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December 2, 2008
Morgan Stanley downgrades Clean Energy sector
Nick over at Morgan issued a good report on Clean Energy yesterday. Unfortunately the dominance of fossil fuels continues and all the air has been sucked out of clean energy. Even Solar. The ongoing credit crunch means that these new technologies are not getting funded. I can hear Exxon and the coal industry cheering.
What's Changed
Industry View: Clean Energy: Attractive to In-Line
Downgrading industry to In-Line from Attractive. We think 2009 will remain a challenge overall for the space due to access to financing, FX pressures, ASP declines, margin compression, and retrenchment in fossil fuel prices. That said, our long-term positive growth thesis, particularly on solar, is unchanged: We view current energy demand destruction as transitory, while long-term secular drivers - emergence, energy security, environment, and economics - remain intact. We expect a better long-term entry point in 3-6 months.
We remain Overweight industry leaders FSLR and SPWRA relative to the group, for three reasons we think are underappreciated by investors: 1) Both companies' solutions are nearly competitive with peak electricity prices in California. 2) The US is likely to announce aggressive new clean energy policies, disproportionally benefitting domestic leaders. 3) Both companies are benefiting from a flight to quality among project developers and lenders. We've also laid out a scenario framework for how investors should think about drivers and catalysts for the group in 2009.
Key debates: 1) Policy. We expect aggressive policy from the Obama administration to act as catalysts for the group, but implementation will take time; the stocks could be volatile as they react to positive news flow, then trade down on policy execution. 2) Pricing. ASP and margin pressure will likely persist, but developer IRRs and falling input costs should be a backstop. 3)Parity. Grid parity (when renewables are cost competitive with the grid) in the US is closer than many think, driven by US utilities and California policy.
Lowering price targets and most estimates. We are reducing our targets on FSLR (to $175) and SPWRA (to $50) and reducing estimates for ESLR, BIOF and PEIX.
Where's the risk? Macro, financing, and pricing pressures, coupled with slow policy realization, could cause even top names to trade flat or down near term.
Posted by Martin at December 2, 2008 8:36 AM
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