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Alternative Energy Stock Outlook - December 2017

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Reducing dependence on fossil fuels has been a policy goal for a long time, at least since the 1970’s oil shock. Plenty of progress has been made already, limiting the long-term appeal of nuclear and carbon capture and sequestration technologies. The industry’s stock market performance this year suggests that investors see the space as enjoying enough momentum to offset the less friendly posture from the Trump administration.

Stocks in the Alternative Energy industry have lagged the S&P 500 index over the last many years, but the industry put up an impressive showing this year and handily outperformed the broader market. The Zacks Alternative Energy industry has lagged the S&P 500 index over the last 2, 5 and 10-year periods, but is currently up 30.6% year-to-date, outperforming the S&P 500 index’s 19.1% gain.

Driving this performance momentum appears to be the realization that growth in the industry is increasingly resulting from voluntary procurement by utilities and corporations due to declining costs of solar and wind technologies, and anticipation of a more carbon-constrained future.

The U.S. renewable energy industry has witnessed significant growth over the last several years, with a number of important decisions in 2015 by both state and federal governments really helping the space. This has helped operators successfully battle against energy generated from fossil fuels in power markets and for procuring contracts across the globe.

A U.S. Energy Information Administration (“EIA”) report projects total renewables used in the electric power sector to increase 41% in 2018. Electricity generation from hydropower is expected to be relatively unchanged at 7% between 2016 and 2018. Generation from renewables other than hydropower is expected to have risen by 9% in 2017 and 10% in 2018.

Notably, renewable energy significantly benefits the environment as well as the economy. In addition to lowering carbon emissions, alternative sources of energy improve public health, create jobs and provide other economic benefits. Moreover, these sources of energy reduce the requirement of water for power production, offering a major advantage over fossil fuels. Offsetting these positives are the additional costs that are incurred by traditional energy sources to fully account for their environmental externalities.

A comprehensive study by the Department of Energy’s National Renewable Energy Laboratory (NREL) shows that renewables will contribute more than 80% of total electricity generation in the United States by 2050, compared with the present level of 30%. The need of the hour is the development of an electricity grid to withstand higher volumes of renewable energy and advanced grid planning to maintain reliability.

To this end, governments, businesses and cities around the world are making concerted efforts to speed up the evolution of energy use. With global energy system transformation being the backbone of climate action, the world has come closer under a set of major cooperative initiatives. It is these environmental considerations that are driving demand for alternative energy sources.

While these favorable demand trends have been boosting the growth prospects of this space, the abundant availability of fossil fuels and dearth of adequate investment in solar companies have emerged as key competitive challenges. Although the industry’s long-term fundamentals remain favorable, the policies of the Trump administration, like signing an order to repeal the Clean Power Plan and its decision to withdraw from the Paris climate agreement, are expected to hit the clean energy space. Given these challenges, growth in 2017 is expected to slow down.

Here, 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 growth in utility-scale solar power capacity by almost 41% from 22 GW at the end of 2016. The projected increase will bring the amount of solar capacity to 27 GW at 2017 end and to 31 GW at 2018 end. In spite of the rapid uptake, solar will still constitute just 1% of total U.S. utility-scale generation in 2018, indicating immense scope for growth.

Solar growth has historically been concentrated in customer-sited distributed generation installations. The EIA expects utility-scale solar capacity to expand in states like California, Nevada, North Carolina, Texas and Georgia.

The solar industry in the United States is booming. The solar Investment Tax Credit (“ITC”) has gone a long way in providing the industry stability and expansion. In the last 10 years, solar has witnessed a compound annual growth rate of almost 60%, with the cost of installation dropping by over 70%.

Over the past few years, utility-scale solar has represented almost two thirds of the market, and this trend will likely continue in the near term, given the huge pipeline of projects under construction.

In particular, 2016 was a record year for the U.S. solar industry. The photovoltaic (PV) market grew 97% from 2015’s individual installations of more than 370,000. Although all market segments grew in 2016, the utility sector recorded maximum growth, which more than doubled with installations totaling over 10 gigawatts (GW).

According to GTM Research, 12.6 GW of new PV installations will come on-line in 2017, reflecting a decline from the record-breaking 2016 figure. After completing a record build out in 2016 and 2017, it is projected that new projects will be procured with completion targets in the next decade. By 2021, there will be over 100 GW of solar installed in the United States, with annual total approaching 18 GW in 2022.

GTM Research’s latest ‘Global Solar Demand Monitor’ report states that eight countries would surpass the 1 GW level of annual PV installations by the end of 2017. By the end of 2018, five more countries will achieve the milestone. China, United States, Japan and India are expected to remain market leaders while emerging markets such as Brazil, Egypt, Mexico, the Netherlands and Spain are expected to gain further traction. The report also forecasts European solar demand to increase 35% in 2018.

Solar in China: The country has established itself as the world’s largest market for solar panels and will likely be home to a quarter of the planet’s new energy capacity from solar panels in the years to come. China is constantly adding power generation sources, and solar is just one of them.

