From Kiplinger's Personal Finance magazine, June 2009
Business isn't so sunny these days for SolarCity, the country's largest installer of residential solar-power systems. But Lyndon Rive, chief executive of the Foster City, Cal., firm, says it's an absence of financing, rather than a lack of demand, that has caused the slowdown. "Once you address that bottleneck," he says, "solar power will boom." So, too, will the entire spectrum of renewable-energy stocks, which lately have generated as much sizzle as a solar panel in an eclipse.
A year ago, alternative energy shone brightly. Then came the financial crisis, which starved the industry of its lifeblood: capital. Lack of it caused demand to tumble and inventories to grow. Says Gregory Wetstone, of the American Wind Energy Association: "Our astronomical growth came to a screeching halt in late 2008." As a result, alternative-energy stocks crumbled. The WilderHill Clean Energy Index, which tracks 51 companies around the world, lost 60% over the past year through April 9.
Enter President Obama. His stimulus package, enacted in February, represents a Herculean effort to reinvigorate the renewable-energy industry. The White House sees a trifecta of benefits from alternative energy: New jobs, a reduction in our dependence on foreign oil, and the beginning of the end of global warming.
Washington is sparing no expense. It plans to spend $150 billion on renewable energy over the next ten years. Consider a typical solar-energy system installed by Rive's SolarCity. Uncle Sam used to pay for 30% of the cost, with a $2,000 cap. But installing solar panels on your roof that produce 5 kilowatts—enough to power an average-size house in some areas—costs $40,000. Under the new program, the feds will still pay for 30% of the system, but there is no longer a cap. If you add in subsidies from state governments, the cost of a home solar system could drop to $20,000.
Big businesses will also benefit from Uncle Sam's largess. Federal incentives will help pay for large renewable-energy projects that will cost hundreds of millions of dollars and generate thousands of megawatts of power. And those incentives will take the form of outright payments, not the generous tax credits the government once offered for such pro-jects. "Tax credits are great, but you need profits to use tax credits, and in this economy nobody's making profits," says Christopher O'Brien, a U.S.-based executive of Oerlikon Solar, a Swiss company.
Guarantees in action
To further spur financing, the Department of Energy is finally guaranteeing loans for renewable-energy projects. The operative word is finally, given that the guarantee program became law in 2005.
The Obama administration has lit a fire under the department, which recently announced its first guarantee—on a $535-million loan to Solyndra, a solar-energy company in Fremont, Cal. The loan, from the U.S. Treasury, will be used to expand Solyndra's solar-panel factory in California. That's right, one branch of the government is making a loan that another one is guaranteeing; the feds aren't leaving anything to chance.
But the ultimate government stimulus for alternative energy may yet be an energy bill that sets renewable-energy goals for all 50 states. Currently, 28 states have their own renewable-energy standards. "We're in a window where renewable energy is a policy-driven market," says O'Brien.
Despite the Obama administration's efforts, spending on renewable energy hasn't yet exploded. The short-term holdup is that applicants must wait for the government to produce new forms and guidelines that detail how to tap stimulus dollars; they should be ready soon.
Regarding large projects, the rules essentially state that if you start building a project before the end of 2010 and it comes online before 2017, you can expect to get a check from the Treasury.
Uncle Sam is willing, but getting private capital still isn't easy. Says Fred Morse, senior adviser to Spain's Abengoa Solar: "
You could take your federal guarantee to your bank and they'd say, ‘I'm not worried about you defaulting; I don't have money to lend.'"
Venture capitalists seem more eager to back renewable energy. In 2008, they invested $4.1 billion in alternative-energy projects, from research and development to construction of solar farms. That's a 54% hike from 2007, according to PricewaterhouseCoopers. That's despite an 8% drop to $28.3 billion in overall venture-capital financing from 2007.
At the moment, says Pricewaterhouse's Tim Carey, venture capitalists' favorite alternative-energy technology is solar. Last year, 45% of the money went to solar projects, compared with 23% in 2007.
