Alt-Energy Stock Outlook - Jan 2016

Governments, businesses, and cities around the globe are making concerted efforts to speed up the energy evolution. As the global energy system transformation is the backbone of climate action, the world has come closer under a set of major cooperative initiatives. Indeed, environmental considerations have been driving demand for alternative energy sources.

A U.S. Energy Information Administration (“EIA”) report projects that electricity generation from renewable sources to increase to 18% by 2040 in the country from 13% in 2013. For 2016, EIA expects total renewables used in the electric power sector to increase by 9.5%. A more comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (NREL) shows that the country can generate most of its electricity from renewable sources by 2050.

These favorable demand growth trends notwithstanding, the abundant availability of fossil fuels and the resultant drop in oil prices have emerged as key competitive challenges for the industry. The industry’s long-term fundamentals nevertheless remain favorable.

Below we discuss some of the major alternative energy sources:

Solar

A major growth area in the renewable space is solar energy. An EIA report indicates continued growth in utility-scale solar power generation, which is projected to average almost 129 gigawatt (“GW”) hours per day in 2017. This marks a 45% increase from the 2016 forecast. In spite of a rapid uptake, solar will still be just 1.1% of total U.S. utility-scale generation in 2017, indicating room for immense growth.

Solar growth has historically been concentrated in customer-sited distributed generation installations. The EIA expects utility-scale solar capacity to expand over 126% between 2014 and the end of 2016, with about 38% of this new capacity being built in California.

Per the latest report released by the Solar Energy Industries Association (“SEIA”), the U.S. trade association of approximately 1,000 companies in the solar energy industry, the U.S. solar energy industry reached 1,361 megawatt (“MW”) DC in the third quarter of 2015, bringing the cumulative PV installations to 22.4 GW DC mark, buoyed by strong contributions from each of the three segments: utility, commercial and residential.

Particularly, the residential market grew 69% year over year, setting a new quarterly record.

The SEIA expects the U.S. PV market in 2015 to witness yet another strong year with installations reaching 7.4 GW DC, representing a 19% increase over 2014.

Solar in China: Although Chinese economic woes continue to hit the market, the longer-term prospects for solar in China remain intact. China has established itself as the world’s largest market for solar panels and will likely be the home to a quarter of the planet’s new energy capacity from solar panels in 2015, according to a report from GTM Research. China is speedily adding as much power generation as possible, and solar is just one source of new energy generation in the country.

While outlining its clean energy goals for 2016, China’s National Energy Administration (NEA) has set a target of 15 GW of new solar PV capacity, which is slightly lower than the goal of 17.8 GW of new additional capacity set for 2015. The country has a larger goal of reaching 150 GW of solar PV capacity by 2020. According to the NEA, China will end 2015 with 43 GW of cumulative solar PV capacity installed.

China has also pledged to attain peak carbon emissions by 2030 or earlier if possible. The country has set a daunting target of boosting the share of non-fossil fuels to 20% of its energy mix by 2030.

The following leading Chinese solar stocks are sure to make the most of the favorable government stimulus: JinkoSolar Holding Co., Ltd. (JKS – Snapshot Report), JA Solar Holdings. Inc. (JASO – Analyst Report) and Trina Solar Ltd. (TSL – Snapshot Report).

Ontario, Canada-based solar product manufacturer Canadian Solar Inc. (CSIQ) is also well positioned with its diversified manufacturing base and project portfolio in Canada, China, Japan and the U.S.

Wind

The American Wind Energy Association (“AWEA”) reported that the U.S. wind industry installed 1,602 MW during the third quarter of 2015, bringing installations in the first nine months of 2015 to 3,596 MW. This is more than double the capacity installed in the first nine months of 2014. This brought the total installed capacity to 69,471 MW. Nearly a record level of wind capacity of over 13,250 MW is currently under construction. The majority of wind construction activity continues to be focused in Texas.

As per the EIA, wind capacity grew by 13% in 2015 and it is expected to increase by 14% in 2016 and 3% in 2017.

As per AWEA, wind power added more capacity than any other energy source, leading the country with 47% of all new electric generating capacity in 2015 (followed by natural gas at 35% and solar at 14%). Since 2008, total capacity more than quadrupled with over 70 GW installed as of Nov 2015, up from 16,702 MW installed at the start of 2015. That is enough to power over 19 million American homes.

Zacks Industry Rank – Mixed Outlook

We rank all the 257-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank. http://www.zacks.com/stocks/industry-rank

The way to look at the complete list of 257+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.

Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #15 out of 257. This corresponds to the top one-third of the list, implying a positive outlook.

The Zacks Industry Rank for the Other Alternative industry is #213 out of 257. This puts the industry in the bottom one-third of all industries. The decline in oil prices has dragged down prices of renewable stocks (both U.S. and Chinese solar stocks on the whole), thereby offering them at attractive valuations.

Renewable sources of energy accounted for about 10% of total U.S. energy consumption and 13% of electricity generation in 2014. Hence, the recent losses suffered by some of the fundamentally strong solar stocks can be good buying opportunities for investors with longer-term horizons. The U.S. solar market continues to grow as it registered 30% year-over-year growth in 2014, per the SEIA.

Please note that the Zacks Rank for stocks, which is at the core of our Industry Outlook, has an impressive track record going back years, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months).

JA Solar Holdings, JinkoSolar and ReneSola Ltd. (SOL – Analyst Report) carry a Zacks Rank #1 (Strong Buy), whereas 8point3 Energy Partners LP (CAFD), First Solar Inc. (FSLR), Solar3D, Inc. (SLTD – Snapshot Report), Trina Solar and Hydrogenics Corporation (HYGS – Snapshot Report) hold a Zacks Rank #2 (Buy).

We remain apprehensive of the Zacks Ranked #4 (Sell) stocks Yingli Green Energy Holding Co. Ltd. (YGE – Snapshot Report), Ormat Technologies Inc. (ORA – Snapshot Report) and Quantum Fuel Systems Technologies Worldwide Inc. (QTWW – Snapshot Report).

EARNINGS TRENDS

As far as the overall results of the alternative energy industry were concerned, the third quarter of 2015 was quite impressive. A number of solar stocks came up with higher earnings last season, while a few plunged considerably from their year-ago levels.

In spite of sluggish numbers from SunPower Corp. (SPWR – Analyst Report), JinkoSolar, SunEdison Inc. (SUNE – Analyst Report) and Canadian Solar, earnings beat from First Solar and JA Solar along with upbeat performance at ReneSola were particularly encouraging, spreading optimism in the broad sector.

The top rooftop solar installer in the U.S. — SolarCity Corp. (SCTY – Snapshot Report) — posted a wider loss in the third quarter due to rising expenses. Yet, its revenues soared 95.1% year over year and the company reported impressive installations for the quarter.

For 2016, we expect solar companies to witness an impressive year with more emphasis on installations. The companies seem to be channeling most of their revenues into installations with the solar and wind-tax credit extensions.

For more information about earnings for this sector and others, please read our Earnings Trends report.

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Alt-Energy Stock Outlook - Jan 2016