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Q&A With Clean Energy Analyst Brian Yerger

I got a chance to sit down with Brian Yerger, who is a partner at ARDA Advisors. ARDA provides research and M&A services in the alternative energy field. In the last few years, working as a sell-side analyst before launching ARDA, Yerger saw a massive spike in interest in this group, but more recently saw them shunned as investors fled the more speculative end of the equity markets. With shares no longer falling, and some names even springing back to life, it's time to hear Yerger's latest impressions and outlook for the industry.

We have certainly have had a wild time with clean energy stocks rising sharply last summer and cooling off in the winter. Any sense of how the next three to six months will play out for the group? What positives and negatives might we see?

Brian Yerger: The short-term direction is unclear. The group is still controlled by fast-money players to a large extent and that produces a lot of volatility and sharp price movements. I would say the group in general could provide excellent trading opportunities near term on both the short and long side.

The positives for the group are more headline in nature.... Government program announcements and clarifications on the stimuli, some large megawatt plant announcements and, best of all, the estimates have moved down enough to create some stabilization at these levels. But in general, the continuing credit crisis and lack of capital for some of the larger projects will remain a headwind at least until summer.

Looking at the solar sector, pricing seems to be in freefall as demand slackened and capacity was built out. Do you have a sense of how and when pricing will stabilize?

BY: That is the million-dollar question for solar manufacturers: Where will pricing bottom out? We believe pricing per watt will continue to erode this year as competition heats up for all technologies and economic headwinds keep forcing the large players to adjust pricing, which forces smaller players into M&A activity or simply out of the business. A reduction of the velocity of pricing decline should happen soon as inventory is adjusting, but pricing will continue to decline as solar power moves toward grid parity on a kilowatt hour (kWh) basis.

One thing to keep in mind is that this pricing erosion and increased competition is good news for the general public and great news for the longer-term demand picture. Solar power is still a bit too expensive in most parts of the country but with rapid price declines for panels, the total installed cost will inch toward the magic "grid parity" number in local markets. As parity is reached for that particular region, demand skyrockets as the financial and economic incentives for residential, commercial and even utility applications make too much sense.

Some investors love the thin-film approach that firms like First Solar (FSLR) are using. Are you a fan of the technology? What about more traditional technology approaches being used by traditional players such as Sunpower (SPWRA)?

BY: First Solar has a competitive advantage on price at the moment, obviously derived from its technology. There's not much to not like about that fact. However, we believe a movement toward pricing and selling energy is underway and the technology behind the supplied energy will eventually become completely irrelevant. Remember, the customer is buying electrons -- they don't care if it is polysilicon, Cadmium-telluride (cad-tel), Copper iridium gallium selenide (CIGS) or mirrors... just as long as it is reliable and as cheap as possible.

First Solar happens to be the cheapest on the market right now, but traditional polysilicon has been in the field for 30-plus years, so in terms of warranty and long-term performance issues there is a bit less risk there. Finally, near term, a warranty is only good if the company is around to honor it, thus larger players with good balance sheets and branding should be able separate themselves from the pack. Longer-term we believe the industry will become technology agnostic.

The Obama administration hasn't shown all of its hand in terms of clean energy policy. What do you expect to see and hear as it unveils more details in coming weeks and months?

BY: The administration obviously feels green energy is important and has stuck to its campaign promise to fund the beginnings of a permanent switch away from fossil fuel. The $50 billion or so allocated to alternative energy is split into many, many pieces and a large portion will be distributed to the states.... How and when those funds are disbursed are important details that have yet to be hammered out because the federal government sees state budgets in shambles and is hesitant -- and correctly so in our opinion -- to give the states millions of dollars without attaching the appropriate restrictions.

So, headline news should be forthcoming on federal dollars, but the process will most likely take longer than people would like. Ultimately, most if not all of the good news from the stimulus package is built into current valuations. A turnaround in the general economy and stock market would probably provide more impetus for increasing valuations than the governmental pronouncements we are sure to hear over the coming months.

Before the IPO market ground to a halt, it looked like we'd keep seeing deals in the space. Can you give us a sense of what types of companies are likely to come public when the IPO market re-opens?

BY: The queue for alternative energy IPOs is long. Many companies that would probably already be public in a normal market are instead being funded with hundreds of millions of dollars pre-IPO. Most are emerging solar companies that are close or ready for commercialization.

What's happening in China? The government appears committed to clean energy, but Chinese-focused stocks such as A-Power (APWR) and Yingli Green Energy (YGI) are 90% off their highs. Is this an investor overreaction, or is the China clean energy play just hype?

BY: Chinese-based alternative energy companies have been under tremendous multiple compression due to an extraordinary unwillingness to take on risk by market participants. After all, most of these companies do not have long track records, though some have a lot of leverage (which is an absolute deal-breaker at the moment), and it is a new industry with rapidly changing dynamics in a foreign quasi-communist country. So although investors may be overreacting short-term, the crowd may be right in terms of reducing exposure at this time.

But it isn't just hype. Chinese governmental policy is in place -- and we predict will continue to be in place -- to spur and incentivize clean energy development in that country. China needs every single power resource at its disposal, especially non-coal. Alternative energy perhaps has a near-term problem with overexposure in our opinion, but the industry is not hype by any stretch, and China's demand for power will only increase again once the global crisis has passed.

I should add that, unlike the dot-com hype boom and bust, many alternative energy companies are profitable even in this very tough global economy.

You can find out more about Yerger's research at the ARDA Advisors website.

Know What You Own: Other solar and alternate energy companies include Energy Conversion Devices (ENER), Kyocera (KYO) and MEMC Electronic Materials (MEMC). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

This was originally published on RealMoney on March 11, 2009. For more information about subscribing to RealMoney, please click here.

How do you survive -- and even prosper -- in a rocky midyear market? Get the "best ideas to make real money" from Jim Cramer, Doug Kass, Helene Meisler and other RealMoney experts at our May 2 Investment Conference. Learn more here.
David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.

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