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Alternative Energy Stock Outlook - May 2017

Zacks Equity Research

The U.S. renewable energy industry has witnessed significant growth over the last several years. The implementation of a number of important decisions in 2015 by the state and federal governments further fueled its growth and continues to drive the sector.

A U.S. Energy Information Administration (“EIA”) report projects total renewables used in the electric power sector to increase 44% in 2018. Electricity generation from hydropower is expected to be relatively unchanged at 7% between 2016 and 2018. Generation from renewables other than hydropower is forecast to rise 9% in 2017 and 10% in 2018.

Notably, renewable energy provides multifold benefits for the climate, health as well as the economy. In addition to lowering carbon emissions, alternative sources of energy improve public health, create jobs and provide other economic benefits. Moreover, these sources of energy reduce the requirement of water for power production, offering a major advantage over fossil fuels. Offsetting these positives are the additional costs that are incurred by traditional energy sources to fully account for their environmental externalities.

A comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (NREL) shows that renewables will contribute more than 80% of total electricity generation in the U.S. by 2050, compared to the present level of 30%. The only need of the hour is the development of an electricity grid to withstand higher volume of renewable energy and advanced grid planning to maintain reliability.

To this end, governments, businesses and cities around the world are making concerted efforts to speed up the evolution of energy use. As the global energy system transformation is the backbone of climate action, the world has come closer under a set of major cooperative initiatives. It is these environmental considerations that are driving the demand for alternative energy sources.

While these favorable demand trends have been boosting the growth prospects of this space, the abundant availability of fossil fuels and dearth of adequate investment in solar companies have emerged as key competitive challenges. Although the industry’s long-term fundamentals remain favorable, the policies of the new administration will likely remove some, if not all, of the policy shields from this space. Given these challenges, growth in 2017 is expected to slow down.

Here, we discuss some of the major alternative energy sources:


A major growth area in the renewable space is solar energy. An EIA report indicates continued growth in utility-scale solar power capacity, in fact by almost 44% from 21 GW at the end of 2016. The projected increase will bring the amount of solar capacity to 31 GW at 2018 end. In spite of the rapid uptake, solar will still constitute just 1% of total U.S. utility-scale generation in 2018, indicating immense scope for growth.

Solar growth has historically been concentrated in customer-sited distributed generation installations. The EIA expects utility-scale solar capacity to expand in states like California, Nevada, North Carolina, Texas and Georgia.

The solar industry in the U.S. is booming. The solar Investment Tax Credit (“ITC”) has gone a long way in providing the industry stability and expansion. In the last 10 years, solar has witnessed a compound annual growth rate of almost 60%, with the cost of installation dropping by over 70%.

Over the past few years, utility-scale solar has represented almost two thirds of the market, and this trend will likely continue in the near term, given the huge pipeline of projects under construction.

In particular, year 2016 was a record one for the U.S. solar industry. The photovoltaic (PV) market grew 97% from 2015’s individual installations of more than 370,000. Although all market segments grew in 2016, the utility sector recorded maximum growth, which more than doubled with installations totaling over 10 gigawatts (GW).

According to the Solar Energy Industries Association (“SEIA”), U.S. installed 14,762 megawatts (MW) of solar PV in 2016, reflecting 97% growth in the PV market over 2015. With this, total installed capacity reached 42.4 GW. In 2016, 22 states each added over 100 MW of solar PV compared to 13 in 2015.

According to GTM Research, 13.2 GW of new PV installations will come on-line in 2017, reflecting a 10% decline from a record-breaking 2016. Utility PV is forecast to comprise 66% of that new capacity.

Solar in China: Although economic woes in China continue to hurt the market, longer-term prospects for solar in the nation remain favorable. The country has established itself as the world’s largest market for solar panels and will likely be home to a quarter of the planet’s new energy capacity from solar panels in the years to come. China is speedily adding as much power generation as possible, and solar is just one source of the new energy generation coming up in the country.

The National Energy Administration (NEA) said that installed renewable power capacity, including wind, hydro, solar and nuclear, will contribute about 50% of total electricity generation by 2020. In 2016, China installed 34.2 GW of new solar power, up 126% from last year’s installations, bringing the cumulative solar capacity to 77.42 GW, according to NEA.

Under China's 13th Five Year Plan (FYP), the country has set a target of attaining 150GW to 200GW of solar PV capacity by 2020. It also intends to shift focus from grid-scale expansion to quality and efficiency.

