Solar Companies See a Bright Future in the U.S.

Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On June 25, President Obama gave orders to issue permits for 10 gigawatts of renewable energy on public land, with the focus on a 200% increase in renewable energy generation by the year 2020. The Defense Department, the largest U.S. energy consumer, also plans to install three gigawatts of renewable energy by 2025, sufficient to supply power to 2.4 million households.

This focus towards installing power plants resulted from Obama’s administration facing the problem of being one of the largest contributors to greenhouse gas emissions. 40% of U.S. carbon-dioxide emissions and one-third of all greenhouse gases arise from electric power plants, according to the data released by U.S. Energy Information Administration.

My report focuses on analyzing the impact of these regulatory changes on the solar companies operating in the U.S.

Solar industry background

Solar power is a basic electricity generating resource, without any repercussions of noise pollution, vibration, habitat impact or waste production. As time has passed, speedy rise in population growth, increasing pollution and exhaustion of non-renewable traditional resources i.e. oil, has diverted the attention to shifting the global focus towards renewable projects for the generation of electricity.

Additionally, solar energy usage does not carry the risks of price volatility or delivery risk, compared to fossil and nuclear fuels. Although solar energy generation depends on the amount and timing of sunlight in daytime, a properly constructed and organized system can be devised to make sure a consistent supply of electricity in the long term at a pre-determined rate.

The rooftop solar energy systems can provide a ground-breaking plan for the solar companies. The solar companies can build their strength by offering a lower price than the grid price to the U.S. residential and commercial markets and focus on generating higher profits through volume.

Solar power generation units are usually positioned at the customer’s place as the sunlight is available universally, unlike hydroelectricity and wind power. Therefore, solar power confines the expenses incurred and costs passed on to the end users.

For most residential consumers looking for socially and environment friendly power source, solar power is at present the only practically feasible option.

Company analysis

First Solar (NASDAQ: FSLR), the world’s largest maker of solar power-plants and SunPower (NASDAQ: SPWR) are all set to gain from President Barack Obama’s proposal to curtail emissions from coal-fired utilities, followed by Duke Energy Corporation (NYSE: DUK) and Sempra Energy (NYSE: SRE).

These solar energy companies are anticipated to advantage immensely from this new legislation in the U.S. requiring installation of renewable sources of electricity generation as commanded by Renewable Energy Standards (RES). Currently, thirty states and the District of Columbia in the U.S. have enforced the RES legislation whilst another seven states look forward to the implementation of renewable energy sources.

Congress has also widened the 30% federal investment tax credit to residential and commercial solar installations up till 2016. As per the American Reinvestment and Recovery Act (ARRA), the U.S. Treasury Department had also adopted a program to give cash grants to make up for investment tax credit for renewable energy projects.
This will resultantly increase the demand for solar projects in the near future as people take action to take advantage of the tax credit.

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Source: Yahoo Finance

The announcement of this decision to switch energy generation source to solar power has been reflected in the forward P/E of the two largest makers of power-plants, First Solar and SunPower. The other two companies, Sempra and Duke, did not see a major shift in its forward P/E as their operations are focused on gas and electric utilities whilst First Solar and Sun Power have their prime business operations centered in solar energy solutions and thus, have shown a major impact in their forward P/Es.

Stock price performance

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Source: YCharts

The major operators, SunPower and First Solar have exhibited a price appreciation of 314% and 189% in the last year. This significant price increase reflects that the investors are confident of the two companies’ potential to register future revenue growth and net margin growth as more and more residential and commercial sites continue to shift to installing solar panels for electricity supply.

As the global focus increasingly shifts to utilization of renewable energy, owing to the growing awareness of clean nature and its pros, among the masses regarding the solar utility providers, mainly SunPower will see its revenues boost coupled with widening net margins.

Sempra Energy operates as an energy services company. The company’s gas and electric company segment is involved in the generation, transmission, and distribution electricity; and sale, distribution, and transportation of natural gas. On June 20, in response to growing national interest in the environmental and economic benefits of natural gas vehicles (NGVs), Southern California Gas (SoCalGas), American Gas Association (AGA) and other partners released five videos aimed at highlighting the advantages of natural gas as a source of clean, plentiful and reasonably priced American fuel.

Lately, Duke Energy also concluded the purchase of two solar power projects from Solar World. The company has invested higher than $2.5 billion to expand its commercial wind and solar business, ever since 2007.

Future outlook

In the light of the recent legislation passed by the U.S. government and its likely future implications, I would advise buying the stock of SunPower as a long term investment. First Solar also holds significant potential but would offer a lower positive return compared to SunPower, as highlighted by its forward P/Es. However, the investor return will take the form of price return only.

Sempra is also a potential investment. It is likely to generate superior returns in the next few years as the public becomes more informed about the advantages of NGVs and shifts to utilizing natural gas to meet their energy needs. Also, the company provides a regular income stream in the form of a rising dividend year-on-year. In 2013, the company is expected to raise annual dividends by 5%.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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