LED Lighting to "Grow Significantly": J.P. Morgan Expert Analyst Picks the Stocks to Out Perform for Next Five Years and Sees this Sub Sector as the Best Investment over Long Term

Wall Street Transcript

67 WALL STREET, New York - August 23, 2012 - The Wall Street Transcript has just published its Utilities, Alternative Energy and Water Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Outlook for Biofuels and Biochemicals - Asia Pacific Demand for Solar Energy - Grid Parity Timelines for Alternative Energy - Water Infrastructure Development - Irrigation and Metering Technology - Water Industry Consolidation

Companies include: First Solar, Inc. (FSLR), MEMC Electronic Materials Inc. (WFR), Broadwind Energy, Inc. (BWEN), Veeco Instruments Inc. (VECO) and many others.

In the following excerpt from just one of the interviews in the Utilities, Alternative Energy and Water Services Report, an expert analyst from J.P. Morgan discusses the outlook for U.S. based alternative energy stocks.

TWST: Please begin with a brief overview of your coverage of the alternative energy sector, including the segments you cover within alternative energy and the specific names you follow.

Mr. Blansett: When thinking about the solar PV sector under coverage, we follow U.S.-based solar companies. We're looking at a relatively muted domestic growth outlook where U.S. solar demand is not necessarily going to be the driver for the industry, and it's a very competitive market.

The U.S.-based names we have under coverage - First Solar (FSLR), SunPower (SPWR) and MEMC (WFR) - have all moved toward a project-development type of business model, where they effectively control many of the variables of their business by going out and developing utility-scale solar projects, which they then will build themselves. So it kind of becomes a market where you don't really have to compete with anybody else on module or system pricing. It reduces the effective competitive nature of the business.

That being said, the pipelines that these companies have built out have grown to be quite large. However, we have not seen significant additions to those pipelines in a couple of years. The economics of solar PV versus conventionally produced electricity in the U.S. is not necessarily in a good place at this time. With the low price of natural gas, conventionally produced energy is very cheap right now. It's trading at least at a 10-year, possibly 20-year low, and that makes large utilities in the U.S. hesitant to sign new renewable energy contracts, especially for solar, because right now they'd be paying significantly more for that solar energy than they would for natural-gas-generated electricity. So right now, the U.S. solar PV market is really being segmented into pre-existing large utility-scale projects that had previously signed purchase contracts that were at good rates and generally a smaller rooftop-based type of market that competes with retail electricity rates.

So we kind of have a muted overall market. It's very competitive. Few companies are making money, and in general it's tough economics across the solar food chain. So we're remaining pretty bearish on the sector for the time being. The growth of the solar sector really looks like it's going to be in Asia, and our U.S. companies do not have a lot of exposure in China and Japan, where we see most of the growth happening. So we think they are going to miss out on that opportunity.

Looking at the wind sector, we cover Broadwind (BWEN), which is a wind tower, service provider and gear maker. Unfortunately, we're looking at the end of federal subsidization for the wind sector at the end of the year. So we're seeing a lot of last-minute rush work getting done this year to try to make sure wind projects are completed before the subsidy program expires. We're going to have a very strong second half of the year, but unfortunately, unless Congress does something to extend the current wind subsidy, we're going to have a very weak 2013, down easily more than 50%, and potentially more than 75% year over year. So we're looking at the next wind boom and bust, which has happened a number of times as the subsidies have come on and offline over the past 10 or 15 years.

Broadwind is going to have a pretty good second half, but a very uncertain calendear year 2013. Specifically for Broadwind, they are moving as fast as they can out of the wind-gearing business and aggressively trying to move into industrial gearing, and into metals and mining and industrial type of applications, frack pumps, heavy equipment, things like this. And so their ability to do that is going to be very important for that company to remain viable because we think 2013 is going to be a pretty tough year for anybody in the U.S. wind food chain.

The third sector we cover is the LED sector. It's the area that we are the most optimistic about longer term. Our optimism is primarily driven by the opportunity for LED-based lighting. This is a very cost-effective way to reduce operating expenses at existing buildings, and we think that this emerging technology is progressing extremely rapidly along the lines of, say, consumer electronics, where there is a semiconductor Moore's Law-type of effect going on. So we have a very fast improvement in performance and a very rapid reduction in costs. We think LED lighting will grow significantly over the next five-year horizon, and we think it will really start to supplant existing lighting technologies.

In the near term, however, the LED industry really continues to be dominated by general consumer electronics demand, and with the broad macro weakness that's out there, we think that's going to offset any growth in the lighting side. So we are looking at a fairly muted second half for the LED industry with lighting offsetting weakness in general consumer electronics demand.

So when it's all said and done, the broader view of our alternative energy universe is we are looking at a pretty tough second half. There are really not a lot of significant positive catalysts at this time on a broad basis. Conventional energy in North America is relatively cheap, making it tough for the generational technologies of solar and wind, and right now, we're having a fairly muted second half of the LED side because of the traditional businesses they feed into, even though we do see continued strong growth in LED lighting.

TWST: Which LED names do you like right now?

For more from this interview and many others, visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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