We made a call yesterday saying it might be time to pick up some STP stock, as it was down a whopping 17% at $30 flat. Our argument was that it was more likely than not that the tax credit (attached to the bail-out plan) would pass, one way or another (worst case only after the inauguration of a new president), and values had become quite compelling. Here is another take on the sector.
So What Happened To Solar Stocks This Time?
Posted by Eric Savitz
- OK, now what’s wrong? Just yesterday, the ever-volatile solar stocks staged a nice rally, as investors celebrated as the Senate tacked an 8-year extension of the solar investment tax credit onto the incredibly bloated financial bailout bill, which passed last night by a wide margin. The bill now goes over to the House. If approved in its current form, the bill would extend the current 30% tax credit for solar panel installations through 2016. That would be a relief for the domestic solar industry, which has been fretting for months about the possibility that the credit might not be renewed when the current credit expires at the end of this year.
- Given the way the stock market sold off today, with the Dow Jones Industrial Average down 3.2% and the Nasdaq Composite down 4.4%, you can conclude either than a) the market isn’t so sure that the bill will actually win approval in the House in its current form, or b) that the bill is not going to be the cure-all that some investors hope.
- Answer a) would mean disappointment for the solar industry. Failure to pass the bill – or just as bad as far as the solar sector is concerned, passage of a slimmed down bill without the solar provision – would resuscitate fears that the tax credits might not be extended before they expire, and potentially bringing new solar installations to a grinding halt.
- But there also may be other factors at work. Merrill Lynch analyst Lu Yeung asserted in a research note this morning that a credit crunch could impact marginal players in the Asian solar industry, noting that many renewable energy projects are debt financed to maximize returns. Yeung actually concludes that “credit for business borrowing has actually loosened up from its peak so domestic lending in China is not a huge issue.” Nonetheless, I would note that the China-based solar stocks were among the hardest hit names in today’s selloff.
- Jonathan Hoopes, an analyst with ThinkPanmure, this morning also raised the issue of the credit crunch on the solar sector in several industry notes. “As we see it, there is potential for negative global repercussions in the alternative energy space on the back of likely tighter liquidity for massive projects,” he wrote. “Tighter debt markets are usually associated with higher interest rates, which reduce IRRs and eliminate projects with marginal economics.”
- Writes Hoopes: “While it is still early days for the solar PV industry, we cannot help but think that there will be more than a few who get crunched in the current credit crisis…we find it hard to believe that the sudden and growing financial market crisis of confidence will not have a negative ripple effect into sectors that rely heavily on project-finance, including the solar PV space which is seeing growth in projects of ever-larger sizes.
- “Hoopes also contends that a slowing economy is a “double-whammy” for alternative energy. First, he observes, as economic growth slows, so does the demand for energy – and with it the urgency to use alternative sources. And second, slower economic growth should reduce the pressure on commodity prices – like coal and crude oil – “raising hurdles” for alternative energy projects.
- And finally, one other note. Paul Lemming, an analyst with Princeton Tech Research, today picked up coverage of the sector, setting Buy recommendations on LDK Solar (LDK), Q Cells, Suntech (STP), Wacker Chemie and MEMC (WFR).
- But in his analysis of the industry, Lemming asserted that the solar sector is currently generating huge excess returns due to government subsidies – and that those returns are not going to last. He says the industry will move from a government-subsidized module price of $3.75/watt now to “economically determined” pricing of $1.50/watt in the 2011-2012 time frame. He advises assessing solar stocks based on 2012 estimates using a $1.50/watt price. “Any other strategy leaves investors playing a great fools game,” he contends. Lemming cautions that PV subsidies are likely to decline sharply over the next 3-4 years, in particular in Germany, which thanks to its subsidy program is the world’s largest solar market.
- Lenming’s conclusion: the solar stocks are going to offer a wild ride. “Volatility of share prices within the solar space has been 3x to 5x that of the volatility in the overall market,” he writes. “While it is often a mistake to extrapolate the recent past into the future, we believe PV stocks are going to remain extremely volatile until module pricing has declined to economically-determined levels. Subsidy-driven module prices leave the potential for sudden, sharp declines in module prices always just around the corner (as some government tinkers with its feed-in tariff rate or the caps on the program.”
- So if you own these stocks, in other words, hang on tight.