Investment bankers Merrill Lynch have initiated coverage of solar energy companies, with a report that brings few surprises but reinforces expectations of industry growth.
The report, "The Sun will shine, but pick your spots," starts with a "Buy" rating for San Jose, Calif.-based SunPower Corp. and a "Neutral" rating for Marlboro, Mass.-based Evergreen Solar.
"We like (SunPower's) product differentiation and its vertical integration strategy. Though the stock trades at a premium valuation, we see further appreciation potential given its strong revenue and earnings growth," according to the report.
"On the other hand, we think (Evergreen Solar) will face challenges due to the lack of product differentiation and scale. That said, solar industry growth and (Evergreen's) potential as an acquisition candidate should help keep the stock at current levels," Merrill Lynch continued.
According to solar energy market analyst J. Peter Lynch, Evergreen Solar stocks gained 213 percent in 2005.
However, in August of 2006, analysts at RBC Capital Markets reiterated their "underperform" rating for the company. The RBC Capital Markets analysts cited a projected decline in total product gross margin to under 10 percent, newratings.com reported at the time.
They reduced the stocks' target price from $11 to $8, and said that Evergreen's low-efficiency solar cells could lead to price weakness and higher total cost than other photovoltaic manufacturers, according to the report.
Merrill Lynch Asia already covers some solar stocks: The company has a "Buy" rating on Suntech Power, "due to its low cost and manufacturing scale," as well as on Renesola, according to the report.
Analysts for the firm did not respond to requests for an interview by publication time of this article.
Lynch, the solar energy market analyst, has pointed to several publicly traded solar stocks that have made big gains in the past few years. "There is enormous potential in this market," Lynch said late last year. "You could double the industry yearly and it still wouldn't be a blip on the world energy market."
Case in point: The market for photovoltaic solar panels worldwide in 2005 was 1.5 gigawatts, or 1.5 billion watts. The total demand for electricity in that year was 4 terawatts, or 4 trillion watts, Lynch said, adding that the demand is growing 2.5 percent a year.
As for 2007, he told United Press International last week: "I think that solar stocks will be weak the first part of the year and strong the second half."
In assessing the factors that will affect solar stock prices, the Merrill Lynch report points to some familiar issues in the solar industry: tax incentives and other government subsidies; polysilicon supply; cell capacity growth.
One of the main reasons solar energy prices remain high is that demand far outpaces the supply of the technology's main ingredient, semiconductor-grade polysilicon. Most analysts expect the gap to ease by the end of 2008, as new silicon refining plants come online. In the meantime, governments such as the United States, Germany, Spain and Japan support making solar more affordable by offering generous tax incentives for those who install a system. According to the Merrill Lynch report, such subsidies will still be necessary in the near future.
Merrill Lynch is not the only institution paying more attention to investing in solar energy. The Motley Fool, an investor advice publication, also noted solar energy's growth potential this week.
"Personally, I believe that counts for a lot," Jack Uldrich wrote, referring to the mounting public support for solar behind the Solar Energy Industry Association political action committee.
Uldrich added that he believes the PAC's current project, proposed House of Representatives bill H.R. 6 ("The American Energy Independence Act") "will enjoy a happy ending by being signed into law. If so, it'd be important for investors of solar energy companies, because its passage -- especially the extension of the 30 percent tax credit -- could be a notable boon to the sales and revenues of many solar companies."
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