US solar stocks rising at dawn of 2014

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Following a plunge in solar industry revenues in 2012, the "prodigal sun" returned during 2013 — with prices stabilizing, margins expanding and a better balance between supply and demand. Most analysts expect the positive momentum to continue into the new year. The only question is, how much growth should we expect?

Speaking to pv magazine, Angelo Zino, research analyst at S&P Capital IQ in New York City, says he expects solar industry revenue to increase by at least 10% in 2014. "This compares to our forecast for a low-single-digit rise in 2013 and follows significant declines in 2012 and 2011."

Pavel Molchanov, research analyst at Raymond James & Associates in Houston, concurs, but says investors will have to be smart and selective to turn a substantial profit during the next 12 months. "Easy money was made in 2013. It has been a bull market, with the Fed [U.S. Federal Reserve] printing currency and the global economy doing somewhat better." Yet Molchanov said that kind of growth would be harder to achieve this year. "It’s going to be more of a ‘stock picker’s market’ in 2014."

Good prospects

Which is not to say that the upswing in the U.S. solar equities market will stall. Several solar stocks were winners in 2013 — and analysts believe they will continue to do well. Among them are:

  • SunEdison (NYSE: SUNE), which has seen its stock appreciate more than 275% year-to-date (based on closing price on December 24);
  • Trina Solar (NYSE: TSL), up 190%; and
  • Advanced Energy Industries (NASDAQ: AEIS), up by a comparatively paltry 30% — but with a plan in place to spin off its thin-film division and scale up its solar business.

In September, SunEdison filed plans to divest itself of its semiconductor division in an initial public offering in early 2014 geared to enable the company to concentrate more on solar growth. At that time, S&P Capital IQ’s Zino recommended the company as a "strong buy" — and he continues to do so despite the fact that SunEdison has since slashed its sales forecasts for 2013. The company now expects to sell from 380 MW to 405 MW of solar projects this year rather than the original forecast of 405 MW to 435 MW.

What is fueling his optimism? SunEdison expects to complete as much as 540 MW of solar projects by year-end — unchanged from its earlier forecast — and has stated that it intends to keep more of them on its balance sheet rather than selling them "in an effort to retain more long-term project value." Zino sees the wisdom in this maneuver, commenting that SunEdison is "holding onto more projects and, overall, this move is going to be viewed as a positive. With more projects on-hand, they will be able to lump them together into yieldco investment vehicles [which pool a number of assets for securitization] that will provide a steady cash flow to shareholders.

"They’ve already started to turn things around," Zino says."The fact that SunEdison lowered its [sales forecasts] doesn’t concern us at all."

As for Changzhou, China-based Trina Solar, another Zino pick, the company is preparing to expand operations in 2014 by entering the Japanese market. The PV manufacturer and project developer revealed just before Christmas that it had received JIS Q 8901 Certification from TÜV Rheinland in Cologne, Germany. The JIS Q 8901 standard was established in February 2012 with the aim of encouraging the wider adoption of PV power-generating systems in the Japanese market through promoting product reliability and user protection. This standard sets out reliability assurance requirements for design, production, and performance for terrestrial photovoltaic modules.

Trina also has a Middle Eastern project in its growing pipeline. The company recently reached an agreement to supply 1 MW of PV modules for use in Jordan’s first large-scale solar power project.

"The main catalyst for Trina’s growth will be international demand," Zino predicts. "There is uncertainty about the Chinese market in 2014. However, we are expecting Trina to ramp up its global project development business next year. That will be the driver."

Lastly, looking at our pros’ top picks, Fort Collins, Colorado-based Advanced Energy Industries (AEIS) remains a strong buy, says Raymond James & Associates’ Molchanov. On the solar side of the company, which today accounts for more than 50% of its business, AEIS supplies photovoltaic inverters to commercial and utility buyers. The company’s shares are up 26.1% for the the three months ending December 24. What’s more, the Englewood, Colorado-based research firm, IHS, has predicted that global inverter shipments will reach a record 41 GW in 2014.

Other frontrunners

But that’s not all: Three stocks that these analysts don’t cover have achieved triple-digit growth: Canadian Solar (NASDAQ: CSIQ), which is up an amazing 772% year-to-date; SunPower (NASDAQ: SPWR), which has appreciated more than 375% YTD; and SolarCity (NASDAQ:SCTY), up 355% YTD.

