Saturday, November 28, 2009

Investing in Next-Generation Solar Power Technologies

Solar stocks are completely undervalued. And big money stands to be made. The following is a current profile of the industry, along with what to expect going forward.

The Solar Industry*

Let's start with the basics.

The global solar industry has grown over 1,500% the past nine years — from an installed capacity of 947 MW in 2000 to 15,221 MW at the end of 2008.

That breaks down to a compounded annual growth rate (CAGR) of about 40% for the same period. Take a look:

solar market growth

Folks, not many things grow 1,500% in nine years. For perspective, the Dow Jones Industrial Average gained only 12% during the same time.

Broken down by country, or by region, some interesting trends also emerge, especially when it comes to the countries with the highest growth rates for solar installations.

For example, I bet you'd never guess that the United Kingdom ranked among the top five countries for solar installation growth over the past eight years.

Here's the full list of those countries, along with their respective solar installation annual growth rates:

  • Spain, 104.2% CAGR

  • Germany, 61.7% CAGR

  • United Kingdom, 34.7% CAGR

  • Indonesia, 33.9% CAGR

  • Japan, 29% CAGR

That's the story for the past nine years. Some savvy investors made a lot of money, but it's nothing compared to what'll happen the next eight years. . .

Solar Stocks Outlook & Industry Forecast

Under a conservative growth scenario, the solar energy industry will grow another 33% by the end of 2009. By 2015, it will have grown over 374% from 2008 levels:

solar market growth

Worth noting is that the compounded annual growth slows during the period from 2009-2015, to 23.6%-down from 40% for the period from 2000-2008.

This is more an indication that the industry is maturing than it is an indication of slower growth. This is due to the volume of solar module being installed.

For example, 15,836 MW of solar energy capacity will be installed in 2015. Only 4,517 MW will be installed this year.

So the percentage growth of installs is slower, but the number of panels being produced and installed is much greater. This is great news for investors.

Interestingly, the countries in which a good portion of these future panels are going to be installed is different from the countries leading the way over the past eight years.

This is due to saturating markets, policy leadership, and the price of retail electricity if different areas.

The five countries leading the way in the next five years are, along with their estimated CAGR:

  • China, 35.3% CAGR

  • France, 46.4% CAGR

  • India, 34.6% CAGR

  • United States, 39.3% CAGR

The U.S. comes in second for anticipated growth over the next five years, with good opportunities also emerging in the Mediterranean basin and Australia.

Preparing for Solar Industry Growth

To get a grip of how the solar industry is playing out, it's helpful to first see who the largest players are.

Here's a chart of the top solar cell producers by market share for 2007-2008:

top solar cell makers

I will tell you, however, that Q-Cells (XETRA: QCE), has since taken over the top spot.

Sharp (TYO: 6753), Kyocera (NYSE: KYO), Sanyo (TYO: 6764), Mitsubishi, and BP Solar (NYSE: BP), cannot be invested in as pure solar plays, so I immediately dismiss them. I'm only after the pure plays here.

That leaves Motech (TAIWAN: 6244), SolarWorld (XETRA: SWV), and Suntech (NYSE: STP), if you want to play with the big boys. Schott is a special case that we'll get to in a minute.

Motech is engaged in the supply of high-quality, low-cost crystalline solar cells to Photovoltaic Industry and module manufacturers worldwide. They've signed major silicon agreements with Nitol (now partially owned by Suntech), and DC Chemical — two of the largest players in the silicon supply game.

If you trade internationally, keep an eye on them.

SolarWorld is a vertically integrated solar company based in Germany. They're involved in the entire process, from silicon production to module manufacturing. And, like Motech, they've also signed a silicon supply deal, worth $580 million, with DC Chemical.

SolarWorld has also built and opened their own silicon production plant.

But Suntech is my favorite play here. It's traded domestically, so everyone has access to it, and it's been performing well despite negative overall conditions.

They boast highly efficient cells, operate across nearly all sectors of the market, and are properly position in both China, the U.S., and Australia.

When it comes to crystalline modules, Yingli (NYSE: YGE), Solarfun (NASDAQ: SOLF), and Trina Solar (NYSE: TSL), are companies to watch.

Concerning thin-film modules, First Solar (NASDAQ: FSLR) is the best game in town.

*Company and industry data and charts provided by GlobalData.


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