Top 2014 Stock Picks from Ben Kallo, Robert W. Baird & Co.'s Senior Analyst Covering Energy Technology & Resource Management: Solar Companies with Ability to Lower Financing Costs to Compete in Power Generation

Wall Street Transcript

67 WALL STREET, New York - February 20, 2014 - The Wall Street Transcript has just published its Alternative Energy & Utilities 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 - Solar Energy Pricing - Government Subsidies and Regulation - Solar Growth Drivers and Headwinds - Regulatory Headwinds for U.S. Utilities

Companies include: NRG Energy, Inc. (NRG), First Solar, Inc. (FSLR), Total SA (TOT), EnerNOC, Inc. (ENOC) and many others.

In the following excerpt from the Alternative Energy & Utilities Report, an expert analyst discusses the outlook for the sector and his top picks for investors:

TWST: Last time we spoke in July, you said that solar was just coming out of a period of overcapacity for the solar sector. Where are we now, and what is your outlook for supply/demand dynamics over the next few years?

Mr. Kallo: For 2014, the solar subsector within my energy technology coverage is one of my favorite spots, because I do believe that we're still in the early stages of the growth in solar fundamentally and in the stocks.

TWST: Solar securitization is a newer trend in the sector. What are your thoughts on it, and what impact do you think it will have?

Mr. Kallo: SolarCity (SCTY) is my favorite pick for 2014, and I think that securitization is one very important method for solar companies and even other companies within energy efficiency to lower their cost of capital. I do think that both SunPower (SPWR) and SolarCity inside of their leasing business have capacity to offer asset-backed securities, which will allow them to raise capital at really the cheapest form of any other type of security.

We saw that with SolarCity when they issued their first asset-backed security, and that's actually when I upgraded the company as one of the reasons for it. It was a small piece of their overall portfolio that backs that asset-backed security, but the rate that came in at 4.8% I think was surprising not only to me but I think to the overall investment community. I think that they tested the water with that small asset-backed security, and I think in 2014 we'll see them do a much larger asset-backed security. If all else stays equal, I think we'll actually see them be able to raise money at a lower rate.

I think SunPower (SPWR), in addition to other different financing mechanisms that are being developed, will also probably do an asset-backed security. When you look at the overall cost of solar, if we talked a couple of years ago, all the focus would be on what payload manufacturers' costs were, and how quickly they could cut cost. As that cost of panels has dropped dramatically, that percentage of the overall system has gone down also. So whereas a couple of years ago a panel might be 50% of a solar system total costs, now it's probably close to 20% to 25%, and financing is really one of the bigger areas where different mechanisms, whether it's an asset-backed security, whether it's a leasing model based on a tax equity like SolarCity or a private company like Vivint or SunPower have, that's all helping lower that financing cost and create demand.

And then you'll see other things like some of the companies will drop out yield cos. Around the last time we talked, NRG (NRG) dropped out a portion of their renewable portfolio into a yield co, so rather than these companies selling projects to either utilities or a private equity buyer, they can sell it to the market through an IPO of a yield co. And so all of these different types of mechanisms are attended to lower the financing costs, and it's one more step in making solar competitive with other floors of electricity generation.

TWST: You recently upgraded Solar City. What factors contributed to your rating change, and what do you like about that stock?

For more of 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, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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