Lazard Less Bullish on Solar Stocks, Supply Issues May Be To Blame

Stock Tickers: ESLR, ENER, FSLR, SPWR, SOLF

Lazard Capital Markets has issued a special report today on the Alternative Energy & Industrials sector.  Sanjay Shrestha, Managing Director and Senior Analyst at Lazard, is lightening up on some of the stance but not going against the tide with any outright negative calls.  Lazard lowered price targets on Evergreen Solar (ESLR) to $12.00 from $15.00 and lowering Energy Conversion Devices (ENER) to $44.00 from $50.00. It is leaving targets intact on First Solar (FSLR) at $75.00 and SunPower (SPWR) at $72.00. Other stock mentioned later from here are not part of the Lazard call, but are used for reference.

The stance is still bullish, but it is obviously becoming more cautious.  A summary statement is as follows: "We remain bullish on the long-term growth prospects of the solar industry and its role in the global energy market. However, given the recent evolution of the industry, increasing capital allocation options for solar investors and the emergence of companies with somewhat of a "me too" strategy, typical at the early stages of a hyper-growth industry, we believe that these dynamics will impact valuations and earnings multiples…..Silicon supply and capacity growth remain key themes: Incremental silicon supply as well as significant cell capacity expansions should lead to faster ASP declines, impacting players throughout the solar value chain……We reiterate that the keys to the long-term success of the industry remain continued technological improvement and reduction in ASP bringing solar electricity on par with retail rates. This will also require every company in the solar value chain to take a longer-term view rather than maximize near-term margins, as retail parity opens a trillion dollar electricity market to PV.

We think that the call out of Lazard comes at an interesting time, and some of their concerns are quite timely and legitimate.  This is on the same day that Solarfun power Holdings (SOLF) is trading down some 17% based on a revenue warning.  What is interesting here is that the current solar environment is becoming a bit stretched as there have been too many solar IPO’s and supply issues are becoming a problem.  Many of the panels, parts, wires, and the like come from China (and elsewhere) that are needed for assemblies and many of the parts makers in the US are either at max-capacity or are running into delays or an inability to secure materials and parts.  There are even reports and some accusations of "hoarding" the various guages of cabling needed because the "rising prices are now known and set in stone."  Whether or not every single aspect of this is true will be hard to bank on indefinitely, but near-term this could be an issue as we are heading into summer and all of the orders are in.  We would normally not delve into a single sector report on this, but there is a lot of merit to it from what is going around in the industry.  The flip side to this argument is that those who have successfully secured supplies and have ample inventories will be able to dictate terms and prices AND can probably expect the alternative energy wave to keep rolling for them.  If there are true shortages then some companies could definitely be left in the lurch.

Jon C. Ogg
May 30, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.