The following leading Chinese solar stocks are sure to make the most of the favorable government stimulus: JinkoSolar Holding Co., Ltd. (JKS), JA Solar Holdings. Inc. (JASO) and Trina Solar Ltd. (TSL).

Ontario, Canada-based solar product manufacturer, Canadian Solar Inc. (CSIQ) is also well positioned with its diversified manufacturing base and project portfolio in Canada, China, Japan and the U.S.


The American Wind Energy Association (“AWEA”) reported that the country’s wind industry has installed 6,478 MW during the fourth quarter of 2016, bringing the total installed capacity to 82,183 MW. It marked the second strongest quarter of installations. Wind capacity of over 10,432 MW is currently under construction and another 7,913 MW is in advanced stages of development.

During the fourth quarter of 2016, 19 states commissioned a total of 47 projects. Texas led the way with 1,790 MW, followed by Oklahoma with 1,192 MW. Presently, there are over 52,000 wind turbines operating in 40 states in addition to Guam and Puerto Rico. In the fourth quarter, the U.S. also commissioned its first offshore wind project  ¿¿  the 30 MW Block Island wind project off the coast of Rhode Island.

In 2016, more than 4,000 MW of power purchase agreements (PPA) were signed and electric utilities released 23 wind-eligible requests for proposals (RFPs).

As per the EIA, wind capacity at the end of 2016 was 81 GW. This is expected to increase to 95 GW by 2018. It is expected that wind generation will account for 6% of total generation in 2018.

Zacks Industry Rank – Mixed Outlook

We rank all the 256-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.

The way to look at the complete list of 256+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries (Zacks Industry Rank between #89 and #176) is neutral, while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.

The Zacks Industry Rank for the Other Alternative industry is #29 out of 256. This puts the industry in the top one-third of the list, representing a positive outlook.

Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #233 out of 256. This corresponds to the bottom one-third of the list, implying a negative outlook.

The recent losses suffered by some of the fundamentally strong solar stocks can be good buying opportunities for investors with a longer-term horizon. The U.S. solar market continues to grow with total installed solar PV capacity in the U.S. expected to almost triple over the next five years, as per SEIA. By 2022, annually, over 18 GW of solar PV capacity will be installed.

Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).

Vivint Solar, Inc. (VSLR) carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings Season So Far

We have already crossed the halfway mark of the first-quarter 2017 reporting cycle, with nearly 58% of the S&P 500 members having already released their earnings report as of Apr 28, 2017. Reported earnings were up 13.7% year over year on 8.2% higher revenues. Among them, 76.4% beat earnings estimates while 68.1% beat revenue estimates. Meanwhile, nearly 1000 companies are scheduled to report results this week, including 126 S&P 500 members.

For the remaining 212 index members (combined with the already reported 288 index members), earnings are estimated to improve 11.2% on 6.2% higher revenues this season. Notably, this could be the third straight quarter of earnings growth after five back-to-back quarters of declines. For more details, you may go through our Earnings Trends report.

Alternative energy companies have also started to report their results. 8point3 Energy Partners LP (CAFD) reported earnings of 3 cents per share in first-quarter fiscal 2017 (ended February 28, 2017). The Zacks Consensus Estimate was pegged at a loss of 18 cents. Earnings declined 88.9% from 27 cents earned in the year-ago period.

Many companies are scheduled to report results going ahead. First Solar, Inc. (FSLR) is scheduled to report first-quarter results on May 2. The company has an Earnings ESP of +69.23% and a Zacks Rank #3.

Vivint Solar is scheduled to report first-quarter results on May 9. The company has an Earnings ESP of 0.00% and a Zacks Rank #2.

SunPower Corporation (SPWR) is scheduled to report first-quarter results on May 9. The company has an Earnings ESP of -27.27% and a Zacks Rank #3.

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Vivint Solar, Inc. (VSLR): Free Stock Analysis Report
SunPower Corporation (SPWR): Free Stock Analysis Report
JinkoSolar Holding Company Limited (JKS): Free Stock Analysis Report
JA Solar Holdings, Co., Ltd. (JASO): Free Stock Analysis Report
Canadian Solar Inc. (CSIQ): Free Stock Analysis Report
8point3 Energy Partners LP (CAFD): Free Stock Analysis Report
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