Solar Stock Winners: Tax Cut Now Official
NEW YORK (
) -- It's official. With the tax cut passed and President Obama expected to sign the package into law on Friday afternoon, solar stocks will get their biggest 2011 gift: the extension of the Section 1603 cash grants for solar project development.
It's been more or less a fait accompli ever since the renewable energy industry lobby groups won the battle to get the cash grant extender tacked onto the tax cut package. Spikes in solar trading were seen last week when the cash grant package came back from the dead. Now, though, with the measure being passed, the Street can begin the game of officially predicting who benefits the most from the solar incentive being extended.
Stifel says in a Friday report that the cash grant extension is a broad positive to the solar space, and given it is only a ONE-year extension, demand pull-in ahead of a 2012 expiration could provide upside to its 1.5GW U.S. estimate for 2011.
For one, wind benefits a lot more than solar. The wind project market benefits more than any renewable energy sector, and dominated the sheer total amount of dollars provided in Treasury cash grants.
In 2009 and 2010, wind dominated the cash grant awards with 84% of all dollars and a total cash grant award of $4.6 billion, according to Treasury data.
Solar projects were in second place -- excluding solar thermal -- representing 7.5% of the total cash grant market, or $413.5 million.
Among solar companies that stand to benefit, Stifel is out with a report on Friday arguing that the biggest winners will be
SunPower
( SPWRA) and
MEMC Electronic Materials
(WFR)
.
The Stifel call on SunPower dovetails with the trading activity at the end of last week, when it became clear that the cash grant would be extended upon passage of the tax-cut package, and SunPower shares shot up 8%.
>>Clean Energy Winners: Tax Cut Trades
MEMC, on the other hand, hasn't benefited at all from the cash grant extension in trading. MEMC shares are down 7% over the past five trading days, even despite bucking the solar trend on Friday and riding higher by roughly 2%. If there's good reason to think that MEMC should benefit from the solar project financing positive, there's also good reason why MEMC shares have not popped on the news.
MEMC announced this week that its CFO was leaving. For a company that has gone through as much management upheaval as MEMC, and continues to disappoint the Street quarter after quarter, another major management departure is not what investors want to see, to say the least. In addition, since the SunEdison solar project unit -- which is the reason that MEMC stands to benefit from the cash grant program -- involves atypical accounting requirements for a solar balance sheet, a change at the CFO level isn't going to provide comfort to investors already uncertain of how to model the project business.
It can't be forgotten that MEMC said with its third-quarter earnings release that there were several elements of solar project accounting that were going to be treated in a way the company had not originally expected.
Nevertheless, Stifel thinks the largest beneficiaries of the cash grant extension will be at the small utility (5 megawatt to 10 MW) level and in the large commercial segments, given the transaction cost relative to the investment size in these projects. This means SunPower and MEMC's SunEdison, given their high share in the commercial market, stand to receive a boost.
Stifel also argues at a more general level that the Chinese module players will benefit from the cash grant focus on smaller projects and commercial projects. The Chinese solar players have not purchased any pipelines of projects, either of a small scale or the gargantuan projects being pursued by
First Solar
(FSLR) - Get Report
. Yet the Chinese companies, including
Suntech Power
(STP)
,
Trina Solar
(TSL)
, and
Yingli Green Energy
(YGE)
have been making progress on straight module sales agreements with major developers in the U.S. marketplace, particularly in California.
At a most general demand level, all solar module companies are anxious for the U.S. to be among the lead markets in 2011, making up for the expected decline in Germany and the Czech Republic. Stifel's take that it "may" have to revise its 2011 forecast for U.S. solar installations of 1.5 GW upwards indicates that it's still not clear whether the cash grant boosts demand on the margins or provides a more significant leg up. As previously noted, Ardour Capital's forecast for 1.75 GW in 2011 was predicated on the cash grant not being extended.
The cash grant is also good news for First Solar, but Stifel explains in its report why it's good news more limited to the margins of the First Solar story. "We believe First Solar and SunPower were dual-tracking their large utility projects for sale under either scenario; however, as the number of tax equity investors and investment dollars is limited (although substantially improved since 2009), the lack of further competition from 1603 cash grants would have led to higher return hurdles to attract the tax equity."
Stifel also notes in its cash grant beneficiary report that
SatCon
( SATC) is the largest supplier of commercial scale inverters with roughly 50% share.
-- Written by Eric Rosenbaum from New York.
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