Most solar stocks have been absolutely crushed over the past month as the broader markets have sold off. With the exception of First Solar (FSLR 2.58%) the biggest and most profitable companies in the industry are trading well below their 52-week highs.
The sell-off has brought down everyone from module makers SunPower (SPWR 5.58%) and Trina Solar (NYSE: TSL) to SolarCity (SCTY.DL), the dominant residential solar installer. Given the fact that first-quarter earnings are just a few weeks away, it's worth looking at whether the sell-off is justified.
Residential solar gets most of the attention, but it's massive projects like this that account for most solar installed in the U.S. Source: SunPower.
Q1 will be a blowout for solar
We don't yet know exactly what first-quarter earnings will look like, but the signs point to another outstanding quarter. Solarbuzz recently estimated that first-quarter global demand for solar was 9 GW, 25% higher than a year ago.
For manufacturers, that's a huge positive because an imbalance of supply and demand have led to low panel prices and low margins. In 2013, the industry started to shift toward more of a supply/demand balance, and prices started to rise. It looks like the trend will continue in 2014, and demand for the year could grow from 37 GW to over 50 GW.
Solar value is only improving
As the price of solar stocks fall, the value they're giving investors is improving. That's because earnings are rising as prices are falling. You can see below that First Solar, Trina Solar, and SunPower all saw earnings improve throughout 2013 and trade at reasonable valuations based on this year's estimates. Keep in mind that SunPower and Trina Solar crushed estimates in 2013, and given the trends, I think they'll do so again this year.
|
EPS Q1 2013 |
EPS Q4 2013 |
Forward P/E | |
|---|---|---|---|
|
First Solar |
$0.69 |
$0.89 |
28.3 |
|
Trina Solar |
-$0.90 |
$0.13 |
15.4 |
|
SunPower |
$0.22 |
$0.47 |
24.7 |
Source: Yahoo! Finance.
If the market for solar grows overall, it's good for First Solar's long-term prospects as well as SolarCity, who is already expecting to grow installations up to 90% this year.
Foolish bottom line
All signs point to a great year for solar companies, even as their stocks fall. I expect record installations both in the U.S. and globally, expanding margins for manufacturers, and even capacity expansions for next-generation panels.
Put it all together, and I think now is the time to buy solar stocks. This is an opportunity to get in on an industry early in its growth phase and hang on for the ride. Just keep in mind that the ride can be volatile, as the last month has shown.
