Sector Watch: Solar energy stocks

With both political parties promising further development of alternative energy sources, the future looks bright for solar energy companies Canadian Solar, Inc. (Nasdaq:CSIQ) and Solarfun Power Holdings Co. (Nasdaq:SOLF). 

Canadian Solar is a leading global supplier of solar modules. The company, which incorporated in Canada but manufactures in China, serves a global customer base of tier one suppliers, solar farm project developers/installers and OEMs.

Canadian Solar is growing through capacity additions, vertical integration and new products. A new manufacturing facility opened in February increases solar module production to 400 MW. A further increase to 620 MW is planned by year-end 2008. The company began deliveries of its high-tech e-Modules in May and has secured a 9 MW e-Module sales contract. With two differentiated product lines (regular and e-Modules), Canadian Solar is able to sell at different price points. The company maintains a strong foothold in Germany and Spain and has diversified its markets to include Italy, the Czech Republic, North America and Asia. 

Silicon supplies and prices are a major issue for solar module manufacturers. Canadian Solar has addressed this issue through supply agreements covering 70% of its 2009 silicon requirements. A new supply agreement signed with GCL Silicon Technology in July further strengthens company feedstocks.

Canadian Solar recorded its fifth-consecutive quarter of sequential growth in the 2008 second quarter. Quarterly revenues rose 250% year over year to $212.6 million from $60.4 million in the 2007 second quarter, and earnings jumped to $10.5 million, or $0.36 per share, from a net loss of $2.9 million, or $0.11 per share, last year. The company also increased 2008 revenue guidance to $850 million to $979 million from $750 million to $870 million. Analysts predict this company will produce 31% annual long-term growth. My $35 target price is well above Tuesday's closing price of $21.34

Solarfun Power Holdings also produces solar modules, which it sells directly and through third-party distributors to solar system integrators. Like Canadian Solar, Solarfun is ramping up capacity, locking in silicon supplies and enhancing its technology. However, Solarfun lacks scale compared to larger competitors. In July and August, Solarfun commenced production at four new lines which increase module manufacturing capacity to 360 MW from 240 MW, signed sales contracts for 77 MW of solar modules and locked in 100% of its 2009 feedstock requirements. In addition, the company raised $71.9 million from an ADS offering. 

Solarfun’s revenues rose 192% year over year in the 2008 second quarter to $197.1 million from $67.5 million, and net income nearly tripled to $11.4 million, or $0.24 per ADS, from $4 million, or $0.09 per ADS, in the 2007 second quarter. Solarfun doesn’t provide revenue guidance but did raise its 2008 shipments outlook to 175 MW to 190 MW from 160 MW to 180 MW. Despite higher revenues and shipment forecasts, Solarfun’s share price fell following second-quarter results due to company warnings of lower average 2009 selling prices. These shares closed at  $11.60 on Tuesday, well below their $40 12-month high.  Consensus estimates target 23% annual long-term growth for Solarfun. My $30 price target for Solarfun is more than twice the recent closing price.     

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