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Solar Power's New Dawn

Solar energy stocks stumbled into 2017 in the midst of a 2-1/2 year washout.

X Overproduction in China pressured solar-component prices down 35% in 2016, straining the industry's bottom line. Incoming President Trump raised the specter of a trade war as he talked up a coal revival and set to work dismantling environmental regulations. And oil prices, traditionally the hottest prod helping to drive solar demand, showed no promise of recovering to even a shadow of their former highs.

But investors, who had sent solar stocks down 60% last year and another 17% in early 2017, had a sudden change of heart. The solar group turned sharply upward in early April. It rebounded 54% through Thursday, to a 29% gain for the year.

What happened? Solar-panel prices began to firm up on improving global demand. U.S. cities and utilities joined a rising number of regions around the world to buy into solar technology, which has grown increasingly efficient and cost-effective enough to compete with more traditional forms of energy.

"They're not just thinking about climate change," Williams Capital analyst Cynthia Motz said. "They're thinking about the economics."

This isn't the first time analysts have argued that the industry was on the verge of transition. But the solar power community is flashing signs of increasing, if cautious, confidence. First Solar (FSLR), the largest U.S. manufacturer of solar panels, saw revenue drop 39% while earnings were flat in the second quarter, reported in late July. But the company raised its profit-margin outlook, with Chief Executive Mark Widmar citing firming prices for solar modules.


IBD's TAKE: Research has shown as much as 50% of the performance in a winning stock's run derives from the strength of its industry group and sector at the time of its breakout, making industry rankings a key factor in vetting leading stocks.


In May, Berkshire Hathaway's (BRKB) Warren Buffett gave the industry a boost, saying he has "a big appetite for wind or solar." The solar group rose 14% for the month.

And a curt comment from Trump in June about possibly placing solar panels along a proposed border wall helped send U.S.-based SunPower (SPWR) up 19% and First Solar (FSLR) up 24% for the month.

The stocks remain highly volatile. First Solar and SunPower both topped analyst expectations for second-quarter financial results. But SunPower trimmed the high end of its revenue guidance for the year, citing the timing of projects in Mexico. The news sent its shares 19% lower on Wednesday.

On Thursday, analysts reiterated buy ratings on Israel-based SolarEdge (SEDG), a maker of direct-current inverter systems used in both residential and commercial solar installations. The firm had easily topped analyst targets, with both revenue and earnings growth rebounding in its report late Wednesday. Shares on Thursday gapped up to a 21% gain.

As a result, the Solar-Energy group now holds one of the 15 best gains this year. It owned the No. 1-ranking on Thursday among the 197 industry groups tracked by IBD.

China: The Saudi Arabia Of Solar

Demand for solar power equipment last year remained strong in many parts of the world, Raymond James analyst Pavel Molchanov says. But excess production out of China, the world's biggest manufacturing center for solar, meant supply overwhelmed demand. This year, China's production has become more restrained, Molchanov says, as it's seen its margins squeezed to the limit.

Molchanov likens the firmer pricing trends to the oil market, where OPEC's deal to curb production has struggled to buoy prices.

"Except, in solar, we don't have OPEC," he said. "We have one country, China, that's 75% of the supply."

A critical change this year came from developers in China, the world's largest solar market, as they raced to wrap up energy projects ahead of a June 30 subsidy cut. The massive spike in demand led to the installation of more than 24 gigawatts worth of solar power in the first half of 2017, putting it on track for a record year.

With supply limits constraining projects in the first half, enough demand should spill over into the second half of the year to stem a fall-off in equipment prices resulting from the pullback in China's subsidies, UBS analyst Liu Shuai says, according to Shanghai Daily.

JinkoSolar said in an earnings release in June that it hadn't seen a drop in demand, although the June 30 cutoff had caused "some uncertainties in China's utility-scale market."

China's move to install more "distributed" solar power — smaller sources located as near as possible to end-users — could help prop up JinkoSolar, according to Bloomberg. The government has encouraged such developments in lieu of the bigger, more remote utility-scale projects likelier to cause grid connectivity problems.

U.S. Solar Stocks' Improved Finances

First Solar's first-quarter earnings report in May brought a much-needed dose of good news for the industry and for Wall Street, said Williams Capital's Motz. Its second-quarter earnings, reported in late July, provided another lift.

