Solar Power Continues to Shine

by: Zacks.com posted on: June 13, 2008 | about stocks: ENER / SPWR / VSE    

Zacks senior alternative energy analyst Jon Kolb was on hand recently to give us his views on where the biggest strength is at the present time. He was also kind enough to give us three Buy recommendations within the space.

What is your view on the overall alternative energy sector at the present time?

The investment outlook for the alternative energy industry is bullish, in our view, with significant growth potential over the next 5-10 years. As with any burgeoning industry segment, there will likely continue to be rapid changes within individual names as new technologies continue to evolve, although the longer-term trend is favorable for diversified long-term investors.

Those investors seeking to capitalize on the ongoing efforts to reduce both domestic and global dependence upon the dominant oil and natural gas producing regions of the globe may wish to focus on emerging and established firms engaged in wind power, solar/photovoltaic, solar thermal, geo-thermal, hydro, marine and biomass-based energy sources. Dozens of such companies exist within the U.S. and many more internationally, ranging from micro-cap ventures to large-cap multinationals.

There is one caveat, however. Individual names will likely continue to experience high volatility in securities prices although a well-diversified portfolio of alternative energy names would be well positioned to profit from rapid growth in the sector.

Let’s start with one such name you recommend.

We remain optimistic about Energy Conversion Devices’ (ENER) long-term potential success, given increased activity in solar power projects. The company also achieved profitability in the reported quarter for the first time since it went public in 1969.

The company’s operating segment, United Solar Ovonics, has a total annual production capacity of 118MW (megawatts). Ongoing expansion plans will increase United Solar’s manufacturing capacity to 178MW by the first half of 2009 and to over 300MW per annum by the end of fiscal 2010. United Solar signed an 18-month agreement with EDF Energies Nouvelles (EDF EN) in September 2007, to supply up to 30MW of thin-film PV laminates for large-scale installations on industrial and commercial buildings.

United Solar’s laminates will be installed on the roof of the General Motors (GM) facility at Fontana in California. United Solar Ovonic also signed a three-year distributor agreement with Advanced Green Technologies, Inc. for $108 million of Photovoltaic [PV] products.

Any caveats regarding a stock like ENER?

The company is developing and expanding its solar business while exiting other non-core businesses. We note the stock’s high volatility, pending sale of its Cobasys joint venture, and higher preproduction costs. Additionally, despite increasing product revenue, the internal restructuring processes and several recently announced contracts, we question the profitability potential of licensing royalties.

A history of negative profit margins, operating income and negative historical earnings, including EPS losses until Q2 08, without meaningful valuation metrics, collectively show potential for moderate-to-high returns yet with high risk. Accordingly, we maintain a speculative BUY recommendation on ENER common stock with a six-month target price of $74.00, representing 13.2% upside potential.

What is another company you see benefiting in this space?

The fortunes of SunPower (SPWR) appear greener given the very high growth potential in the alternative energy industry, and specifically solar power energy, with apparently greater certainty of polysilicon supply through SunPower's new 5-year supply agreement with Jiawei SolarChina. In addition, a new solar cell manufacturing facility in the Philippines and the company's expansion into the Italian market with the acquisition of Solar Solutions adds visibility to the story.

New cheaper polysilicon supply contracts and thinner wafers are improving the solar cell and panel production overheads. We have a BUY recommendation on SPWR common stock with a six-month target price of $106.75. Price appreciation to our near-term target price represents 34.6% upside potential.

What are some of the main advantages of solar power, in your view?

Compared to other renewable energy technologies, solar power is one of the most benign electric generation resources. Solar cells generate electricity without air or water emissions, noise, vibration, habitat impact or waste generation.

Unlike fossil and nuclear fuels, solar energy has no risk of fuel price volatility or delivery risk. Although there is variability in the amount and timing of sunlight over the day, season and year, a properly sized and configured system can be designed to be highly reliable while providing a long-term, fixed price electric supply.

