Morgan Stanley: Buy The Dip On SolarCity

• SolarCity Corp SCTY shares declined 21 percent in the past month, in-line with the solar TAN index.
• Morgan Stanley’s Stephen Byrd upgraded the stock from Equal-Weight to Overweight, while maintaining the price target at $93.
• SolarCity does not have the perceived financing concerns associated with other solar companies, and solar growth fundamentals remain strong despite low oil prices.

Analyst Stephen Byrd believes the recent decline in SolarCity’s shares was largely due to a drop in oil prices, pressure on certain solar stocks and the downturn in the overall market. He explained that “the perceived linkage” between oil prices and renewable economics “is largely overblown in our view.”

SolarCity does not need to access equity markets to fund its growth through 2016, Byrd said, adding that residential projects can be easily financed through low cost debt given the robust economics of these projects.

Although the decline in Investment Tax Credit (ITC) from 30 percent to 10 percent will dampen the company’s 2017 growth modestly, the loss of tax equity can be offset with cost cuts and incremental ABS proceeds.

SolarCity’s 2Q15 update showed installations ahead of the guidance and an increased NPV per watt, despite only modest sequential cost declines. Byrd mentioned that the company’s strengths lie in its significant market share in the U.S. residential leasing segment, its highly credit worthy customer base and strong value proposition of its product relative to utility bills.

“We project the US distributed generation market to grow rapidly, and project SCTY to grow its install base by ~39% annually in 2015-20,” the Morgan Stanley report said.