Much of the money is being used to finance the move by solar companies from development to full production, Carey says. Still, the financial crisis dampened even venture capitalists' ardor for renewable energy, he says. Funding fell 14% from the third quarter of 2008 to the fourth.
The second major constraint on the expanded use of alternative energy is the power grid, or lack thereof. Massive wind farms in the Midwest and solar farms in the Southwest aren't much use if they aren't connected to major cities. Says Morse: "It's not enough to build a car factory. You have to build some roads." Wetstone, the wind-energy association official, says the extent to which the power grid is developed will ultimately determine whether wind meets 3% to 4% of the nation's energy needs, or as much as 20%.
Utilities build and own most of the grid, and they've stepped up funding. However, experts say the federal government may have to step in with a "national transmission policy" to spur grid development if it expects solar and wind generation to thrive.
These problems make the timing of a renewable-energy boom tough to call. Investors say they're ready when it does come, though. According to a study by Allianz Global Investors, 78% of investors believe green technology could be the "next great American industry," and nearly all investors (97%) say exploring alternative fuel sources will remain important even if oil prices remain low. Says Steven Berexa, managing director of research for RCM Informed, an Allianz subsidiary: "Alternative energy's rise isn't going to be smooth, but it's going to be one of the great new growth industries."
Stocks that will survive
Renewable-energy bulls like to say that if you think the dot-com boom was big, just wait for the watt-com explosion. That may be wishful thinking. But you can bet that the dot-com and watt-com booms will be similar in one respect: Just as many Internet companies fell by the wayside, many alternative-energy firms will disappear in the coming shakeout (for a look at individual alternative-energy sectors and their prospects, see 5 Pillars of Renewable Energy).
So if you want to buy individual stocks, invest in companies that are already profitable and likely to survive. The standout in the solar sector is First Solar (symbol FSLR). "As other competitors suck wind, First Solar will be getting their market share," says Morningstar analyst Rick Hanna.
First Solar's strengths and the shortcomings of its rivals became evident in March, when the Tempe, Ariz., company bought the solar-power assets of rival OptiSolar for $400 million worth of stock.
OptiSolar had landed a contract to build the world's largest photovoltaic solar farm for PG&E, a huge California utility, but it couldn't handle the project.
"It's becoming pretty clear that some of these companies can't produce power at the cost they said they could," says Hanna.
First Solar's technology produces electricity at the lowest cost-per-watt in the industry. Most solar cells use silicon wafers to generate electricity from sunlight. Silicon wafers are also the basic component of semiconductors, which makes solar-cell firms compete with chip makers for materials.
But by using cadmium telluride to make its thin-film panels, First Solar is immune to silicon supply problems.
When it comes to alternative-energy stock prices, profitability and viability don't necessarily add up to stability.
First Solar went public in November 2006 at $20 per share, skyrocketed to $317 by May 2008, then cratered to $85 last November. The stock closed at $142 on April 9. At that price, it trades at 22 times estimated 2009 profits. But given the vagaries of the market, earnings estimates for alternative-energy companies turn on a dime.
Although solar and wind generate the most renewable-energy buzz, geothermal energy is cheaper and more dependable (it works rain or shine).
The go-to company in this area is Ormat Technologies (ORA). Some geothermal companies are larger, but they're privately held, and the stocks of smaller public firms are riskier than Ormat.
That makes Ormat "the only blue-chip geothermal company you can invest in," says Brian Yerger, head of research for AERCA Advisors, a Wilmington, Del., consulting firm. Ormat's scarcity value translates into a premium price. At $31, the stock trades at 23 times 2009 earnings of $1.35 per share. (Ormat was a member of the original Kiplinger Green 25; see the table below.)
Ormat, headquartered in Reno, Nev., is a soup-to-nuts supplier. Its plants turn hot water and steam from the earth into electricity. In its simplest design, water and steam are pumped from underground to a heat exchanger, which boils a fluid that drives an electricity-producing turbine. The water is then returned to the earth.
Ormat's electricity unit, which accounts for three-fourths of sales, sells power from plants it builds and owns. The rest of the company's business is building power plants for others.
