The continuing trend toward green and clean sources of energy is a surprise to no one and the movement is continuing to gain more and more momentum as time passes. Politicians have been finding they can gain strong political capital through supporting renewable energy and as companies build scale, costs decrease which make the economic feasibility that much more of a reality. The ability for solar power to supply whole cities is not quite there yet but it looks like solar’s ‘time in the sun’ is quickly approaching. 

Some stats to shine a light on the potential:

Some key findings in a recent report on renewable energy investment show that while renewable energy investment dropped 12% in 2013 compared to 2012, one of the main reasons was due to declining costs of the photovoltaic systems. This means that more capacity could be installed for less cost. The report also notes that greater efficiencies are leading to renewable energies such as wind and solar being able to operate without the help of subsidies. Solar appears to be the rising star (I think that’s another pun!) amongst global renewable energy investment with 53% of investment going into solar power. Wind power garnered the second largest amount of investments globally at 37%. The report is worth a read through and makes it seem that solar power is becoming the renewable energy of choice.

Although the trend has support globally, it is interesting to break down which countries are really stepping up to the plate. From 2008 to 2011, Canada has shown interest in solar power with 495 megawatts of installed capacity at the end of 2011 and an annual growth rate of 147%. We do not think Canada is the big story here, however. As with most things on a global scale, China is the country to watch as China does not only make up the largest investments in clean energy but a large proportion of it consists of solar power. Of the $54 billion China invested in clean energy, just over $20 billion went toward solar power and it is probably a safe bet that due to some serious air pollution concerns within the country, investments in cleaner energies will not stop any time soon. The way I see it is that if you are bullish on China, you are bullish on clean energy and solar. Pollution is an issue that China is unlikely to ignore and it may be an issue that it cannot ignore even if it wanted to.

So if you are a believer of the long-term demand for solar power, where should an investor put their money? We always feel it is prudent to point out the passive options, which in this case would be the Guggenheim Solar ETF with the clever ticker ‘TAN’. We are not huge fans of the ETF simply because the top three holdings represent nearly 23% of the total holdings and it is fairly easy to replicate while bypassing the fee. Within the TAN ETF, we will be highlighting two interesting investments and a third traded in Canada:

Canadian Solar (CSIQ) – Canadian Solar produces a range of solar modules that are integrated into residential, commercial and industrial power systems. While CSIQ is up 100% over the year, the valuation remains fairly constrained and trades below peers with a forward P/E of 7.1 and EV/EBITDA of 5. This is even with expected revenue growth of 68% in 2014 and 20% in 2015. The big risk with Canadian Solar is a debt/equity ratio of 2.25 in Q1 2014. Interest is covered, shown by the EBIT interest coverage ratio of 2.2 and the cash balance of $364MM provides some ability to pay down debt but the leverage is a risk and is likely what is helping keep the valuation down currently.

First Solar (FSLR) – First Solar designs, manufactures and sells solar modules as well as systems coupled with the modules to allow for power plant construction. The valuation of FSLR is interesting with a P/E of 16.6 that is twice that of peers but an EV/EBITDA and P/CF multiples trading below competitors at 6.8 and 12.6 respectively. The growth profile is less exciting for FSLR but fundamentals are strong with good margins and a liquid balance sheet that has minimal debt. 

5N Plus (VNP) – We always try to throw a company into the mix that is traded on Canadian exchanges and the options, as usual, are slim. The best option we could find is VNP, which is covered by 5i Research. VNP produces specialty chemicals, some of which are inputs to semiconductor and solar technology. Interestingly, VNP has signed an agreement with FSLR, expiring in 2019, where FSLR will purchase all of the required cadmium telluride (used in thin film solar cells) from VNP. Revenue growth is looking good at VNP but earnings growth is still low and a history of equity issues along with sub-par performance since the 2007 IPO make 5N Plus a difficult name to like too much. Debt has been declining and things do look to be turning around at the company so the sun very well may come out tomorrow with regards to VNP.     

As always, please ensure you perform your own due diligence before making an investment decision. The above securities mentioned should not be construed as any sort of recommendation to buy or sell. Finally, in an effort to remain truly independent, those employed by 5i Research do not hold any Canadian stocks that are mentioned through the 5i website but employees are able to own U.S. securities. The writer does not own any of the securities mentioned at this time and does not plan to within the next 48 hours.