Stars Align for Renewable Energy

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From Standard & Poor's Equity Research

S&P equity analyst Jim Yin says the strong buy recommendation is based on his positive outlook for the solar energy industry. He sees demand for solar cells rising by 30% a year through 2010, outstripping available supply and driving prices higher.

Suntech Power Holdings (STP), one of the world's largest solar cell manufacturers, is another stock that S&P analysts are bullish on. The company has grown rapidly in recent years and says it is now the largest producer of solar PV cells in the world, with an annual manufacturing capacity of 420 megawatts (MW=1 million watts) as of Sept. 30. It expects to more than double that, to 1 GW of capacity by the end of 2008, a fourfold increase since 2006. Suntech, says S&P equity analyst Mike Jaffe, has locked in a large number of orders for the coming years. Jaffe expects Suntech's revenue will more than double in 2007 to about $1.4 billion, and rise by another 50% in 2008 as manufacturing capacity expands. Profit margins should widen during that time also, he says, as Suntech starts to receive cheaper silicon wafers under a seven-year contract that begins in midyear.

The third renewable energy company recommended by S&P is Cypress Semiconductor (CY), which bought San Jose-based PV cell maker SunPower in 2002 and has sold some of its shares since then. It now owns 57% of SunPower (SPWR), which trades on the Nasdaq and supplied about half of Cypress' revenue and net income in the third quarter ended Sept. 30, 2007. Through Dec. 15, SunPower shares surged by 236%; shares of Cypress—which also makes a wide range of chips used in autos and consumer electronics—doubled over the same period, far surpassing the performance of the S&P 500 and reflecting the increase in value of its SunPower stake.

S&P equity analyst Clyde Montevirgen believes the shares of Cypress are undervalued. Although he thinks SunPower will keep growing, "we have a buy recommendation on Cypress not only because of its solar business, but also because we think Cypress' core semiconductor business is overshadowed by its solar business and is grossly undervalued."

Scully is a reporter for Standard & Poor's Editorial Operations .