Sun's Up!

Monday, March 13, 2006

SOLAR STOCKS HAVE GONE SUPERNOVA in the six months since our bullish story on the solar business appeared ("A Place in the Sun3," Sept. 19, 2005.) Some may be too hot to handle just now, though the industry's long-term outlook is radiant.

Credit for the monster rally goes to a magical convergence of high oil prices, surging demand for solar cells and strong financial performance by solar companies. With crude above $60 a barrel, the sector also is winning fans in government; President Bush, the former Texas oilman, proposed that Uncle Sam spend $148 million on solar research in fiscal 2007, about twice his '06 request. Even more impressive: the $3.2 billion the California Public Utility Commission plans to spend on new solar incentives.

As the table nearby shows, the solar-stock rally has given a dramatic lift to shares of many of the sector's key players. The sector also has seen a trio of hot new offerings, from Q-Cells (Ticker: QCE.F), a German solar-cell company; Suntech (STP), China's leading solar-cell producer, and SunPower (SPWR), a solar-cell spin-off from Cypress Semiconductor (CY). All three have doubled since coming public. More IPOs `initial public offerings` are coming this year, including from Siltronic, a silicon-wafer producer to be spun off by German chemical giant Wacker-Chemie, and Norwegian solar-cell maker REC.

Two stocks highlighted in our story have had big moves: silicon wafer specialist MEMC Electronic Materials (WFR) is up more than 70% since the story ran, while solar-cell maker Evergreen Solar (ESLR) has doubled. Both continue to win fans, as analysts lift profit forecasts.

Brett Hodess, the semiconductor- equipment analyst at Merrill Lynch, last week lifted his earnings estimates and price target on MEMC, one of the world's top producers of silicon wafers, which can be turned into computer chips or photovoltaic cells. MEMC also manufactures polysilicon, the raw material used to make silicon wafers. As we have reported, polysilicon is in exceedingly tight supply, due to expanding demand for solar cells and the reluctance of polysilicon companies to risk over-expansion. In a report last week, Hodess wrote that polysilicon prices could increase 25% a year for the next two years.

"As we see it, polysilicon supply will remain below demand through 2007," Hodess said in an interview. "Almost all of the polysilicon companies are adding capacity, but most of that won't be online until late 2007 and 2008. Meanwhile, the solar-cell manufacturers have also announced substantial new factories to make wafers." Hodess expects MEMC to earn $1.78 a share in 2007, up from a projected $1.40 this year. His new price target: $44. Last week, the stock was around $35, up from $19 last September.

Michael Rogol, who follows solar stocks for CLSA Asia-Pacific Markets, thinks solar's expansion phase has only just begun. He says the business last year produced wafers capable of producing 1.6-1.7 gigawatts of power. By 2010, he says, the total should be at least 8 gigawatts.

Rogol rattled off 10 buy recommendations, including Q-Cells, the top European solar cell provider; Evergreen; Solarworld (SWV.F), a German company that via the acquisition of Shell Solar recently became the largest U.S. solar-cell producer; Tokuyama (4043.JP), Japan's largest polysilicon supplier; Suntech; Carmanah (CMH.TO), a Canadian solar-products firm; Conergy (CGY.F), a German solar-power wholesaler; Taiwanese solar-cell maker Motech (6244.TWO); Sharp (6753.JP), the world's top producer of photovoltaic cells, and SunPower.

J. Michael Horwitz, an analyst with Pacific Growth Equities in San Francisco, thinks Evergreen remains the best domestic bet; he has Sell ratings on SunPower and Suntech, which he thinks are fine companies, but overpriced. That said, he sees little chance that new polysilicon supply being added by MEMC and its rivals will create excess capacity. "We've got 37,000 tons of capacity now, and we'll approach 50,000 to 60,000 tons in 2008," Horwitz says. "But prices aren't likely to come down much. Guys will fight for the excess capacity."

Bullish over the long term, Horwitz warns that the huge rally leaves solar stocks at risk for a 20%-50% pullback, perhaps triggered by operational issues associated with the substantial new capacity the industry is adding. Another worry: the solar-cell companies, he says, are at risk of shrinking margins as polysilicon prices continue to expand.

Nonetheless, there seems little doubt that the solar industry is in the early stages of what should be a long-lived boom. It might be prudent to take some money off the table, but it's too early to walk away. For solar investors, the sun should continue to shine for a long time to come.