Financing is an issue: The money behind some of Ormat's biggest projects sounds like a who's who of beleaguered Wall Street firms (think American International Group). Still, notes Yerger, the company expects $120 million in project sales this year, and revenues should hit $405 million, up 17% from last year.
A $4.5-billion piece of the White House's renewable-energy plan will help utilities convert to "smart grid" technologies. And the key player in smart grid is Itron (ITRI), which makes automated meters that collect and analyze data on resource use. Of the 2.6 billion meters in operation at U.S. utilities, only about 6% are of the automated variety that Itron sells, and the company supplies half the market.
Automated meters help utilities increase efficiency by better monitoring how electricity, gas and water are used. "A lot of the stimulus money is going to upgrade government buildings, and Itron equipment will logically be included in that," says John Rubino, author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, $27).
Rubino says Itron will also be a major player in "smart metering," which lets utilities turn off appliances in customers' homes in exchange for lower rates. Florida Power & Light, a subsidiary of FPL Group, already has a half-million customers who allow partial control over certain appliances at certain times. That lets the utility shift demand from peak to off-peak hours, improving its efficiency.
When the financial crisis hit home last September, Itron's stock plunged, falling from $99 in mid September to $34 in mid November. At $47, it trades at 14 times estimated 2009 earnings of $3.41 per share. That's a tiny bump up from last year's profits, but analysts see earnings jumping 22% in 2010.
Conservative choice
Speaking of FPL Group (FPL), what has long been considered a traditional electric utility may be the best domestic play on wind energy. In addition to owning Florida Power & Light, a regulated utility, FPL also owns NextEra Energy Resources, which has operations (mostly wind farms) in 25 states and Canada.
In 2008, 55% of FPL's profits came from NextEra, marking the first time the lion's share of FPL's profits came from the unregulated side of the company. And NextEra is aggressively adding wind capacity. As more states—and perhaps the federal government—start mandating renewable energy, FPL will be ready to rake in contracts.
Because of its regulated utility business, FPL is clearly the most staid stock on this list. At $52, it trades at 13 times estimated 2009 earnings of $4.06 per share, which would be a 6% increase over last year's earnings. But analysts may be underestimating the impact of the pending green-energy boom. In a move that separates FPL from most of corporate America, the Juno Beach, Fla., company raised its dividend earlier this year, marking the 14th consecutive year of higher payouts. The stock yields 3.6%.
Smart-metering systems, geothermal plants and solar farms cost millions. But you can buy a cutting-edge bit of green tech at your local hardware store for $20. That's the price of a flashlight that uses a light-emitting diode (LED) instead of a standard incandescent bulb. Kind of expensive for a flashlight, you say? True, but consider that the LED will shine for 50,000 hours—almost six years—before burning out. It also uses 85% less power than an incandescent bulb, and half as much as a fluorescent bulb.
A leader in LEDs is Cree (CREE), which supplies illumination for electronic devices and the lighting market. Because LEDs cost many times more than incandescent or fluorescent bulbs, you won't be lighting your home with them anytime soon. But LED products can be a smart choice for commercial buildings. Already, about 1,000 facilities in the U.S. use Cree's suspended ceiling lighting unit, the LR24. Cree will benefit directly from White House energy-efficiency goals -- a point underscored by the use of Cree products in renovations at the Pentagon and the Federal Reserve.
Impressive results
Cree's business has exhibited resilience in the face of recession. Sales of LED products, which account for 84% of its revenues, increased 28% in the second fiscal quarter, which ended December 24, from the same period in 2007. The Durham, N.C., firm is also developing a reputation for bucking trends. For example, although analysts expect personal-computer sales to fall in 2009, they see Cree selling more LEDs to backlight laptop screens.
Cree's shares recently fetched $27, or 45 times estimated earnings of 60 cents a share for the fiscal year that ends June 28. Analysts see earnings growth of 18% annually over the next three to five years. If Cree's earnings do grow that fast, the lofty price-earnings ratio may be justifiable.
By Bob Frick, Kiplinger Senior Editor
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