Invest in wind stocks, avoid solar, says Jefferies

London, 7 January: Investors should avoid the solar sector in the early part of this year, according to equity analysts at investment bank Jefferies International, but wind energy companies may be a good bet as orders are expected to surge.

The pricing of solar systems and profit margins for manufacturers were under considerable pressure throughout much of 2009, and this is set to continue in early 2010, said analysts Michael McNamara and James Harris in a note published yesterday.

Demand for solar modules will be strong, they said, particularly in the first half of 2010, as developers rush to finish projects in Germany and Italy. These governments are likely to reduce feed-in tariffs for solar farms, as the low pricing of solar modules means developers are reaping an unusually high return on investment. These two countries represent about 60% of solar sector revenues and a reduced tariff will impact longer-term demand.

Despite rising demand elsewhere, such as China, the analysts expect the solar market to remain oversupplied. “We estimate a 15% decline year-on-year in module price for 2010,” they said.

The climate of price deflation means “at the moment, we have no buy-rated stocks in the European solar sector,” they said, adding that Norway’s Q-Cells and Germany’s Solon are two stocks to avoid going into 2010.

“For investors who need to maintain exposure to the solar sector, we suggest that [London-listed ingot and wafer producer] PV Crystalox’s strong balance sheet and lower earnings multiple make it a relatively safe harbour, although we should stress the uncertainty over wafer pricing in 2010 remains a key source of concern,” McNamara and Harris said.

Wind turbine suppliers are expected to fare better, they said, as turbine orders will pick up, especially from the US where developers must begin construction this year to qualify for certain government grants. Lower construction costs and stable power pricing means wind developers will also see better returns.

“We are very bullish on the wind sector in 2010 and feel that investors can find attractive opportunities in both turbine suppliers and wind developers,” the analysts said.

Jefferies’ top pick of developer is Portugal’s EDP Renováveis, while Denmark’s Vestas and Spain’s Gamesa are its top turbine sector picks.

“At current valuations, we believe that Hansen Transmission, Nordex and EDF Energies Nouvelles are less attractive than their peers, while Terna Energy offers tremendous potential although limited liquidity and exposure to Greek sovereign risk could pose concerns to some investors,” the analysts said.

Greece is wrestling with a financial crisis and credit ratings agencies have downgraded their ratings of Greek debt.