Future Looks Bright for Solar Sector

After spending a day at the large solar trade show Intersolar, which takes place every year in San Francisco, I remain bullish on the solar cycle. After a strong rally off the bottom of the cycle last summer, the group is now pausing and consolidating. I believe another leg up is in store for the group during the second half of this year and into 2015. Here is why:

Capacity in the industry is rationalized. When I walked the floor two years ago at another large trade show, Solar Power International, I was shocked at the number of small, marginal Chinese panel vendors exhibiting. Everyone and their brother in China had entered the market, which created massive overcapacity. The industry took longer than expected to reduce capacity, because solar was viewed as a jobs program in China for some time, but now most marginal players have exited and the industry is more stable under the control of a dozen or so major producers. Walking the floor of Intersolar, I visited the large booths of the major players such as Yingli and Trina, but the smaller "me toos" were nowhere to be seen. Volume growth will remain robust. Project IRRs are attractive, especially in certain geographies such as Japan, and project financing interest is very high. Low rates around the world are driving capital into reasonably attractive projects, and solar power plants that have low operating costs, stable cash flows, and guaranteed customers (in the form of utility power purchase agreements (PPAs)) will attract investors. Furthermore, the barriers to entry in project development are low, so the solar power plant business can grow robustly around the world. Additional capital for projects is entering via "yieldcos," which are packages of alternative energy projects that pay out their cash flows as dividends. Several have gone public, the most recent being Next Era Energy Partners (NEP). SunEdison's solar power yieldco, TerraForm, is on file and should price soon. Tax structures and government economics ensure strong demand—at least in the U.S. -- for years to come. Our resident expert Glenn Williams, who is a must-read on everything he posts, has written extensively on the hidden tax benefits both to investors and to government revenue streams. Check out his most recent post. Multiples are still reasonable. Scanning most of the major names brings up a long list of single-digit multiple stocks. FirstSolar (FSLR) is probably the most expensive in the group at a simple market multiple of 13x the 2015 EPS estimate, but Trina Solar (TSL) is at 8x 2015, and Canadian Solar (CSIQ) is at 6x. Obviously multiples will be low at the peak in any cyclical industry (and high at the bottom), but we seem to be too early in this cycle for single-digit multiples to be signaling a top.

Solar is a classic "growth cyclical" industry -- it has clearly defined cycles but also a strong underlying secular growth trend. With solar-generated electricity priced at grid parity in most geographies, combined with continuing "cost downs" in panels and balance of system, and the ongoing social desire for renewable sources of power, I expect the secular trend for solar to be in place for years to come. That, plus being in an attractive part of the cycle with profitability coming back, means the group has some room to run still.

Read the full story and get access to the Real Money Pro trading floor.

There’s no substitute for a trading floor to get great ideas, so Jim Cramer created a better one at Real Money and blogs there exclusively. We then added legendary hedge fund manager, Doug Kass, with his exclusive Daily Diary and best investing ideas. Staffed with more than 4 dozen investing pros, money managers, journalists and analysts, Real Money Pro gives you a flood of opinions, analysis and actionable trading advice found nowhere else, and allows you to interact directly with each expert.

Already a Subscriber? Please login.

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.