Why Solar Power Stocks Are Still Earthbound
By NORM ALSTER
LONG-SUFFERING investors in solar energy
stocks had reason to enjoy the first six weeks of 2013. After several
years of poor performance while the overall market advanced, solar and
other “green” energy technologies were market leaders early this year.
But by the end of the quarter, most of these stocks had fallen again.
Was the strong performance of early this year simply a dead-cat bounce?
What are the prospects for an emerging, relatively expensive technology
that seeks to displace dirty — but cheap — hydrocarbons?
At the core of solar’s sorry market performance lies an enigma: solar sells, but it’s tough to turn a profit.
Global demand for clean, renewable energy is not the issue. “Demand has exceeded by far the projections of even two years ago,” Ben Schuman, an analyst at Pacific Crest Securities, said.
At the end of last year, installed global solar capacity stood at 96.4
gigawatts, up 43 percent from 2011 and roughly the equivalent capacity
of 115 typical nuclear plants, according to Shayle Kann, vice president for research at GTM Research. Mr. Kann predicted further growth of 35 percent this year, to 129.7 gigawatts.
Nevertheless, company profits in the sector have been erratic — and shareholder profits scarce. The Guggenheim Solar exchange-traded fund, which mirrors a portfolio of solar stocks, fell nearly 30 percent in the 12 months through March.
So what is the most commonly invoked explanation for an industry where
sizzling demand translates into sinking share prices? “Chinese
industrial policy,” replied Kevin Landis, manager of the Firsthand Alternative Energy fund.
Chinese national and local governments have encouraged solar production
with a grab bag of inducements, including loans, loan guarantees, tax
breaks and even free land.
But the solar market, unlike other industries prone to cyclical
overcapacity and subsequent busts, hasn’t self-corrected. Chinese
vendors, Mr. Schuman said, haven’t been “as responsive to typical
indicators” of excess production. “They haven’t closed capacity,” he
said. “In China, shareholder profit can be a lower priority than
employment, or the competitive dynamics between provinces and cities.”
So the prices of solar panels have been in free fall. In 2005, panels
typically cost $3.50 per watt of power. By last year, prices had tumbled
to 75 cents a watt. This year, Mr. Kann estimates, they will fall to 49
cents.
But Ken Abrams, a manager of the Vanguard Explorer
fund for the last 18 years, says he thinks a looming shakeout of
suppliers will ease overcapacity. Chinese producers are among the prime
victims of their own overproduction, he said. And it is unclear how long
the Chinese will support failing ventures. Eight Chinese banks pushed the main subsidiary of one major panel producer, Suntech Power Holdings, into bankruptcy last month.
“We see increasing hesitance on the part of Chinese government agencies
to finance continuing deficits,” Mr. Abrams said. If Chinese authorities
withhold support, more producers will fail, easing the overcapacity
that has shredded prices.
Who would gain in such a shakeout? Mr. Abrams says it is a good time to
consider industry leaders. The Vanguard fund holds large positions in
First Solar, a solar systems developer based in Tempe, Ariz., and in
Solar City, a leader in leasing solar systems; it is based in San Mateo,
Calif.
But globally, low-cost producers should prevail, Mr. Schuman said. These would “probably be Asia-based,” he added.
Some fund managers are looking to a creative business model that can flourish with rock-bottom panel pricing.
Why lock into selling solar panels that keep getting cheaper? Better to
buy the panels, install them free and then charge for the electricity
they generate, gaining a predictable revenue stream. That’s the logic
behind Solar City — which mainly serves residential and commercial
customers in the United States — and several private solar leasing
companies
“When the price of panels goes down, their business gets better,” Mr.
Landis said. “The sweet spot is buying the panels and owning the
output.”
Leasing is intended to overcome customer resistance to the high upfront
cost of solar installation. Since a December initial public offering,
Solar City shares have more than doubled.
Still, the leasing model requires upfront investment that can obliterate
earnings until the customer base expands enough to produce offsetting
lease income. Such is not yet the case with Solar City. which reported a
larger-than-expected loss in the fourth quarter of last year.
Solar City is not the only company that employs leasing. SunPower, a
major panel producer based in San Jose, Calif.,, has built a leasing
business. And with several smaller private leasing firms, further
I.P.O.’s are “a good possibility,” Mr. Abrams said.
“Leasing is going to be 90 percent of the solar business,” he said.
Colm O’Connor, co-manager of the Calvert Global Alternative Energy
fund, says he expects the United States, Japan and China to lead this
year in solar installation growth. Mr. O’Connor has a position in
Kyocera, the ceramics maker and panel manufacturer, which could benefit
from adoption of solar power in Japan.
In most areas, solar power is more expensive than coal and natural gas
options for electricity generation. But the gap has narrowed, and in
places like Hawaii, Italy and Japan, he says, solar is now roughly even
in cost. He has trimmed his overall investment in solar, however,
preferring other areas of alternative energy. His largest holding is
Novozymes, the Denmark-based enzyme maker that stands to gain from the
emergence of cellulosic ethanol, made from sources other than corn.
Novozymes will capture “a large part” of the cellulosic market, he
predicted. “We are favorable on the long-term outlook for cellulosic
ethanol.”
Mr. O’Connor also favors companies that help manage delivery of energy
from solar and wind sources. The Prysmian Group, based in Milan, Italy,
has contracts to connect a North Sea wind park with the mainland grid in
Germany. The PSI Group, based in Berlin, markets software that helps to
manage the fluctuations in renewable energy production.
Frederick Reynolds, who manages the Reynolds Blue Chip Growth
fund, has stakes in Solar City and First Solar. But, he says: “I don’t
have much conviction in solar stocks in general at this time. I’m
running the risk that I’m early.”
Mr. Reynolds tries to balance long-term optimism with near-term anxiety.
“I think they can do well long term,” he said, “but until then there’s
lots of volatility.”
ONE factor that may eventually help solar stocks is that institutional investors have relatively small holdings.
For example, they own slightly less than 22 percent of SunPower shares,
according to Nasdaq. By contrast, institutions, which include pension
funds, insurance companies and mutual funds, own more than 92 percent of Google’s outstanding shares.
Asked if low institutional ownership could turn into a positive, because
so much buying power is untapped, Mr. Reynolds said: “I see it as a
positive. A lot of institutions may be buying after me.”
Until then, holders of solar stocks can only nurse their wounds. Those
who take the lead are often rewarded with arrows in their back. And
right now, a lot of solar investors have “backs full of arrows,” Mr.
Landis lamented. http://www.nytimes.com/2013/04/07/business/mutfund/solar-companies-stocks-face-an-uncertain-future.html?pagewanted=all&_r=0
