Its stock is not on the buy list of any analyst, but SolarCity (NASDAQ: SCTY) once again proved to be a "rainmaker" for its industry in November by offering the first-ever bond issue in the United States to be backed by solar power contracts.
Meanwhile, several solar stocks are ending the year more fiscally fit than they were when it started. Among the equities that analysts were strongly recommending as November drew to a close were Advanced Energy Industries (NASDAQ: AEIS), SunEdison (NYSE: SUNE), SunPower (NASDAQ: SPWR), and Trina Solar. (NYSE: TSL).
Capital ideas
In a challenging economy and a highly competitive business sector, SolarCity has consistently created new sources of financing that have been widely adopted throughout the solar industry. The San Mateo, California-based company already is known for its innovative rooftop leasing program, launched in 2008, which helped to stimulate the solar residential market by virtually eliminating the upfront costs of installation.
Now, SolarCity is offering institutional investors the opportunity to purchase bonds secured by its consumer and commercial power contracts. The offering is intended to raise US$54 million (39.8 million) to finance the continuing expansion of SolarCity, which also announced in November that it planned to open 10 new operations centers in California by year-end 2013, nearly doubling its statewide locations. The bonds carry a 4.8 percent interest rate and will mature in December 2026.
The breakthrough securitization is being "closely watched" by the financial and energy industries, Pavel Molchanov, research analyst at Houston-based Raymond James & Associates, told pv magazine. Although Standard & Poors gave a rating of BBB+ to the notes — a low investment-grade designation — Molchanov commented, "The way I would characterize [this relatively small] securitization is that SolarCity is testing the waters before plunging in next year with much larger offerings."
Benjamin Kallo, cleantech energy analyst for Robert W. Baird & Co. of San Francisco agrees. "SolarCitys bond issue probably was the biggest announcement of the month," he commented to pv magazine. Our firm upgraded SolarCity to an ‘outperform' rating on the basis of that announcement. This is really the first asset-backed security backed by residential solar power contracts — and it will be good, overall, for the industry as it drives the price of financing down."
Indeed, the new funding will be urgently needed because the federal investment tax credit for solar energy projects is scheduled to drop to 10 percent from 30 percent at the end of 2016. As Andrew Giudici, a senior director at Kroll Bond Rating Agency, told The New York Times recently, "Actually getting the first deal done will hopefully open up different outlets for other developers as well."
SolarCity closed the month at a ticker price of US$52.28 (38.46), down 5.1 percent after posting mixed Q3 results on November 7. Its price to book value was US14.04 (10.34). However, overall, investors remain happy: The companys stock value has quadrupled since its initial public offering (IPO) a year ago.
"This thing [SolarCity] is an absolute roller coaster, right?" Angelo Zino, senior industry analyst at S&P Capital IQ in New York City remarked to pv magazine. "If you look at the month of October, it was the best-performing solar stock. Its got a great business model; were just not positive on the company because of the fundamentals."
A "strong buy" on SunEdison
St. Peters, Missouri-based SunEdison (NYSE: SUNE), which has been beating the bushes to raise extra cash for its solar power business, could see this bond issue as "a huge positive," Zino said. "Solar players are tapping the market for cheaper ways to finance solar projects," he explained, "and SunEdison undoubtedly will consider a mix of feasible funding options."
In September, SunEdison filed plans to spin off its semiconductor division in an initial public offering of up to US$250 million (184 million), scheduled to take place early in 2014, so that it could concentrate more on solar growth. But thats not all thats planned, according to Zino, who has put a strong buy on SunEdison.
Zino notes that, prior to SolarCitys bond issue, SunEdison had bruited plans to fund new solar projects by spinning off some properties into a new publicly listed yieldco in the United States next year. "Basically, [the yieldco would be] a public vehicle that would be spun out to generate about US$40-US$50 million (29-37 million) in [distributable] cash flow. It's just a way for them to maximize return potential for shareholders," Zino remarked.
He added, "Yieldcos also are starting to develop. In 2014, youll start seeing solar companies tie a number of projects together and offer investors the opportunity to buy these assets as publicly traded vehicles. Milford, Connecticut-based NRG Energy [NYSE: NRG] did one earlier this year."
Looking at the SunEdisons current financials, a 75 percent rise in the companys solar energy business revenue helped it to break even on an adjusted basis in Q3. Solar pipeline, projects under construction and backlog all grew sequentially, with 558 megawatts (MW) under construction at quarter-end.
The stock closed on November 29 at US$12.71 (9.35) — up 34.4 percent for the month.
SunPower still sizzles
Silicon Valley-based SunPower, a manufacturer of high-efficiency crystalline silicon photovoltaic panels that convert 21.5 percent of ambient sunlight into energy, also is going mano a mano with First Solar (NASDAQ: FSLR) and SolarCity on project installations. The company has built up a large EPC pipeline to remain profitable — not only in the States, but in emerging markets, including South Africa and Chile. It also has a foothold in the rapidly growing solar market in Japan and has done business in Europe.
According to Ben Kallo of Robert W. Baird, "My favorite solar stock that I cover is Sunpower at this point, because of its advanced technology and high efficiency, as well as its expansion into both residential and utility scale project development, both in America and abroad."
Whats more, Kallo told pv magazine, SunPowers geographic diversification gives it the best exposure to the Japanese market of any U.S. solar firm; over 20 percent of its revenues in the past couple of projects have come from Japan.
"When I think about companies trying to move into new markets," he added, "SunPower has the best opportunity to do that in a cost-effective way because of the companys [66 percent ownership by the Paris-based oil and gas company] Total S.A. Theyve made big announcements in Chile and South Africa — both for 80 MW utility scale projects. They can do all of this more cost-effectively than, for example, First Solar, because Total already is doing business in many regions worldwide and they know the energy players on the ground. Whats more, their balance sheet is very solid."
Travis Hoium of The Motley Fool also has identified SunPower as a top pick. "SunPower is improving the back-end technology and cost of solar while SolarCity is improving the efficiency of installing solar on rooftops around the country. I'm thankful for the innovations at both companies that make for not only great investments but also a revolutionary and clean energy source."
SunPower ended November at a share price of US$30.34 (22.33) — down 2.0 percent, but up 57.1 percent for the past six months.
Other considerations
Fort Collins, Colorado-based Advanced Energy Industries, which still has one foot in the thin-film business and one in the solar market, remains a top pick for Pavel Molchanov of Raymond James & Associates. On the solar side, which accounts for more than 50 percent of its business today, AEIS supplies photovoltaic inverters to commercial and utility buyers. The stock closed out November at US23.82 (17.53), up 16.8 percent, cementing its October growth of 20 percent.
Finally, there was good news and bad news for two manufacturers based in China. The nations second-largest panel producer, Trina Solar, reported a returned to profitability for the first time in two years and raised its shipment forecast 11 percent. The companys net income for Q3 was US$9.9 million (7.3 million) — a major turnaround from its Q2 loss of US$33.7 million (24.8 million) for the Changzhou-based company. Revenue rose 24 percent over the previous quarter.
Based on those results, S&P Capital IQ's Zino said that his firm had improved its rating of Trina to a "strong buy." He explained, "Weve had a buy on this stock during the entire recovery here. The fact that they were able to return to profitability sooner than anticipated, plus a number of factors that could drive the stock higher (including some alleviated risks) convinced us to push that rating even higher."
The news was not as encouraging for Wuxi, China-based Suntech Power Holdings, already in bankruptcy proceedings, which reported on November 26 that it plans to appeal a decision by NYSE Regulation, the New York Stock Exchange's independent oversight body, to begin delisting proceedings of Suntech's American Depositary Shares.
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