These two solar companies are joining up to form a new type of solar power venture, leading to upgraded price targets for each stock.
SunPower (SPWR) and First Solar (FSLR)
from Tech Trend Trader
The economic justification for solar power is growing all on its own as a surge of capacity and production, much of it in China, is quickly driving down the cost of megawatts harvested from the sun. And once that happens, it doesn’t really matter who’s in the White House or who controls Congress; the power of the market will be in play.
We’re already seeing evidence the tide is turning in certain regions with Apple (AAPL), for example, making a big commitment to solar energy not because the company is a tree-hugger but because it is the cheapest form of energy for its application. In a sign of just how quickly things have changed, data shows that more Americans work in the solar business than in coal mining.
The lower cost of solar is resulting in a surge of new installations. Between 2012 and 2014, solar’s share of new U.S. electricity generating capacity swelled from 10% to 36% as other sources, mainly wind and coal, saw their shares decline. Currently, there is 16.1 gigawatts of photovoltaic generating capacity, up from 1.2 gigawatts five years ago. The chart above shows just how dramatic the ramp up of new solar installations has been.
Going forward, the Solar Energy Industries Assn. estimates that the pace of installations will nearly double from 2014 to 2016 with growth led by utility build-outs.
As the future for the industry brightens again, after a series of disappointments, investors are rounding back to the stocks of the companies set to benefit. The Guggenheim Solar ETF (TAN) has jumped by roughly 30% since the middle of January and looks ready to potentially break free of the trading range that’s held it since early 2014.
Given the price pressures on PV cells from China, many U.S.-based solar companies have shifted their focus to vertical integration—from designing and producing cells and systems to financing, arranging, and constructing entire power plants. A new variant of this model is to spin off built power plants with steady revenue streams as dividend-based infrastructure plays or “yieldcos” to income-hungry investors trying to earn a far rate-of-return in a world of super-low interest rates.
SunPower (SPWR) and First Solar (FSLR) recently announced they are in advanced talks to form a joint yieldco spin out. Both engineer, manufacture, and install solar power systems to clients large and small. And both are looking to take advantage of corporate structure as a way to maximize returns to shareholders and get into the game, albeit indirectly, as private-sector power generators.
The way this works is that SPWR and FSLR would sell their revenue generating power plants to the new yieldco, which in turn, would attract low-cost capital from investors seeking steady dividends. The parent companies benefit from the asset sales (freeing up working capital) as well as kickbacks from the yieldco based on the achievement of dividend-per-share targets (basically, reflecting the quality and output of assets sold).
Given the announcement of intent to form a joint yieldco, analysts at Morgan Stanley upped their price targets on SPWR. The advantage is that the assets of the two development companies, when combined, will be more attractive due to geographic diversification and the fact that one is more focus on utilities while the other is big into so-called “distributed generation” installations in space-constrained environments.
Details on the joint yieldco are still forthcoming, and solar industry earnings are volatile from quarter to quarter, but clearly both SPWR and FSLR are looking attractive here as they jumped over both of their 200-day moving averages last week for the first time since October.
This is a major development in world economic history; let’s take part.
Jon Markman, Tech Trend Trader, published by Money and Markets, a Division of Weiss Research, Inc., http://www.weissresearchissues.com/tech-trend-trader, issues@e.moneyandmarkets.com, 1-800-291-8545, March 9, 2015