Bright prospects for US solar stocks

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Just two months into 2014, several solar companies already have the requisite "fire in the belly" to lead the industry to another record-setting year. Among the strongest equities on the U.S. markets are SunEdison (NYSE: SUNE), up 31.90% year-to-date; SolarCity (NASDAQ: SCTY), up 42.29% YTD; and Canadian Solar (NASDAQ: CSIQ), up 22.37% YTD.

Still other industry players have hit analyst expectations, including SunPower (NASDAQ: SPWR), which is up 2.57% YTD. What’s more, SolarWorld (SRWRF:OTC US) is back from the dead—up over 10,000% for the month of February, at US$59.40 (€43.15) per share —and already is causing a small stir on the Street as it, once again, “calls out” its global trade partners.

On the other hand, Wuxi, China-based Suntech—the world’s biggest solar-panel maker back in 2011—announced on February 14 that its American Depository Shares were about to be de-listed by the New York Stock Exchange.

And First Solar’s (NASDAQ: FSLR) prospects are looking somewhat dimmer—with its shares down 44% YTD. In its earnings press release on February 25, the Tempe, Arizona-based thin-film giant reported US$768 million in net sales in 4Q2013, a decrease of US$497 million from the third quarter of 2013. The company is currently relying on the shrinking U.S. utility scale market to fill its project pipeline—and looking toward international growth and a possible yieldco to turn things around.

Making it official

After months of industry speculation about SunEdison’s solar yieldco, the Belmont, California-based company made it official on February 18 by filing a Form S-1 with the U.S. Securities and Exchange Commission (SEC) related to its proposed initial public offering (IPO). To date, few details on the yieldco have been released.

However, last November SunEdison CFO Brian Wuebbels revealed to Reuters that the company would sell a stake somewhere between 20 percent and 30 percent in its new yieldco subsidiary, in order to finance new projects. Wuebbels said the unit—which will comprise projects in the U.S., Canada, Mexico, Chile, the U.K. and Japan—is likely to produce US$40 million to US$60 million of distributable cash flow. He also revealed that it would pay a quarterly dividend, with the first disbursement expected in the first quarter after the IPO.

SunEdison missed its 4Q2013 revenue/EPS estimates— which were "well below expectations," according to Angelo Zino, research analyst at New York City-based S&P Capital IQ.

That said, Zino is not concerned about the company’s earnings and neither are most of his colleagues in the investment community. As Zino exclusively told pv magazine: "We [at S&P Capital IQ] don’t think the stock value is going to move on earnings going forward; it will move on what’s in SunEdison’s pipeline and on how much lasting value they can create for shareholders. The company has retained a strong backlog of projects in its pipeline of 127 MW [above the projected 100 MW to 110 MW], which will be rolled into the yieldco as soon as Q2.”

Indeed, Zino believes that the yieldco is "the biggest reason for the stock’s appreciation this month," and he predicts that "the stock’s value will rise sharply once the SEC gives its approval." Not only that, but once the first yieldco has hit the market, investors should make way for more, Zino says. He anticipates seeing at least one more from SunEdison this year—possibly a Hong Kong or Singapore IPO that would comprise its Asian and South African projects.

Both prospective IPOs are unrelated to the $250 million offering SunEdison is planning for its semiconductor business.

SolarCity plans second securitization

Following a successful securitization of projects last November, SolarCity is planning another round of financing for the second quarter of this year, according to Pavel Molchanov, research analyst at Raymond James & Associates in Houston.

During the first round, the San Mateo-based solar installer offered institutional investors the opportunity to purchase bonds secured by its consumer and commercial power contracts. The offering was intended to raise US$54 million to finance the continuing expansion of SolarCity. The bonds carry a 4.8% coupon and will mature in December 2026.

