rooftop market.

In the first quarter, First Solar’s revenue jumped 25.8 percent, to $950.1 million from $755.2 million a year ago, largely due to revenue from its 139 MW Campo Verde project in California, which it sold in April 2013 and will continue to operate under a 10-year contract. Net income jumped to $1.10 a share from $0.66. Both figures topped Wall Street’s expectations.

The company’s balance sheet is also strong, with cash of $975.2 million and $138.2 million of long-term debt, as of March 31.

First Solar now expects earnings of $2.40 to $2.80 a share for all of 2014, up from its previous forecast of $2.20 to $2.60. The stock has gained 29.4 percent year-to-date and sports a p/e ratio of 17.2.

NOTE: Get instant access to more detailed analysis of First Solar, plus Robert Rapier’s top picks from across the energy landscape—from oil and gas to pipelines and renewables — when you take The Energy Strategist for a no-obligation test drive today. Click here to get started now.