Someday. That's the word defining the solar-power industry. It started out as a song of promise -- someday this is going to be a big business! -- but more and more it's sounding like a complaint: Solar power is coming someday, we just don't know when.
Normally, in a speculative sector like alternative energy, not knowing isn't a barrier to investment. The uncertainty can actually generate volatility, which can be worthwhile for traders who can ride the waves and stomach the risk.
But the wait for solar's payday has outlasted even the more enthusiastic speculators. That leaves fundamental investors, and for the past few years the fundamentals haven't been very positive for these companies. But that's starting to change.
Boom and Bust in Solar Stocks
After a spectacular year in 2007, when many solar companies reached all-time highs and several debuted in high-profile initial public offerings, 2008 proved unkind. Even before the market collapse in the fall of 2008 -- which dried up the credit that the capital-intensive solar manufacturers depended on -- many solar issues were falling back to earth.
Today, many of them are worth less than half what they traded at two years ago. LDK Solar (LDK) is down 83.6%, Suntech Power (STP) has lost 75.3%, Sunpower (SPWRA) is off 84.1%. Even First Solar (FSLR), the thin-film maker that emerged as the sector's first big star, is down 57.1%. Only Trina Solar (TSL), the Changzhou-based solar-module maker, is close to break-even. Its shares are down only 1.4% in the past two years.
There are a number of reasons for the declines. Along with the credit crunch, solar companies were hit by a glut of solar modules that few expected. A few years ago, as energy prices were edging up to record highs, solar manufacturers were investing heavily in new production facilities, aided in good part by easy loans and a friendly market for stock offerings.
Cheaper Gas Curdles Demand for Solar
The recession caused gas prices to fall by 60% from their 2008 highs, curdling demand for solar installations. Utilities, the biggest customer for solar projects, simply found carbon-based energies cheap again. And some governments in Europe, which had long offered so-called feed-in tariffs to help subsidize the solar industry in its infancy, began to rethink their generous subsidies.
The hard times for solar carried an important silver lining. The production glut drove solar panel prices down, allowing farsighted customers to buy them at a reasonable cost. And the lost subsidies forced more solar companies to rely not on public support but private customers. As painful as the turmoil has been, it's also sped up the maturation of the industry. That "someday" is finally within sight.
A longstanding goal of the solar industry is "grid parity" -- the ability to produce electric power as cheaply or at lower cost than other energies powering the electric grid. According to a recent report from the Department of Energy's National Renewable Energy Laboratory, some parts of the U.S. -- Hawaii, New York and much of California and Massachusetts -- have already reached grid parity. By 2015, two-thirds of the U.S. will have solar power at grid parity, NREL estimates.
Better Days Ahead for Solar Sales
But try cheering up beleaguered solar investors with the news that better days are coming five years from now. Instead, the Claymore/MAC Global Solar Index, an ETF comprising 32 solar stocks, is down 30% this year, compared with a 2% rise for the S&P 500. And a company like Trina Solar, which had bucked the bearish trends in the solar sector last year, has lost 22% of its value this month without any bad news. That prompted a Raymond James analyst to recommend the stock, arguing it could rise 50% above its current level of $20.12.
Which brings us back to the fundamentals of these solar companies. The prolonged slump has left some at attractive valuations. Trina is trading at 12.9 times its trailing 12-month earnings and 8.6 times its projected earnings for next year. Yingli Green Energy is trading at 9.7 times its future earnings. Claymore/MAC says that the average PE ratio of the stocks in its solar ETF is 15. The average PE for the S&P 500, meanwhile, is 20.6.
Of course, the solar market still faces great uncertainty. Any hit to the global economy could weaken demand further. And it's still unclear just when demand will begin to catch up with supplies. But the bearishness afflicting the sector seems overdone. Many of the companies that have muddled through the recession are operationally strong.
And they may be facing a tough market, but they are growing. As Pallavi Gogoi pointed out last week, green tech industries like solar power are poised to be a key area of job creation, with the Bureau of Labor Statistics projecting that green jobs will continue to grow in the next 10 years.
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