Light At The End Of The Tunnel

Investor's Business Daily

America Honda Motor Co. last week announced an incentive plan offering new buyers of Honda or Acura cars money to help pay for solar power installations from SolarCity.

The $65 million program is available to customers through dealerships in the 14-state area where SolarCity (SCTY) operates. SolarCity and Honda (HMC) expect to accommodate "thousands of interested homeowners in the fund.

The deal bolsters Honda's environmental image as a developer of fuel-efficient cars. SolarCity, which went public with a $92 million IPO in December, gets access to potentially thousands of new customers.

San Mateo, Calif.-based SolarCity is the largest residential solar installer in the U.S. It also builds charging stations for electric vehicles. The partnership is just one example of a solar power industry working its way out of a difficult slump.

The solar business got a huge push in the past decade with financial incentives from governments worldwide. Government subsidies, generally in the form of tax breaks to solar systems buyers, have helped the many publicly traded companies in the space, among which First Solar (FSLR) and SunPower (SPWR) have the largest market capitalizations.

Broken Tax BreaksThe economic downturn led to vast retractions of tax breaks in countries including Spain and Germany — both heavy early adopters of solar power technologies. The subsidy cuts short-circuited demand growth, leading to erratic quarterly financial reports and volatile stock action as the industry has been whipsawed by several years of boom-and-bust cycles.

That action has swept the 24-stock Energy-Solar group to extreme rankings, high and low, among the 197 industries tracked by IBD. It currently holds the No. 1 ranking. Six months ago it ranked near the bottom of the list.

The trade's stumbling block for the past two years has been an oversupply of solar panels. A rapid, state-subsidized expansion of China's solar manufacturing capacity quickly outstripped slowing growth of global demand. Prices tumbled and the price of polysilicon wafers, the raw material used to make solar cells, fell 73% from 2010 through the first half of last year, according to Maxim Group.

Research firm IHS Solar Research says revenue derived from solar panel production and installation will drop to $74.5 billion this year, down from $77.5 billion last year and well below the $94 billion in 2011. That plays out in companies like China-based Suntech Power Holdings (STP), which had revenue of $3.1 billion — the highest in the group —in 2011. Analysts see Suntech's revenue plummeting 44% for 2012.

IHS projects the industry's overall revenue will rise 19% in 2014 to $89.2 billion. It sees double-digit gains from 2014 to 2016, reaching $115 billion in 2016.

Total installed solar capacity, estimated at 97 gigawatts in 2012, is projected to reach 330 gigawatts in 2020, a compound annual growth rate of 16.5%, according to research and consulting firm GlobalData.

One gigawatt is equal to one billion watts, or 1,000 megawatts. In a basic sense, a typical nuclear or coal power plant generates about one gigawatt of power.

Satya Kumar, a research analyst with Credit Suisse, in comments this month about the solar industry, said the damage caused by overproduction of polysilicon-based solar panels is subsiding. After years of pricing declines, "polysilicon and panel pricing have bottomed for the solar industry," he wrote.

But the young industry still faces an intense shakeout.

IHS estimates there were 750 makers of photovoltaic products in 2011. That dropped to 500 last year and is expected to drop again, to 150, in 2013. As the excess supply dwindles, IHS expects to see a firming of prices and more stability.

Excess panel capacity in China "needs to be permanently retired," Kumar wrote. He also said several companies would need to restructure and write down debt.

Ray Of HopeThe industry's production glut cloaks the fact that solar demand continues to expand at a healthy clip.

Installation of solar photovoltaic panels in the U.S. doubled in 2010 and doubled again in 2011, according to the Solar Energy Industries Association. It forecasts a U.S. growth rate of 70% in 2012, a slowdown but well above the 14% global growth rate.

"This year is shaping up to be a difficult one for the solar industry," Michael Barker, a research analyst at NPD Solarbuzz, told IBD. "The industry is still growing, but it's lower than what we've seen in previous years.

In 2012, about 29 gigawatts of solar photovoltaic power production was created worldwide — up just 5% from the year before, according to NPD Solarbuzz. This is the first time in a decade that growth has been less than 10%, due partly to the drop in government incentives.

Europe remained the largest market for solar installation in 2012, but its share of demand slipped to 57%, vs. 68% in 2011 and 82% in 2010. The second-largest region was Asia, at 30%, led far and away by China. The U.S. ranked third at 12%. More than a third of U.S. demand came from California, underwritten by government mandates and rebates.

Despite cuts to government incentives, NPD Solarbuzz forecasts that the photovoltaic industry will see a more rapid expansion this year, fueled by growth in Latin America, the Middle East, Africa and parts of Asia. But that growth, which depends upon government decision makers navigating economic, environmental and other issues, is far from certain.

"The government incentives were designed to spur demand, and they did that," said Barker. But as solar component costs have fallen, so have government subsidies.

The key thing for solar energy firms now is to show they can be cost competitive with other forms of energy, from coal and natural gas to wind power and various forms of hydropower.

"Solar has to compete in many ways against every other energy source," said Barker, "and that varies by the region, its climate and government policy.

Solar Goes Toe-To-ToeScott Reynolds, a research analyst with Jefferies, in a detailed research report published in January, said solar is becoming increasingly competitive in many marketsHe also said solar companies are changing business models to deal with the oversupply. Of the companies he follows, SunPower remains the most exposed to spot pricing.

SunPower designs, makes and markets high-performance solar electric systems for residential, commercial and utility-scale power-plant customers. In early 2012 it commenced a reorganization to better align its business with the changing business environment.

When the company reported fourth-quarter financial results on Feb. 7, it showed a 20% increase in revenue to $678.5 million, reversing an 8% drop in revenue in the prior quarter and its best performance in five quarters. Adjusted earnings per share rose 350% to 18 cents a share, its best showing in seven quarters.

"We continue to execute on our accelerated panel cost reduction road map," said Thomas Werner, chairman, president and CEO, in a conference call that day. He also described how the firm made advancements in solar panel efficiency and longevity. As the cost of solar power reaches parity with high-cost fossil fuel resources, "We foresee that our power plant business will become increasingly international in scope," he said.

First Solar plans to announce its fourth-quarter results on Feb. 26. Consensus estimates of analysts polled by Thomson Reuters is for earnings of $1.76 a share, which would be a strong reversal from the loss of 46 cents posted in the same quarter a year ago. Revenue is projected to come in at $1.3 billion, which would be a 97% increase from a year ago and its strongest revenue growth in 14 quarters.

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