Citigroup: Sun Set to Shine on Solar Investors

Monday, 11 Feb 2013 08:37 AM

By Michelle Smith

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The sun is set to shine brighter for some solar investors, according to a new Citigroup report.

Citigroup expects a surge in demand for solar energy, MarketWatch reports, noting that the brokerage firm sees a number of seemingly positive fundamentals for the industry.

For example, over the past five years, installations grew at a compounded annualized rate of 59 percent, according to MarketWatch. Then too, there is the political drive for cleaner energy and the rising costs of fuel.

Editor's Note:
 
Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

“Key point, many of the U.S. utilities we have surveyed over the past several weeks have highlighted the need to diversify into other generation sources — it is well understood that gas prices won't stay depressed forever,” the reports states.

Yet, the positive fundamentals do not appear to be priced into the shares of solar companies.

And perhaps rightfully so in the case of some companies, according to Citigroup analyst Shahriar Pourreza, author of the report.

Playing the solar market at this point is about looking at which segment of the business has the sunniest outlook.

As Forbes points out, Pourreza initiated coverage of seven companies, but stamped buy ratings on only four of them.

The recommended companies have two criteria in common. They either have or are gaining global exposure in sustainable growth regions and they also have significant exposure to the downstream segment of the solar market.

According to the Citigroup report, it is the downstream companies that are set to see the strongest growth.

“The commoditization of the module business” is seen as a pitfall for those companies heavily exposed to the upstream segment.

The fact that it is difficult to distinguish one solar panel from another erodes the competitive advantage of manufacturers. To brighten their prospects, manufacturers will need to offer more services, requiring a shift of resources downstream, the report says, according to Forbes.

Also, weighing on upstream companies is the outlook for a loss of the plush margins they once enjoyed. Citigroup expects margins to improve beyond current levels. But, “will we ever see gross margin levels witnessed prior to the downturn of solar manufacturers? We doubt it,” Pourreza writes.

Those companies given a buy rating include SunPower, MEMC Electronic Materials, Advanced Energy and First Solar. Trina Solar and Yingli Green Energy were rated with a hold rating, while Suntech received a sell rating.

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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