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Are Equipment Makers Solar's Safest Bet?

Shares of solar equipment maker GT Solar rise in the pre-market on Thursday after a buy initiation from Wunderlich Securities.



) --

Solar equipment maker

GT Solar


received an initiation at buy on Thursday morning from Wunderlich Securities analyst Theodore O'Neill.

Shares of the solar equipment stock were up in the pre-market by more than 5%.

Solar equipment makers have been receiving some positive press in recent weeks, as solar demand forecasts turn more optimistic, and Chinese solar companies plan to churn out record levels of solar capacity.

The Wunderlich analyst has placed an $8 price target on GT Solar shares, which closed on Wednesday at $5.33. O'Neill wrote in his research initiation that the $8 price target "doesn't require heroic assumptions."

The Wunderlich analyst thinks that growth in demand for solar translates almost one-for-one in the demand for raw materials and solar ingots. While O'Neill acknowledges that growth has slowed in the near term as the supply of solar modules exceeds demand, the analyst picks GT Solar as a play on the need within the solar industry to lower production costs. The Wunderlich analyst cited GT Solar's statement that it is on the road to next-generation equipment that will produce raw polysilicon at $20/kg.

Wunderlich's O'Neill estimates that half of the world's current capacity is produced on an inefficient cost basis.

However, timing an entry into GT Solar shares may prove tough for investors, as its largest venture capital backer still owns a huge percentage of common shares, and has stated

its intention to successively sell its GT Solar stake.

In addition, solar demand, which has proven hard to forecast accurately in the past -- and will continue to be a politically sensitive issue influenced by any changes to existing solar feed-in tariff schemes -- is a prominent risk factor.

Wunderlich is projecting that the global photovoltaic market and photovoltaic industry revenue will reach 12 gigawatts and $13.2 billion, respectively, in 2012. Wunderlich's demand forecast takes two years to get to

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the level of solar capacity that some analysts believe solar will reach by the end of 2010.

In the polysilicon production market where GT Solar is a global leader, Wunderlich estimates that 186,000 metric tons (MT) of polysilicon production capacity will be added from 2008 to 2012.

What about the poly glut that has significantly depressed prices in the polysilicon market and led to questions about the strategy of solar module makers like

Yingli Green Energy


to ramp up their own poly plants?

Yingli announced on Thursday morning that it plans to begin production of poly at the level of 3,000 MT in mid-2010, and has no plans to expand beyond the 3,000 MT production level at this time.

For the Wunderlich analyst, the argument about polysilicon supply comes down to the belief in a distinction between polysilicon and economically viable polysilicon at $60/kg and below.

Wunderlich estimates that there is only 70,000 metric tons of polysilicon production that is economically viable in current world markets, and of that, nearly half is soon to be obsolete, forcing the need for investment in GT Solar's equipment.

-- Reported by Eric Rosenbaum in New York.


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