China's Shining Solar Twins

08/13/2009 1:00 pm EST

Focus: STOCKS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Joshua Levine of ChangeWave Research say two of China’s biggest solar energy companies have very bright prospects over the next few years.

Our twin portfolio solar plays, SunPower (Nasdaq: SPWRA) and Suntech Power Holdings (NYSE: STP), are heating up these days.

[For the second quarter], SunPower reported earnings of 24 cents per share, beating consensus by ten cents. Revenues rose 39% year over year to $298 million, versus the $263 million consensus.

The company issued up side guidance for fiscal year 2009, seeing earnings per share (EPS) of $1.15 to $1.60, compared to the consensus of 96 cents. Revenues for the full year are expected to range between $1.35 billion and $1.7 billion, versus the $1.32 billion consensus.

Several favorable trends support SPWRA's strong outlook:

1. A 76% jump in module sales (as opposed to full solar systems) enabled SunPower to lower inventory by $80 million and cut its inventory days nearly in half—reducing inventory risk.

2. Funding for cheaper roof-top installations of solar panels—SPWRA's sweet spot—should be available and could actually improve in calendar year 2010.

3. SunPower's brand and technology has higher exposure to the US solar market than its competitors—a big advantage now that the US market is on the upswing, supported by government subsidies and a favorable regulatory environment.

As a result of all of these events, we're removing SunPower from the Hold list and giving it a Buy Under price of $28. We suggest you pick up shares on any pullbacks and buy aggressively below $26.  (It closed below $29 Wednesday—Editor.)

Suntech is China's (and the world's) largest manufacturer of solar modules. STP is a giant beneficiary of China's new push to offer subsidies for utility-scale, solar power projects, as well as rooftop installations by the thousands.

Beijing's bid to boost the solar energy sector could draw more than $10 billion in private funding for projects and propel China to the top of the solar market in the next three years.

The government will subsidize 50% of the investment for solar power projects, as well as relevant power transmission and distribution systems that connect to grid networks. For independent solar systems in remote regions with no power supply, the subsidy will rise to 70%.

Utilities are required to buy all surplus electricity output from solar power projects that generate primarily for the developers' own needs, at similar rates to benchmark on-grid tariffs set for coal-fired power generators.

The government plans to install more than 500 megawatts (MW) of solar power pilot projects in two to three years. Now that's a stimulus plan anyone can believe in.

We're raising our Buy Under on Suntech to $18 and recommend that you add to your position or establish a new one on any pullbacks. (It closed above $18 Wednesday—Editor.)

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