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Tuesday, July 23, 2013 | Issue #2083
Six-Baggers for the Next Decade: Part 2
David Fessler, Energy and Infrastructure Strategist, The Oxford Club
|  Investors looking for a high-growth sector within the energy industry for the next 10 years need look no further than renewables. No sector is set up for explosive growth like renewable energy is.
As we discussed yesterday, renewable energy sources are being adopted by governments and businesses around the world at a pace that has vastly outstripped projections.
It's true that renewable energy has had many detractors throughout its brief history. Many politicians believe renewable technologies are immature and require further research in order to be viable.
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Not surprisingly, some of these views are pushed by the fossil fuel industry. After all, they stand to lose big if renewables are adopted much faster than anticipated. Here are a couple of examples...
Exxon Mobil (NYSE:XOM), in its 2012 Outlook for Energy: A View to 2040, said, "advances in technology will be necessary to make [renewable] fuels more practical and economic... geothermal and solar will remain relatively expensive."
Chevron Corporation (NYSE:CVX) said, "because of major technical hurdles such as scalability, performance, and costs as well as market-based barriers, broader adoption [of renewables] can't happen overnight."
What about cost?
Comments like "Renewable energy is too expensive" or "Public subsidies for renewables will be required for the foreseeable future" are typical. The reality is fossil fuel subsidies far exceed those for renewables.
The International Energy Agency (IEA) World Energy Outlook 2012 estimates global fossil fuel subsidies at more than $520 billion in 2011. This compares to approximately $90 billion for renewable energy.
What about environmental costs?
Those associated with nuclear and fossil fuels aren't typically included when doing cost comparisons with renewables.
Then there is the risk associated with fossil fuel price swings. Some experts say that between 1-3 cents per kilowatt hour should be added to power costs associated with natural gas.
The bottom line on renewables is that their future growth is entirely underestimated by today's investment community.
Shining Bright
I'm particularly bullish about solar energy. Who wouldn't want to get rid of their gas and electric bill, and replace it with something that's clean, natural and cheaper? The problem has always been equipping homes and business with solar panels and other necessary hardware - no small expense.
But some great companies are charging ahead to solve that problem. We discussed one of them, SolarCity Corporation (NYSE: SCTY), yesterday. Another is Canadian Solar Inc. (Nasdaq:CSIQ).
Canadian Solar, like SolarCity, is poised to become a "six-bagger" - a stock whose value jumps six-fold over a 10-year period.
Canadian Solar is a vertically integrated player in the sector. Starting with raw polysilicon, the company manufactures its own ingots, wafers, cells, modules, systems and solutions.
Based on 2012 shipments, Canadian Solar is the world's fourth-largest solar manufacturer. Due to its vertical integration, Canadian Solar has one of the lowest installed costs of any module manufacturer.
The company covers the spectrum of the solar market. It offers residential system kits as well as commercial rooftop installations. In addition, it actively develops and constructs utility-scale power plants.
The company's industry-leading cost structure means its all-in module cost was $0.57 per watt at the end of March. Right now, Canadian Solar has more than 5.0 GW of modules installed in more than 50 countries.
Business Is Good
Another big differentiator for Canadian Solar is its business model. In 2012 its system and solution business was approximately 13% of the company's revenue. In 2013, that number is expected to grow to approximately 50%.
One of the largest growth opportunities for the company comes from its utility-scale projects. It has several in the works:
- It has expanded its utility-scale pipeline in the U.S. to 255 Megawatts (MW).
- Its Japanese market utility-scale projects total 125 MW.
- It recently won a contract to supply 91 MW of modules for projects in Thailand.
The deal that stands out to me is a plan signed on June 10 with Grand Renewable Solar LP to build a 130 MW utility-scale solar power plant. The company expects the deal to generate over $300 million.
With the addition of these two projects, Canadian Solar has nearly 1 GW of utility-scale projects in its pipeline. In Canada alone, it has identified 29 solar power plants it expects to complete between now and 2015, with a cumulative value exceeding $1.5 billion.
In the Japanese residential market, business is booming. The company started selling residential system kits there in 2009. After the Fukushima disaster, business surged. In 2012, the company booked $120 million in Japan.
Canadian Solar expects to ship between 1.6-1.8 GW of modules in 2013. In Q1 2013, 17.9% of module shipments went to the Americas, 24.7% to Europe and 57.4% to Asia and others.
We believe Canadian Solar will be another disruptor stock 10 years from now.
Good investing,
David Fessler
Energy and Infrastructure Strategist, The Oxford Club
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