The solar industry performance in 2013 was a surprise. The stocks generally performed well throughout the year and the global solar forecast is for high growth again in 2014. The industry had significant excess capacity headed into 2013, particularly in China, and the Street was concerned that the magnitude of excess capacity would lead to further declines in margins and make selling solar panels and unprofitable endeavor.
Quite the opposite happened and the industry’s margins started to rebound, demand improved and the industry was profitable. For 2014, solar is again expected to continue its global growth with the US and China leading the way.
Global Forecast for 30% Growth in 2014
NPD Solarbuzz is forecasting a 49GW market in 2014, up 30% versus 2013. Currently 22GW are schedule for installation between the Oct 1, 2013 and the end of 1Q14. The 49GW is an increase of 30% over the 36GW of 2013 installations. According to NPD Solarbuzz, the improving demand is due to solar manufacturers returning to profitability with stronger global sales and marketing networks. Certain tax credits, green initiatives and other factors also play a role.
Regionally, Japan, the United States and China will install about two-thirds of new global capacity in 2014. Investors should hence look to solar stocks based in these geographies. In China, where the Street assumed there was significant excess capacity at the end of 2012, tier-1 manufacturer’s production utilization could easily top 90%. The cost could fall below $0.50 per watt for silicon and non-silicon modules in China which in turn could further increase demand. NPD Solarbuzz forecasts 30% growth beyond 2014 due to the more attractive cost and industry prices.
The NPD Solarbuzz forecast is more aggressive than one from Mercom Capital Group who estimates 43GW of new capacity globally. Mercom estimates 6GW of US installations in 2014 with strong growth from China and Japan as a ‘wildcard’.
While there is some divergence between these forecasts, both are bullish and contain similar estimates for US solar growth. While residential use will continue to expand, commercial will benefit to a greater extent. The lower costs make building solar power plants more attractive and profitably and act a more significant catalyst to that market.
First Solar – Play on US Commercial Solar Industry
First Solar (NASDAQ: FSLR) is based in Arizona. It manufacturers and markets photovoltaic (PV) solar modules with an advanced thin-film semiconductor technology. It also designs and builds PV solar power systems. It reports in two business segments, the components segment and systems segment. The components business deals with selling the solar parts and modules and the systems business manages the sale of the solar modules and the engineering and construction of solar power plants. It has 8GW installed worldwide and is a leader in the US for solar plant construction.
Management at First Solar sees 7.7GW of DC opportunities, it booked 1.3GW and shipped 1.2GW through the end of 3Q 2013. The breakdown of the opportunities is almost 50% focused in the North America with Latin America as the second largest opportunity. The following chart breaks down managements potential books by geography.
In its 3Q13, capacity utilization was at 80%, up versus the prior quarter but actually down by 600bps from last year. Its conversion efficiency was 13.3% and the cost per watt was $0.59. This was down by $0.08 from the prior quarter and versus the prior year. This is important to the profitability of the company over the long-term. It expects manufacturing costs of $0.61 per watt excluding underutilization and upgrades. Module efficiency for the year should average 13.1%. The quarter market the best q/q reduction in manufacturing cost per watt in six years. Management believes it can cut manufacturing cost per watt to $0.36 in 2015, whereas Chinese manufacturers do not expect this level of efficiency until 2017.
Analysts are forecasting sales growth of 7.4% for First Solar in 2014, up from 4.3% in 2013. For the first quarter 2014, growth is estimated at 19%, If bookings can accelerate behind greater demand, the sales forecast for full-year 2014 could prove conservative and lead to increases to estimates. Analysts forecast EPS of $4.40 in FY13 and $3.40 for FY14. First Solar shares trade at 11.9x TTM earnings and 16.9x FY14 EPS.
SunEdison (NYSE: SUNE) is expected to see higher sales growth of almost 40% based on current consensus but that is behind a 7.4% decline in 2013 sales. Analyst estimate FY13 EPS of -$0.13 and FY14 EPS of $0.56. It trades at 27.8x FY14 earnings. SunEdison’s cells are less efficient than competitors and are a concern. This has weighed on profitability. SunPower (NASDAQ: SPWR) and SolarCity (NASDAQ: SCTY) are also players in the industry that investors can look as other plays on the growing industry.
First Solar has steady demand and cadence of new project installations slotted for 2014. It also has a low manufacturing costs and forecasts further costs reductions which should drive above average profitability over the next 2-3 years. The industry is poised for growth and is still attractive even taking into account the stock performances in 2013.
What are your thoughts on the demand for solar power in 2014?