The company did not release full 4Q2013 financials, as was expected in February—a glitch attributed to "accounting-related delays." On the whole, however, Molchanov told pv magazine that he characterizes the stock as solid, with a “market perform” rating. Total revenues for the quarter of US$47.3 million—up 87%, year over year—marginally topped Raymond James’ estimate of US$45.4 million. Lease revenue of US$22.4 million—up 60% year over year—was "toward the lower end of guidance," he said.

And reflecting the seasonality of the residential solar market, which normally peaks during spring and summer (not during the winter months), Molchanov said that SolarCity’s deployment numbers will be "back-end loaded," with only 16% of annual cumulative installations planned for the first quarter (or 78 MW to 82 MW). Full-year 2014 guidance remains at 475 MW to 525 MW.

"SolarCity is executing well, and its position as the top (non-utility) downstream pure-play in the U.S. market is secure, despite a landscape that’s getting tougher … as vast amounts of capital flow to other lease providers as well," Molchanov told pv magazine at the end of the month.

High hopes for Canadian Solar

More analysts jumped on the high-performing Canadian Solar bandwagon in February—including the likes of JPMorgan Chase & Co. of New York City, and Arlington, Virginia-based FBR & Co.

In a note to clients, JP Morgan assigned an "overweight" (or buy) rating and a US$50.00 price target to the stock. On February 28, Canadian Solar opened at US$43.10 and closed at US$41.84, with a day range of US$40.61 to US$44.50.

FBR Capital’s expectations were somewhat lower. The investment bank initiated coverage on the stock with a "market perform" rating—a rather neutral assessment—and a price target of US$40.00.

According to a story in Street Insider, FBR analyst Aditya Satghare told clients in a note: "Canadian Solar offers a unique mix among the Chinese solar complex with a top-three position globally in module sales and a growing and profitable project development business. We believe, however, that the current stock price fully captures the sizeable profit potential from the existing Canadian pipeline, the best balance sheet among the Chinese peers, a growing project development business in markets such as Japan and China, and an expanding presence in the global module business."

What’s more, on February 12, Canadian Solar boosted its own earnings guidance for 4Q2013. The company now expects fourth quarter revenues to rise by about 75%, in line with increased demand for its solar panels. Canadian Solar will report the final results on March 5.

Interestingly enough, such China-based industry players as Trina Solar (NYSE: TSL) and Yingli Green Energy (NYSE: YGE) also may have reason for optimism. On February 27, China’s Ministry of Industry and Information Technology announced that, by the beginning of the second quarter, it will compile a list of solar projects that will receive financing from China Development Bank (CDB) Corp. Among the t

ypes of schemes that will be high on the list for consideration are research and development, technology upgrades, mergers and acquisitions, and overseas development,

Indeed, according to a poll conducted by Deutsche Bank last fall, China and Japan will continue to enjoy strong growth that will largely be driven by Yingli and Trina, which will "remain the picks in the Chinese solar sector."

SolarWorld redux

However, what is good news for Asia is apparently not helping the newly resuscitated SolarWorld to breathe any easier. SolarWorld—based both in Bonn, Germany, and in Hillsboro, Oregon—had no sooner been salvaged by an infusion of capital from Qatar Solar Technologies than it began to "rag on" China’s trade practices again in a manner reminiscent of the trade wars of 2011-2012.

In January, SolarWorld CEO Frank Asbeck began urging the U.S. International Trade Commission (ITC) to investigate whether China’s solar manufacturers had been "working around" America’s punitive duties on their modules by moving their production facilities to Taiwan. Now, the ITC has found evidence of malfeasance, and decisions on what further measures will be taken by the commission are scheduled to be revealed on March 26 in relation to anti dumping (AD) duties, and on June 9 for countervailing duties (CVD).

While U.S. manufacturers such as First Solar are backing SolarWorld’s campaign, predictably enough, the downstream sector of the industry is simply enraged. Jigar Shah, president of the U.S.-based advocacy group the Coalition for Affordable Solar Energy (CASE), fired back at Asbeck in February—heatedly implying that the Qatar connection might be responsible for the rekindled trade action.

