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Solar Energy Stocks: All Fired Up

Is the group's recent run-up a solar flare or a sign of bigger things to come?

Solar energy stocks are hot once again, with shares of industry players jumping as much as 58% in the past month. Much of that bounce is due to nearly uniformly positive quarterly earnings reports from some solar outfits. Company executives were able to allay investors' fears about declining demand and lower prices for solar panels and related materials, concerns that were fueled by a sharp reduction of government subsidies in countries such as Spain.

"You've had a lessening of fear in the market of what would happen with Spanish traffic and the U.S. tax credit," says Pavel Molchanov, an analyst who covers solar companies for Raymond James & Co. (RJF). "The visibility hasn't improved, but investors are taking it more in stride and are feeling more confident that, even in the worst case, there will be ample demand in other more early-stage solar markets."

The U.S. investment tax credits for wind and solar power, which currently reimburse property developers 30% of what they spend on installations, would revert to 10% at yearend if no legislative action is taken. "To most developers, that 10% may as well be zero," says Mark Burger, a principal at the Oak Park (Ill.)-based renewable energy consulting firm Kestrel Development.
Stronger Demand Down Under

On earnings conference calls, the management of several solar companies assured shareholders that instead of a decline of more than 10% in the average selling price for solar modules in 2009 that investors had feared, prices would probably fall 5% to 10%. Top executives stressed that despite an expected drop in demand from Spain, which plans to cap the number of solar projects eligible for a form of subsidy known as feed-in tariffs starting next year, they are seeing demand strengthen in countries like France, Italy, and Australia.

Japan's plan to restore its solar subsidies beginning next year after a four-year absence is also contributing to investor optimism. Feed-in tariffs are the renewable energy payments federal governments make to regional or national electric utilities to encourage them to buy solar- or wind-generated electricity at above-market rates set by government.

Positive news from individual companies such as SunPower (SPWR) has given the sector an added boost. The company signed a contract with Pacific Gas & Electric (PCG) in mid-August, under which it will not only sell 250 megawatts worth of solar panels to the utility but serve as the contractor and project developer on a 800-Mw power plant to be built near San Luis Obispo, Calif. SunPower is in a better position than most solar-panel manufacturers due to its in-house expertise as a provider of integrated systems.
Value Investors Intrigued

The project demonstrates the viability of utility scale for photovoltaic technology and for SunPower to win additional contracts, Credit Suisse (CS) analyst Satya Kumar said in an Aug. 15 research note. There could also be announcements of photovoltaic contracts from Southern California Edison, the state's other major utility. One possible glitch: The PG&E contract is contingent on extension of the American investment tax credit.

Another reason stocks have been rallying is their depressed valuation levels, says Molchanov at Raymond James. "The [price-to-earnings] multiples of solar companies had gotten so remarkably low that you had a lot of value investors starting to look at them, where historically solar has been more on the growth part of the spectrum," he says. Even after the rebound in the group, the typical solar company is trading at roughly 15 times 2009 earnings, less than half the annual growth rate in revenue of more than 40%, he adds.

Essa SunPower se quebrar os $100 tem boas perspectivas à vista...