Sector Watch: Solar energy stocks
As oil prices rise, alternative energy sources such as wind and solar power are becoming increasingly affordable, which spells potential success for Canadian Solar Inc. (Nasdaq: CSIQ) and EMCORE Corporation (Nasdaq: EMKR), two small caps rooted in the solar energy sector.
Canadian Solar, together with its subsidiaries, designs, develops, manufactures and markets solar modules for converting sunlight into electricity. It produces standard solar modules for residential, commercial and industrial solar power generation applications, as well as customized products incorporated into customer designs such as solar-powered bus stop lighting and solar-powered car battery chargers. In addition, the company works with government agencies to implement solar power development projects and is already providing solar-powered electricity to rural areas of China.
Canadian Solar markets its standard solar modules through distributors and system integrators worldwide. Specialty products are sold directly to manufacturers. The company is headquartered in Canada and manufactures its solar modules in China.
In mid-November, Canadian Solar announced a major new contract in Spain to deliver solar panels representing 60 megawatts of annual generating capacity. Deliveries have already commenced and the company expects to complete the installation this summer. In addition, Canadian Solar recently delivered 11.7 megawatts of solar module generating capacity to Germany for three large solar power projects. Spain and Germany are emerging as important solar markets because of new government incentives driving demand.
Solar energy is comparatively expensive in part due to the high cost of polysilicon used in the manufacture of solar panels. This substance is in high demand and short supply. To minimize supply issues, Canadian Solar has entered into long-term supply contracts that have already secured 90% of its silicon requirements for 2008 production.
During the first nine months of 2007, Canadian Solar’s revenues increased three-fold year-over-year to $175.3 million from $43.8 million, reflecting expanded manufacturing capacity and new contracts. The company recorded a $6.2 million, or $0.23 per share, net loss for the nine-month period but turned profitable in the September quarter. This compares to a $4.3 million, or $0.25 per share, net loss in the first nine months of 2006.
September quarter net income rose to $522,000, or $0.02 per share, from $239,000, or $0.01, per share in last year’s September quarter. The company is also making good progress on a new solar module manufacturing facility in China that will increase production capacity four-fold to 400 megawatts.
Canadian Solar recently raised 2007 revenue guidance to $285 to $295 million from $255 to $265 million and is forecasting 2008 revenues in a $650 to $750 million range. Analysts expect Canadian Solar to turn profitable in 2008 and produce 35% average annual growth over the next five years. My $22 price target for Canadian Solar is above Tuesday’s closing price of $18.59. Over the last 52 weeks, shares have ranged between $6.50 and $31.44.
On a similar side of the solar energy spectrum, EMCORE Corp. produces and sells solar products for the satellite and terrestrial solar power markets.
For satellite applications, EMCORE offers high-efficiency semiconductor-based solar cells, covered interconnect cells and integrated solar panels. The company’s products for terrestrial applications include concentrating photovoltaic (PV) systems for utility-scale solar applications and solar cells and components for solar power concentrator systems.
EMCORE also owns a fiber optics business which markets optical components and sub-systems for transmitting voice, data and video over high speed networks. The company’s products are marketed worldwide by a direct sales force, distributors and application engineers. EMCORE’s solar cells are based on gallium arsenide, not polysilicon, so the company also avoids silicon supply shortage issues.
In mid-December, EMCORE announced a purchase order to supply 5.7 megawatts of concentrating PV systems to alternative energy projects in South Korea, as well as a letter of intent covering follow-on projects totaling 14.3 megawatts. In addition, EMCORE announced an agreement with a Korean semi-conductor packaging company for a Korean joint venture to manufacture photovoltaic systems.
During the fiscal year ended September 2007, EMCORE’s revenues rose 18% to $170. Solar product revenues rose 54% year-over-year to $59.7 million from $38.7 million and represented about 35% of overall revenues. The company recorded a FY 2007 net loss (excluding non-cash expenses) totaling $21.5 million, or $0.42 per share, mainly due to investments in its new terrestrial Solar Power Systems division. EMCORE is targeting at least 24% growth in FY 2008 revenues to a $210 to $230 million range. Several analysts predict EMCORE will turn profitable in FY 2008. Consensus analyst estimates predict EMCORE will produce greater than 100% growth next year and 30% annual longer-term growth.
My $14 price target for EMCORE (EMKR) is above the closing price of $10.57 on Tuesday. Shares have ranged between $3.84 and $15.90 over the last 52 weeks.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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