Our Take on Solar - Near Term More Weakness Likely, Which Will Be Unique Opportunity to Accumulate

Apr 21, 2009
Author: SCP Editor

April 21, 2009 – The good news for solar, according to iSuppli, is that global revenues generated by PV installs is expected to growth from $30.4 billion in 2008 to $90.6 billion in 2013, while installations are forecast to increase from 5,235MW in 2008 to 26,900MW in 2013.

The bad news is that conditions are expected to get worse in 2009 before they get better. Revenue is expected to decline this year to $18.2 billion, while installations are expected to decline to 3,546MW. Exacerbating the near-term outlook for solar is that there is so much oversupply in the markets. Yesterday we reported that Pacific Crest’s Mark Bachman’s channel check estimates that there are potentially about 2GW worth of excess modules on the market with prices approaching €2.00/watt  (and as low as €1.80/watt in “significant quantities”).

iSupply had also recently forecast that wafer-based production capacity will increase from 6.2GW in 2007 to 17.8GW in 2010 and 27.5GW by 2012, while poly production will increase from 5.7GW in 2008 to 19.4GW in 2010 and 37.6GW in 2012.

In addition, poly prices have continued to slide into the first quarter. So, companies that were writing down inventories in Q4 when poly was selling for $150-$160/kg, are likely going to have to follow up with more write downs now that prices are reportedly as low as $80/kg.

What this means for solar investors is that the near-term outlook looks shaky, and we wouldn’t be surprised to see another round of pretty dismal results for the Q1 out of the sector. This will likely create downward pressure in the near term for solar stocks.

But keep in mind that the sector is poised for some pretty remarkable growth heading out of 2009. If iSuppli is on target, PV system installations are queued up for 658% growth for the 2009-2013 period while revenue is forecast to grow by 234%.  Over this period, the oversupply in production capacity, modules and poly will get soaked up by a marked increase in demand, and this will provide an improved environment for pricing stability.

Our thesis is that the next round of weakness in solar stocks will represent a unique opportunity to buy growth in solar at a discount, and that the worst, in the sector, will have been priced in at that point. We are looking for solar to be an outperformer heading out of 2009 and through the 2013 period.

Companies that we would be investing in on weakness in the near term would be low-cost producers with stronger balance sheets and access to capital. These are critical criterion for navigating an environment that is still extremely challenging. We don’t see any reason in the near-term to take additional risk on with more speculative names. Even at current levels, not taking into account further weakness in the group, leading companies in the sector, and low-cost producers are trading at multiples which have focused almost exclusively on pricing pressure, oversupply and low-to-no growth. Stick with them.