Barclays Highlights Solar Outlook, And How To Play The Long Game

The 2Q16 results reported by the Solar industry reflected neither company-specific issues nor a one-off weak quarter; rather they likely indicated “an inflection point in the solar cycle driven by unintended policy consequences and the inherent limits in solar technologies,” Barclays’ Jon Windham said in a report.

Macro Headwinds

Decelerating policy-driven demand, along with more module manufacturing capacity that is expected to come online by yearend 2016, is likely to result in global overcapacity in 2017, analyst Windham noted. The estimate for y/y increase in manufacturing capacity has been revised from 30 percent to 15 percent, since expansion plans have been scaled back.

The additional capacity is expected to be driven mainly by Chinese manufacturers expanding into Southeast Asia to circumvent US import tariffs. Windham expects module manufacturers to witness significant gross margin pressure in 2017.

The analyst added that there is also likely to be intensifying competition in the residential solar space due to large US developers focusing on residential and commercial solar markets. “Additionally, we generally expect growth in this segment to slow on incrementally less favorable net metering regimes and customer confusion over policy changes.”

How To Play The Sector

While mentioning that the Solar sector is likely to be volatile, Windham recommended investors to focus on “names with the lowest leverage and conservative management teams.” He suggested stocks of First Solar, Inc. FSLR, 8Point3 Energy Partners LP CAFD and Solaredge Technologies Inc SEDG.

“We expect the short-term outlook to remain challenged and prefer companies that can weather a downturn before capitalizing on a relatively less competitive landscape during the cycle upswing,” the analyst commented.

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