For clean energy investors, 2010 finished on a dismal note. A
change of political control in Congress signaled diminished support
in Washington for any kind of major financial incentives in
alternative energy. In Europe, fiscal challenges led countries such
as Italy and Germany to scale back their previous commitments to
clean energy subsidies.
But a trio of factors has started to boost the outlook for the
clean energy sector:
- First, oil prices have spiked and are now at a level that
makes technologies such as wind and solar much more competitive
without the aid of subsidies. If oil prices stay aloft for a
sustained period, then a fresh wave of solar and wind power
programs is likely to begin.
- Second, the nuclear disaster in Japan has led many to
question whether it would be wiser to focus on
environmentally-friendly technologies such as wind, solar and
biofuels.
- Third, the U.S. dollar continues to weaken, making U.S.-based
clean energy plays look far more appealing in the eyes of foreign
companies.
These factors help explain why French energy giant
Total (NYSE:
TOT
)
has made a 60% investment in California-based
Sunpower (Nasdaq:
SPWRA
)
for $1.37 billion. Total's offer for that stake was at a 44%
premium to where
shares
had been trading. That got investors' attention.
As a result of the
acquisition
, investors are now starting to sniff around other clean-energy
plays in the United States, wondering which will be next. There are
three U.S. clean-energy stocks -- two in solar and one in wind --
that could start to pop up on more radars. They're inexpensive,
poised for strong growth and could be the target of mergers and
acquisitions (M&A) hunters. Here they are…
1. First Solar (Nasdaq:
FSLR
)
To complement its $6 billion wind-power business,
GE (NYSE:
GE
)
announced plans in April to become a major player in the
solar power market within the next five years. Why did GE wait
until 2011 to make such announcement? It's because the industrial
giant has finally been able to boost its own technology, by
achieving a 12% sunlight-to-energy conversion ratio using thin-film
technology. This will enable GE to keep up with Chinese rivals,
most of which focus on traditional silicon-based technology that
costs more to produce but yields higher energy-conversion rates. GE
executives figure the 12% ratio for the company's cheaper approach
is still a market-beater.
If that's the case, then First Solar -- the pioneer of thin-film
technology -- can really boast. On a May 3 conference call with
analysts, the company's executives noted the cost-effectiveness of
thin-film using a slightly different measure. First Solar can make
a panel of power that produces one watt of power for just $0.71.
It's hard to compare that with GE's 12% energy conversion target,
but First Solar believes its approach will remain as the most
inexpensive. Any potential suitor would be able to immediately
establish technology leadership.
Right now, First Solar is feeling the ill effects of the late 2010
industry slowdown. Demand slumped and industry inventories built
up, leading the company to issue second-quarter guidance below
analyst forecasts. A key 290 megawatt (
MW
) project, known as Agua Caliente, has also been postponed from the
second quarter to the third quarter of this year.
It will likely take until the end of the third quarter for results
to appear robust relative to forecasts again. As a result of the
tepid outlook observed in the recent conference call, First Solar
shares are back below $130, the lowest level in nearly six months.
The stock now trades for just 12 times next year's projected
profits, the lowest forward multiple in a number of years. With
shares down $50 from the 52-week high, potential buyers may
spot
a bargain, especially foreign suitors that can take advantage of
the weak dollar.
2. GT Solar (Nasdaq; SOLR)
When it comes to actually producing traditional solar panels made
of thick, silicon-based modules, it's hard to compete with Chinese
manufacturers. Investors need to focus on the companies providing
the advanced technologies used by these high-volume manufacturers
such as N.H.-based GT Solar, which provides reactors and furnaces
used at major Chinese factories. GT Solar is considered by many to
be the industry's leader.
Anyone looking to acquire GT Solar would inherit a very stable
business. Current
backlog
of $1.2 billion represents about 18 months worth of business. And
unlike many solar businesses that are hoping to grow their way into
positive
free cash flow
, GT Solar is already there, having generated roughly $150 billion
in free cash flow in fiscal (March) 2010.
Despite the healthy backlog, strong free cash flow and solid
technology base, GT Solar could be acquired for a reasonable price.
Shares trade for less than eight times projected fiscal (March)
2012 profits. A buyer could pay a 50% premium and get the business
for about 12 times projected 2012 profits. Alluding to the recent
positive developments for the solar-power industry, Brean Murray
analysts note that "small-cap niche stocks such as GT Solar are
likely to benefit from the broader macro improvements in the solar
industry." They see shares rising from a recent $10.50 to around
$15.
3. Broadwind Energy (Nasdaq:
BWEN
)
Shares of this wind-equipment maker are getting a decent lift on
Monday (May 9) from solid first-quarter results. Sales of $43.5
million were roughly 10% ahead of forecasts, enabling the company
to eke out a small operating
profit
against expectations of a small loss. Management also noted that
orders in the quarter were strong, setting the stage for an
improved second quarter as well. Although shares have slumped badly
in the past two years thanks to a slowdown in wind-turbine
spending, the worst looks to have passed. Backlog looks stable at
about $225 million, the company has sufficient cash on hand to deal
with the lean times, and it is likely to see rising interest as
investors focus deeper on M&A possibilities in the sector.
As I noted
back in December
, rumors circulated that GE and others may be looking at acquiring
the company. Even in the absence of M&A activity, shares look
attractive at less than one times projected sales.
Action to Take -->
As noted earlier, solid reasons are emerging to take a fresh look
at clean-energy stocks. M&A opportunities help, but the
fundamentals alone make this sector more appealing to investors now
that oil is pricey and nuclear power's prospects have become dicey.
Any of the three stocks discussed above are solid candidates for
investors.
-- David Sterman
P.S. -- Few investors realize that a 20-year energy agreement
between the United States and Russia is about to expire. This deal
supplies 10% of America's electricity. As broke as our government
is, the situation is so serious that President Obama is asking for
$36 billion to avert this crisis. And Republicans support him.
Here's what's going on…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