The National Energy Administration (NEA) said that the installed renewable power capacity, including wind, hydro, solar and nuclear, will contribute about 50% of total electricity generation by 2020. In 2016, China installed 34.2 GW of new solar power, up 126% from last year’s installations, bringing the cumulative solar capacity to 77.42 GW, according to the NEA.

Under China's 13th Five Year Plan (FYP), the country has set a target of attaining 150GW to 200GW of solar PV capacity by 2020. It also intends to shift focus from grid-scale expansion to quality and efficiency.

China's solar industry is expected to produce 25% more panels in 2017 compared with 2016, supported by domestic sales and demand from the U.S. and emerging markets.

China had a total of 101.8 GW installed solar capacity by June 2017, after adding 24.4 GW in the first six months of 2017, the industry association said. It is anticipated to reach 110 GW in the near term, the target that Beijing had aimed to achieve by 2020.

Some of the leading Chinese solar stocks, such as JinkoSolar Holding Co., Ltd. (JKS - Free Report) and JA Solar Holdings, Inc. (JASO - Free Report) , are likely to make the most of the favorable government stimulus.

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

Wind

An EIA report indicates that wind capacity additions will bring total wind capacity to 88 GW by the end of 2017 and to 96 GW by the end of 2018. This reflects an increase of 17% from the electricity generating capacity from wind of 82 GW at the end of 2016. It is expected that wind generation will account for 6% of total generation in 2018.

The American Wind Energy Association (“AWEA”) reported that 534 MW of wind capacity was installed during the third quarter of 2017, bringing the total year-to-date installed capacity to 2,892 MW. Wind capacity of 13,759 MW is currently under construction while another 15,875 MW is in advanced stages of development. The total capacity thus comes to 29,634 MW, reflecting 27% year-over-year growth. Project developers declared 638 MW in new construction activity and 4,248 MW in new advanced development activity during the third quarter, a combined 4,886 MW.

During the third quarter of 2017, four states commissioned a total of 243 turbines across five project phases. Texas led with 402 MW, followed by Indiana (100 MW), New Mexico (30 MW), and California (2 MW). Presently, there are 84,944 MW of installed wind capacity in the United States, with more than 52,000 wind turbines operating in 41 states plus Guam and Puerto Rico.

In the third quarter of 2017, Utilities announced new plans to develop and own 3,040 MW of wind capacity. Project developers announced 1,337 MW of power purchase agreements (PPA) were signed during the quarter. Six corporate customers signed PPAs during the third quarter, accounting for 62% of total project capacity contracted.

Zacks Industry Rank – Mixed Outlook

We rank all the 265-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.

The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of industries is that we put all 265 of them into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).

Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (To learn more visit: About Zacks Industry Rank.)

The Zacks Industry Rank for the Other Alternative industry is #117 out of 265. This puts the industry in the top half of the list, implying a positive outlook.

Within the Zacks Industry classification, the Zacks Industry Rank for Solar is #51 out of 265. This corresponds to the top half of the list, implying a positive outlook.

The recent losses suffered by some of the fundamentally strong solar stocks can be good buying opportunities for investors with a longer-term horizon. The U.S. solar market continues to grow with total installed solar PV capacity in the U.S. expected to almost triple over the next five years, as per SEIA. By 2022, annually, over 18 GW of solar PV capacity will be installed.

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).

While SolarEdge Technologies, Inc. (SEDG - Free Report) sports a Zacks Rank #1 (Strong Buy), JA Solar Holdings and SunPower Corp. (SPWR - Free Report) carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Q3 Earnings Season

A number of alternative energy companies have reported their third-quarter results. 8point3 Energy Partners LP (CAFD - Free Report) reported earnings of 27 cents per share in third-quarter fiscal 2017 (ended Aug 31), missing the Zacks Consensus Estimate of 65 cents by 58.5%. The bottom line also declined 40.7% from 38 cents in the year-ago period.

First Solar Inc. (FSLR - Free Report) reported third-quarter 2017 adjusted earnings of $1.95 per share, beating the Zacks Consensus Estimate of 85 cents by a whopping 129.4%. The reported number also improved 60% from the prior-year figure of $1.22.

SunPower reported third-quarter 2017 earnings of 21 cents per share. The Zacks Consensus Estimate was pegged at a loss of 36 cents. In the year-ago period, the company had reported earnings of 88 cents per share.

Canadian Solar reported third-quarter 2017 adjusted earnings of 22 cents per share, in line with the Zacks Consensus Estimate. The figure was lower than earnings of 27 cents per share recorded a year ago.

JA Solar posted third-quarter 2017 adjusted earnings of 13 cents per American Depositary Share (ADS), missing the Zacks Consensus Estimate of 18 cents by 27.8%.

A few companies like ReneSola Ltd (SOL - Free Report) is expected to report results soon. The company has an Earnings ESP of 0.00% and a Zacks Rank #3 (Hold).

We expect solar companies to witness impressive growth this year, with more emphasis on installations. The companies seem to be channeling most of their revenues into installations backed by solar and wind-tax credit extensions.

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