The leader of the pack — and this year’s second-best performer on the Nasdaq Stock Exchange (following Zhone Technologies Inc. [NASDAQ: ZHNE]) — is Canadian Solar. According to Bloomberg, "More than 41% of the Guelph, Ontario-based company’s third-quarter revenue came from developing solar farms, especially in Canada, up from 22% a year earlier. That led to a net income of $27.7 million [€20 million]." With operations in North America, South America, Europe, Africa, the Middle East, Australia and Asia, Canadian Solar has delivered more than 5 GW of solar modules to customers in over 70 countries.?

SunPower continues to be a top pick because of its downstream exposure, with projects not only in the United States, but in Japan, Chile, and South Africa. Indeed, The Motley Fool’s Travis Hoium comments, “It has so much captive demand that it is sold out of panels for the next 18 months and is building a new 350 MW plant to increase capacity.” He points out, "This is the first [substantial] capacity expansion by a major solar player since the market began falling apart two years ago."

As for SolarCity, the San Mateo, California-based mega-installer used its connections with Elon Musk’s Tesla electric vehicle empire to launch the DemandLogic smart energy storage system in December. The system — meant to provide short-term electricity backup, even when the grid is down — relies on the same lithium-ion battery technology that runs the Tesla vehicles. In a time of severe weather concerns, DemandLogic represents another profitable game-changer for SolarCity, which continues to introduce innovations to the market. The company’s shares were up 17% for the month ending December 24.

And while this hasn’t been their best year, let’s not count out First Solar (NASDAQ: FSLR).The Tempe, Arizona-based thin-film manufacturer and project developer seems to be regaining its luster, after achieving significant improvements in technology and panel efficiency that have cut per-watt production costs. Its share price is up about 80% YTD.

A financing fracas in 2014

Finally, as 2014 begins, the legislative agenda in the U.S. Congress will include an item that could have long-term implications for U.S. investors and industry players — the tax reform/tax extension package.

The Washington, DC-based Solar Energy Industries Association (SEIA) has already placed a priority on sustaining “smart tax policies” in the new bill, stating, "Defending existing funding sources and aiding in the creation of new forms of financing helps to ensure further industry innovation and growth. … The Investment Tax Credit (ITC) [is] critical to lowering costs for customers and opening financing opportunities. Accelerated depreciation under the Modified Accelerated Cost Recovery System (MACRS) continues to drive job creation and industry growth by providing the market certainty needed for long-term investments."

However, at the moment, the fate of the tax bill — and of SEIA’s concerns — will rest in the hands of a congressman yet-to-be-named. The deal-breaker or deal-maker will be a new political appointee, because Senate Finance Chairman Max Baucus (Democrat-Montana), who is the long-time power broker behind the U.S. tax package, is about to be dispatched as ambassador to China. In fact, Baucus is departing from the tax-writing committee several months earlier than expected, leading to debate on the Beltway about who will be left in charge of the task.

According to the new site, Politico, the Baucus-sponsored first draft of the bill proposed consolidating or wiping out scores of tax breaks that promote clean energy and efficiency, "as part of a radical makeover that would offer incentives for natural gas, nuclear power and other low-carbon sources, while junking other benefits popular with consumers."

As envisioned by Baucus, the bill would slash the US$150 billion (€110 billion) bottom line for incentives for both renewable and fossil fuel energy over the next decade by more than 50%. In their place, his plan would create two broad incentives for clean-electricity and fuel that would be based on greenhouse gas levels, as determined by the Environmental Protection Agency.

Needless to say, the draft has sparked controversy and some pundits have joked that Baucus’s early departure may be of his own volition. "I think he is trying to get out of town!" comments Molchanov, not entirely seriously. "Both the fossil fuel sector and the solar industry have come out against his tax plan. He can go to China and this [debacle] will be forgotten even before he buys his ticket."

Indeed, at this point, that may be the only the right plan for Baucus, but what’s ahead for the industry? After a spectacularly successful year, the solar sector will start 2014 with rising profits but unfortunately also with intensifying concerns about what the future of renewable energy financing holds.