SolarCity Stock Leads Solar ETF Up 22% In May


White-hot solar energy ETFs continued exploding in May, outperforming all nonleveraged ETFs for two months straight as well as year to date.

The sector regained its shine this year as falling solar panel prices sparked an onslaught of unanticipated consumer demand and manufacturers became more efficient, market watchers say. But investors should wait for overheated prices to fall back to earth before buying, they say.

Guggenheim Solar ( TAN ) rocketed 22.27% for the month vs. 2.36% for the SPDR S&P 500 ( SPY ).

Market Vectors Solar Energy ( KWT ) vaulted 17.35%.

SolarCity ( SCTY ) led TAN's portfolio with a 67% vertical ascent during a month in which it reported first-quarter results. The leading U.S. residential solar energy installer increased its customer base 106% from the year-ago period.

The number of residential megawatts deployed vaulted 137% year over year. It has a backlog of 195 megawatts.

The San Mateo, Calif.-based firm lost 41 cents a share in Q1 while growing sales 21% to $30 million. After a four-quarter string of losses, it expects to be cash-flow positive in the second quarter.

The pioneer in third-party solar leasing announced in May a $500 million deal from Goldman Sachs, allowing it to build about 110 megawatts of solar power systems to lease to homeowners and business. Customers then pay a fixed monthly rate.

"Third-party ownership has taken the residential solar market by storm, and the model is still in its early days," Shayle Kann, vice president of GTM Research wrote in a February 2013 report. "(TPO) now comprises over 70% of all residential solar installations."

Decades Of Growth Expected

The solar leasing program started in California and has expanded to 14 states -- mainly in the Northeast and West Coast. The concept has turned solar energy into a new investable asset class that will enjoy sustained growth for a decade, said Micah Myers, senior vice president of corporate development at Clean Power Finance .

"SolarCity is modeling themselves as a utility company 2.0," he said.

He estimates the number of U.S. solar installations is doubling every 18 months, going from roughly 75,000 to 85,000 homes in 2012 to just less than 1 million by 2016 as falling prices attract buyers.

Solar panel prices have dropped sharply from an average of $16,000 per home in 2008 to about $3,000 now.

SunPower ( SPWR ), up 50% in May, adopted the TPO business model in late 2011. The third-largest U.S. solar firm by market value controls about a fifth of the U.S. residential market and plans to launch leasing programs in France and Australia and five other countries in the near future. Cowen & Co. projects this customer base will double by 2015.

"Over the life of a lease relationship, SunPower should enjoy cash flow from customer payments, with opportunities to gain value in renewals (for 10 or more years), and up-sell new products and services," Cowen analysts wrote in a May 16 note.

SunPower's Q1 earnings jumped to 22 cents a share after losing 12 cents in the year-ago period. Q2 sales climbed 29% to $635.4 million. Its second-quarter sales and earnings guidance eclipsed analyst expectations, while full-year guidance met views.

S&P Capital IQ projects revenue will rise 11% this year and 6% in 2014 after rising 5% last year.

In a partnership withTotal (TOT), SunPower has a 6 GW project pipeline, which includes 300 projects in 45 countries, according to Cowen.

First Solar (FSLR), TAN's largest holding and the largest solar firm by market value, soared 18% in May. Q1 earnings of 69 cents a share marked a major turnaround from a loss of 8 cents a share in the year-ago quarter, although it missed analysts' Q1 earnings views.

Sales vaulted 52% to $755.2 million, topping forecasts by 4%. First Solar reported a backlog of 3.1 gigawatts, up from 2.9 GW in the fourth quarter.

Projects under contract stood at $4.4 billion, about the same as in the fourth quarter, according to Credit Suisse.

Investment Risks

TAN has more than doubled from its 52-week low. That followed its cratering 96% from peak to trough between 2008 and 2012.

First Solar's upside is limited considering that all its new projects this year have been bought and not developed on its own and its acquired products could carry low gross margins, Credit Suisse analysts say.

Solar energy firms rely heavily on federal credits, state incentives and rebates for installations, and so any unexpected cuts could affect revenue. Buyers now can receive as much as 30% of a system's cost as an investment tax credit. And this credit is expected to drop 10% on Jan. 1, 2017.

Solar module industry revenue is forecast to drop 20% to $20.5 billion this year, according to NPD Solarbuzz . Revenue is expected to stay below 2012 levels through 2014 and rebound by 2015. Manufacturing capacity reached 45 GW in 2012, while the end market only called for 29 GW. NPD Solarbuzz expects continued overcapacity and declining sales in 2013. The firm sees more industry consolidation through 2014 as companies go out of business or get taken over, leaving the remaining firms with larger market share.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: KWT , SCTY , SPWR , SPY , TAN

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