Also, unlike other renewable resources such as hydroelectric and wind power, solar power is generally located at a customer site due to the universal availability of sunlight. As a result, solar power limits the expense of, and energy losses associated with, transmission and distribution from large-scale electric plants to the end users. For most residential consumers seeking an environmentally friendly power alternative, solar power is the only viable choice because it can be located in urban and suburban environments.

Any other big stories out there among solar energy or other alt-energy companies?

VeraSun Energy (VSE) is on the fast track of growth with its recent merger with fellow biofuel company U.S. BioEnergy. Earnings rose in the reported 1st quarter due to higher ethanol volumes and prices, partially offset by surging corn prices. Post-merger, the company is expected to become the largest bio-fuel company in the world.

However, the cyclicality of the ethanol industry and rising prices of corn and natural gas, remain a concern. Nevertheless, recent bullishness on the energy bill for ethanol production, rising crude oil prices, ongoing capacity expansion plans and value unlocking through synergies from the recent merger with USBE should maintain the momentum of growth over the near-term. We also have a BUY recommendation on VeraSun, with a six-month target price of $7.50, representing 27.1% upside potential.

Jon Kolb is a senior analyst covering the alternative energy industry for Zacks Equity Research.

This article has 6 comments! Add yours below...

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This article has 6 comments:

  •  
    dickus
    Jun 14 10:40 AM
    Solar power, unlike wind power, sees to benenfit from continueing technology improvements in Photovoltaic and polysilicon technology development. I can't see where there is much to be gained from windmill technology that can equal potential gains in solar technology. Look at microprocessors and other computer related gains over the past 20 years.
  •  
    nakedjaybird
    Jun 14 02:05 PM
    You're right Dickus, but we should not let that stop us from fully developing wind as an alternative energy to oil, gas and coal.

    First, it's free energy.

    Second, we need to use every technically and economically feasible (standalone, or even if using redirected oil, gas, coal, etc., subsidies and tax breaks) free-energy source (tidal, geothermal and maybe even biofuel, etc.). Especially, the friendly and simplistic ones like solar has and is becoming (what I mean by simplistic regards damage control, spiderweb complexities w.r.t. associated requirements [regulation], demands [multiple industry involvement], resources, etc.

    For instance, solar requires sun and sand (simplisticly speaking). Silicon and glass (maybe: or equivalents) processing are the significant complexities.

    I'd really like to see some solar sites producing solar energy to make or process the silicon (talk about reproduction: nearest thing to perpetual motion: well,........).

    The Dutch and the early farmers in the US were not wrong in putting up windmills; and water-wheels came very early to human existence as well. As long as they are free and near simplistic, use them.

    Oil, gas, coal and wood were fine to use (as was animal fat, bees wax, etc.) when they were on the surface; free-for-the-taking, more or less. But those energy sources have become far from free at the surface, not to mention or discuss their replenishment, and more so their complexities. Proof of that is all the media discussion and industry failure fear.
  •  
    alphameister
    Jun 14 09:00 PM
    Good article and good comments, but the country also needs prudent utilization of domestic carbon reserves in addressing energy shortages for the foreseeable future. While we can't "drill our way out of the problem," we can certainly reduce economic pain and disruption by taking a comprehensive approach to the problem.
  •  
    tessant
    Jun 15 12:24 AM
    My Website
    i have been telling people for about 2 years that solar is is like the microprocessor in 1983. Look at what has happened to it during the last 25 years. We have all of the silicon valey money going into solar, the technological breakthroughs will be significant.

    scott
    solarfeeds
  •  
    tessant
    Jun 15 12:24 AM
    My Website
    i have been telling people for about 2 years that solar is is like the microprocessor in 1983. Look at what has happened to it during the last 25 years. We have all of the silicon valey money going into solar, the technological breakthroughs will be significant.

    scott
    solarfeeds
  •  
    lepso
    Jun 16 11:16 AM
    Solar, Geo, Wind, Hydro, Atomic, Oil, and others, all these energy sources are important. Conservation and preservation and of these energies are also to be high on the scale.
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