Spring brings sunnier view for solar stocks

• Reuters
• Thursday March 27 2008

By Nichola Groom

LOS ANGELES, March 27 (Reuters) - After a long dark winter, spring has brought a sunnier outlook for solar stocks.

Shares of solar power companies are on the rise again after a sharp sell-off this year, and many on Wall Street said the worst is over for the beaten down sector -- for now.

Volatile oil prices and concerns about a slowing U.S. economy dampened U.S. investor enthusiasm for solar stocks earlier this year following a booming year for the sector in 2007. In recent weeks, however, oil prices have soared to over $100 a barrel and several solar companies have posted robust sales and earnings, bolstering the case for investing in solar power.

"It certainly looks like we've seen the bottom in most solar stocks," Raymond James analyst Pavel Molchanov said in an interview. "Now that the overall market has stabilized and there is more investor optimism in general, we are seeing money flow back into the solar space, with good reason."

Shares of companies like cell and panel maker SunPower Corp , Chinese solar cell maker JA Solar Holdings Co Ltd and Suntech Power Holdings Co Ltd have been pummeled this year due to a weakening U.S. economy, uncertainty regarding government subsidies for alternative energy projects in the United States and Spain, and fears of an impending oversupply of solar cells and panels.

JITTERS

SunPower's stock has shed about 45 percent this year after soaring 250 percent in 2007, and Suntech shares are down 55 percent following last year's 142 percent gain.

In recent weeks, however, soaring crude oil prices and rosy earnings reports from companies including JA Solar and Canadian Solar Inc have helped assuage investor jitters.

"Any time you see oil hitting over $100 a barrel it makes solar more feasible," said Christopher Walsh, manager of the Spectra Green Fund. "And, some pretty good earnings from a lot of these guys came out, so everyone is a little more comfortable with the current state of the business."

0il doesn't have a direct correlation to demand for solar power since most electricity in the United States is generated from coal or natural gas. However, higher oil crude prices generally help boost investor interest in renewable energy.

Walsh's more than $25 million Spectra Green Fund has increased its positions in JA Solar, First Solar Inc and MEMC Electronic Materials Inc this year, he said, to take advantage of weakness in the stocks.

"The long-term outlook is still very very favorable," Walsh said, adding that solar power is still just a tiny fraction of the world's energy supply.

JA Solar's stock had lost nearly half its value this year when it dropped to $12.17 on March 10. It has since rallied 45 percent, helped by analyst upgrades and a strong earnings report. Shares of thin-film solar company First Solar have also been on the rise, climbing nearly 14 percent this week.

CHEAP ENOUGH

That rally also extended to SunPower -- up 17.5 percent this week -- and Suntech -- up 20 percent -- as Wall Street analysts said the stocks were now cheap enough to snap up.

"Most of the U.S. solar names look undervalued relative to growth and earnings," Cowen & Co analyst Robert Stone said in a client note on Monday, in which he reiterated his "outperform" ratings on SunPower, Suntech, First Solar, Trina Solar Ltd and Evergreen Solar.

Legislation to extend tax credits for renewables is expected to be introduced in the U.S. Senate in April, which Stone said has "improved chance of passage" because it would not be funded by new taxes on oil production. Stone also said he expects new legislation in Spain to be settled by July.

Eric Becker, who co-manages the $50 million Green Century Balanced Fund, agreed that valuations in the sector are attractive now, unlike at the end of last year.

"The fundamentals of the business warrant healthy valuations, but they were getting to be bubble territory," Becker said, adding that solar stocks had likely hit a "short-term bottom."

"REASONABLE VALUATIONS"

At the beginning of January, SunPower was trading at 56 times 2008 earnings, while Suntech carried a multiple of 38 and First Solar was valued at 116 times earnings.

"The valuations now are very reasonable," said Becker, who particularly likes SunPower shares at their current multiple. The company's stock trades at about 33 times 2008 earnings. In comparison, First Solar carries a multiple of 85, while Suntech is valued at 22 times earnings.

Becker's fund has been increasing solar holdings this year, buying shares of SunPower, First Solar and solar equipment maker Applied Materials Inc.

Still, Becker warned that a pullback in oil prices could cause the sector to go into another tailspin later this year.

"If the economy continues to weaken and energy prices fall, the psychology around alternative energy stocks could be hurt," he said.

That uncertainty could also make it tougher for solar manufacturing equipment maker GT Solar Inc and residential solar installer Real Goods Solar Inc, a unit of Gaiam Inc, to complete their initial public offerings.

GT Solar filed to go public in April of last year, while Real Goods filed with regulators in February of this year.

"The outlook is not too great for these guys getting out the door in the near term," said Samuel Snyder, senior research analyst with IPO research firm Renaissance Capital.

The American Depositary Shares of Chinese solar wafer maker ReneSola Ltd, the only solar company to debut on the U.S. markets so far this year, have lost 24 percent of their value since their Jan. 29 offering.

This week alone, however, they are up 31 percent. (Editing by Brian Moss)