Solar firms still on solid ground after '07 rally

Reuters | Tuesday, 08 January 2008

Solar energy companies may have a difficult time matching their stellar 2007 stock gains, but industry watchers say the sector's growth prospects are on solid ground through the end of the decade.

Investors gobbled up solar stocks last year, setting off sharp jumps in some and raising fears that the industry could be vulnerable to a downturn.

"Valuations are getting pretty rich. These stocks have been some of the top performers of 2007, and I think that there is a lot of potential for solar overall and the space will continue to grow; but that may already be reflected in some of their prices," said Mark Manley, analyst with Natixis Bleichroeder.

Leading the pack is First Solar Inc, which saw its value surge eight-fold last year to reach a market capitalisation of about $US20 billion ($NZ26.4 billion).

First Solar is a leading maker of thin-film photovoltaic cells that convert sunlight into electricity. Investors flocked to its stock as the company opened new manufacturing plants and promised to nearly double its revenues in 2008.

But thin film remains less than 10 per cent of the total solar manufacturing market. And despite output growth of about 50 per cent in 2007 to more than 12,000 megawatts, solar energy still represents well below 1 per cent of the world's generation capacity.

So far, most of the demand for solar power has come from Europe, where countries such as Spain and Germany have implemented generous subsidies to support the technology.

But the appetite of the United States and that of Asia, particularly China, has been growing.

"That means that there is a tremendous market penetration opportunity. As the market develops, growth rates should remain very high," said Pavel Molchanov, analyst at Raymond James.

That growth potential has lifted the price for solar sector companies above 35 times their projected 2008 earnings, compared with about 14 times earnings for the Standard & Poor's 500 Index. First Solar is trading at a lofty 130 times earnings.

While First Solar has caught the eye of investors looking to jump to the leading edge of the technology, thin-film photovoltaic cells are not likely to displace silicon-based technology anytime soon. Silicon arrays are more suitable than thin film for homes and businesses, while either technology can be used for larger, utility-scale projects.

"That is the versatility of silicon-based solar technology, but there is definitely room in the market for both products," Molchanov said.

The silicon-based companies, such as Germany's Q-Cells AG, China's Suntech Power Holdings Co Ltd and US-based SunPower Corp, posted sharp stock gains between 150 and 250 per cent last year.

But tight supplies of silicon have crimped growth and threatened to hit profit margins for those companies, as prices for the material have surged to more than $US300 per pound from less than $US50 three years ago.

Silicon supplies should become more ample in 2009 as new production capacity comes on line, analysts said.

"And once people believe that the silicon shortage will abate, that will trickle through to the solar stocks," said Edward Guinness, co-manager of a $US170 million Guinness-Atkinson alternative energy fund.

Guinness said he prefers the larger players in the sector, including Q-Cells, Suntech and SunPower, although he said SunPower's valuation at about 60 times 2008 earnings was a concern.

Among the smaller players, Taiwan's Motech Industries Inc 6244.TWO and US DayStar Technologies Inc, a thin film producer, are attractive, he added.

Malchanov said he also is positive on many players in the sector, especially SunPower and Trina Solar Ltd, a vertically integrated Chinese company that is trading at a modest 18 times its expected 2008 earnings.