"CASE calls on SolarWorld to explain its investment from government-backed Qatari company Qatar Solar Technologies," wrote Shah. "As announced this week, [Qatar Solar Technologies] provided capital for the struggling German company’s restructuring—a company whose only leverage in the market is a complaint that has the potential to cripple the U.S. solar industry.

"As U.S economic interests hang in the balance between two foreign companies, SolarWorld and [Qatar Solar Technologies] should explain how the latter’s investment makes any sense other than as an effort to undermine renewable energy deployment in the United States," Shah demanded.

Play-by-play analysis

And now the analysts have begun weighing in. "This is a story that may not have generated a ton of headlines, but is potentially going to be a big deal farther down the road," according to Pavel Molchanov of Raymond James.

There’s an intriguing twist to the new trade complaint, Molchanov points out, explaining, "Earlier in February, the U.S. Trade Representative filed another case against India—that time, going at it from the opposite angle."

In fact, while America wants to prevent China’s manufacturers from dumping low-cost modules on U.S. shores, it has the opposite problem in India—which is taking its own measures to ensure that solar projects are constructed with domestic content. "Even while we are trying to keep Chinese companies from dumping in the U.S.," Molchanov explains, "India is trying to stop America’s solar equipment from flowing so freely into its market."

Specifically, India required about 10% of new PV projects granted permits during 2013 to use domestically made solar cells and modules. The rule violates international trade law and raises the cost of solar energy, in the opinion of U.S. Trade Representative Michael Froman.

The World Trade Organization already has struck down a similar regulation, imposed by Ontario, Canada, as part of its solar program. Until last May, Ontario was able to require at least 60% domestic content to be used in each solar project; now, that number has, overall, been reduced to about 20%.

How will both of these trade actions affect stock prices? "Long-term, the jury is still out." Molchanov comments. "These trade cases can drag on. But clearly, if the rules on Chinese imports get tightened, then it’s not going to be good for the Chinese panel makers [and vice versa for the U.S. in India]."

What’s more, all of the hoopla has not stopped U.S. solar developer SunEdison from winning a 100 MW project in India’s first national auction since 2012, held in late February.

All’s well that ends well

Overall, SunPower was a winner in 2013. Not only did the company meet industry expectations (as well as its own) with 431% stock growth, but it announced a 350 MW expansion for 2014, and a new Detroit-based partnership that will enhance further growth. SunPower will provide the solar cells for Ford’s C-MAX Energi hybrid vehicle—generating power for the car’s electric battery while the sun is out.

What’s more, the Silicon Valley-based company has entered the emerging markets of Chile and South Africa with its solar projects; has a new US$220 million U.S. leasing program courtesy of Bank of America, and will be producing silicon within approximately 12 months.

"When it comes to SunPower, what’s really going to move the needle is the leasing business," S&P Capital IQ’s Angelo Zino told pv magazine. "We also think that, like SunEdison, SunPower is now going to hold on to some major projects and try a yieldco, maybe in 2015."

Taking its lumps

Finally, we come to First Solar, which Pavel Molchanov said in a recent note to clients, had experienced "an exasperatingly messy year" in 2013. "Keeping up with the ‘see-saw’ that is First Solar (both fundamentally and sentiment-wise) remains akin to a full-time job," commented Molchanov.

"Over the [past 12 months, First Solar] had a bullish analyst day in April, a dilutive equity raise in June, a guidance cut in August, and an offsetting guidance hike in November. Throughout this time …our stance [at Raymond James has been] leaning negative. While it is fair to point out that First Solar has (1) a better balance sheet than most of its major peers, and (2) a backlog of legacy projects proving reasonable visibility into 2014, there also are plenty of risks for longer-term profitability—including thin film’s loss of economic appeal. We maintain our "market perform" rating."

Zino characterizes First Solar as "the lumpiest of the bunch in terms of performance," noting, however, that as a large-scale project developer, the company is in a "good position to hold on to projects on hand" for a yieldco and make a comeback in the future.