The rise and swoons in solar energy stocks over the last few years suggest the sector is purely speculative. Excess capacity undermines the fundamentals for firms, supporting the case that gains made in 2013 are short-lived. The timing is right to ask if the solar energy has its mojo back, rewarding patient investors with more gains.
Solar in a nutshell
Shortly after the financial crisis, governments encouraged solar energy installations by supporting the industry with tax-reducing incentives. When governments, such as those in Europe, were constrained by deteriorating budgets, tax benefits were removed, causing many solar energy plays to drop. Weak firms exited the industry through bankruptcies, and excess industry supply shrunk steadily in the last year.
But new contract wins and strong recent quarterly results are two reasons to be bullish on the industry.
Firms announce new deals
Canadian Solar (CSIQ) is an example of a firm winning bullish investors. Shares are up nearly 240% in 2013. The company announced that Soleq Solar, an Asian solar power provider, will acquire 91 megawatts of its solar module. Canadian Solar also won construction of a 130-megawatt solar power plant for Grand Renewable Solar. The project is a Samsung renewable energy development.
Click on the images below to see data over time. Sourced from Zacks Investment Research.
Strong quarterly results
JA Solar (JASO) reported strong quarterly results in May. The firm shipped 443 megawatts in its first quarter, and expects to ship between 1.7 gigawatts and 1.9 gigawatts in 2013. Gross margin was 6%, compared to negative 4.6% in the prior quarter.
Yingli (YGE) is another solar stock reporting stronger sales. The company generated revenue of $431.4 million last quarter, which beat consensus by over $43 million. Positive gross margins of 4.1% gave investors hope that profitability will be sustainable for Yingli and other solar energy firms. Demand for utility-scale projects is expected to grow, which suggests Yingli will meet its guidance of shipping at least 3.2 gigawatts in 2013.
Trina Solar (TSL) finally had a good quarter. Gross margin improved sharply, up from 1.7% in the previous quarter to 11.6%. The firm raised its guidance for panel shipments in 2013 from 2.0-2.1 gigawatts to nearly 2.4 gigawatts. In the second quarter, shipments rose 647 megawatts, representing a 64.6% decline from the previous quarter. Trina still managed to raise its operating expenditure by 68.7%.
Investors should stay cautious
Solar energy stocks are clearly on a rebound, but if investors take profits in the sector, not all companies will bounce back from a sell-off. Canadian Solar and Yingli are likely on a stable path to recovery. Yingli has loans from the China Development Bank that will stabilize the funding of its debt. Canadian Solar won big contracts that will support the recent rise in its shares. Bullishness for JA Solar may fade, because the firm filed an offering to raise $80 million. JA Solar still has $890 million in debt, with more than half due within one year. And Trina had a good quarter, but will need another one to justify its recent rally.
Written by Chris Lau
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