The Arizona-based components maker, which also develops solar farms, reported strong demand from U.S. businesses and from the utilities investing in larger installations.

In April, First Solar announced that it was preparing to sell two early phase solar-farm projects in California, as well as its interest in the yieldco 8Point3 Energy (CAFD). Expectations for those sales, as well as a tax benefit, led the company to include a massive hike in its full-year margins and earnings-per-share forecast in its Q2 report — to $2-$2.50, up from 25-75 cents.

The divestments are an effort to speed its transition to a new and larger panel, the Series 6, which could drive increased economies of scale and profitability.

SunPower is expected to turn cash-flow positive this year and to report its first annual profit in three years in 2018. The rebound follows a 25% staff cut announced last year, as well as other cost reductions, including a plant closure in the Philippines. SunPower is also trying to shift toward distributed power generation.

Although tough on profit margins, the slide in prices over the past decade has helped make solar more competitive. The benchmark price of a solar panel now stands near 32 cents per watt, down from $3 to $4 a decade ago, Molchanov says.

"First and foremost, the increasing affordability of solar continues to be a fundamental driver of global demand," First Solar's Widmar said on the Q2 earnings call. "We continue to see substantial demand in established markets and the emergence of new markets with significant growth potential."

Energy auctions around the world, particularly in sunnier climates and emerging markets are increasingly being won by solar, Cowen's Osborne says. Examples include Argentina, Mexico and the Middle East.

Trump, Tariffs And Solar Economics

Amid many pluses and minuses, Trump's net impact on the industry remains unclear. He has stirred hope in coal -mining country. But solar stocks took off in June after he touted the idea of building a Mexican border barrier "as a solar wall, so it creates energy and pays for itself."

The president's feverishly criticized decision to withdraw from the Paris climate pact won't do renewable energy any favors. But its immediate financial impact is negligible.

"The Paris climate accord is a headline negative," Osborne said. "But it hasn't driven one dollar of incremental demand yet. So it's not like there were hundreds of millions of dollars of Paris-related revenue in solar last year."

Trump's most immediate impact might be felt in a trade case before the U.S. International Trade Commission involving two solar-panel manufacturers.

Those two companies — Suniva, which has filed for bankruptcy protection, and the U.S. division of German manufacturer SolarWorld, which has filed for insolvency — say they've been decimated by cheap solar panels brought into the U.S. from Asia. The two are calling for higher tariffs on imports.

Critics note that tariffs on Chinese solar panels are already steep — averaging 30% in recent years. They also say tariffs would threaten the current low prices that have supported the installation and development bonanza — which is responsible for the vast majority of 260,000 jobs now accounted for by the U.S. solar industry, according to the Solar Energy Industries Association.

Analysts say developers and installers may scramble to lock in lower prices before Trump rules on the matter, potentially later this year. Solar stocks could be in for a bumpy ride as the case unfolds.

But although Trump gets public-relations mileage out of railing against China's alleged trade abuses, other foreign policy matters could force a more cautious tack. The big one is North Korea, which appears to be coming closer to having a nuclear missile that could reach the U.S.

"The White House is trying to be friendlier with China in order to make progress on North Korea, so escalating a trade war would not be advantageous," Molchanov wrote in a research note.

Meanwhile, many cities and states are moving to broaden their solar energy base. In July, South Miami's city commission OK'd a measure requiring solar installations on new homes, following similar requirements in San Francisco and elsewhere in California.

Meanwhile, the industry presses on.

A year ago, utility giant Duke Energy (DUK) bought a large solar farm in the shape of Mickey Mouse's head, providing energy to Disney's (DIS) Walt Disney World in Florida. Even in overcast Wisconsin, NextEra Energy Resources, a subsidiary of NextEra (NEE), in January announced that it would build, with a regional power company, a large solar energy center in the state.

French oil giant Total (TOT), which owns a majority share of SunPower, also owns battery maker Saft, giving Total an opportunity to move into battery storage. Tesla plans to help build a huge battery farm in Australia. Just this past week, Elon Musk's Tesla (TSLA) announced, along with its Q2 results, that it had put in place its first solar-tile roof installations, beginning with the homes of a handful of top Tesla executives.

And as younger people come of investing age, socially responsible investing has become a positive trend for publicly traded solar stocks.

"Millennials and younger generations do care more," Motz said. "They gotta live here."

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