Cleantech Perspective
􀂄 Downgrading cleantech to market weight
Cleantech performed in line with the market in the first quarter. We are
downgrading our cleantech weighting to market perform since we think business
won’t improve much until 2010. The stimulus effect may come later rather than
sooner and cleantech returns on capital are low, limiting the upside. Cleantech
does look inexpensive long term at a market multiple. We remain overweight the
Efficiency and Geothermal sectors and have upgraded Storage. Solar is
downgraded to equal weight. We are underweight Fuels, Water, and Waste.
A few of our favorite things
Some of our cleantech group’s top buys include Yingli, Suntech, First Solar,
Hansen, and EDP Renovaveis. Underperforms include REC, MEMC, Q-Cells,
Cree, and Vestas.
Earnings revisions show slight improvement
Cleantech earnings revisions have been extremely negative, but might have
reached an inflection point in March. Revisions became less negative, especially
in Storage and Efficiency. This second derivative turn makes severe
underpeformance less likely, but we still don’t expect upward revisions soon.
Industry slowdown continues
General interest in cleantech is strong based on newspaper articles and an alltime
trading volume high in March. Industry revenue, however, was flat year over
year in 4Q/08, and the average operating margin was below 2%. Venture capital
investments in cleantech declined to $1 billion in the first quarter compared with
$1.7 billion a year ago. IPOs were essentially nil—cleantech needs “proof of
concept” with a couple very successful IPOs within the next couple years.
Too soon to overweight Solar
We expected a 1Q bounce in Solar stocks, which didn’t happen as fundamentals were
even worse than expected. Solar year-over-year revenue growth went from +82% in
3Q/08 to +15% in 4Q/08. We prefer Asian solar names, which benefit from lower
polysilicon prices and are among the few showing improving margins this year. We
now expect both module prices and industry revenue to fall by one-third this year
before revenue rises by 40% in 2010 (still below the 2008 level). Companies remain
too optimistic, and polysilicon is in oversupply to the tune of 3GW.
Cleantech Sector Performance
In 1Q/09 cleantech (-9%) performed about in line with the market (-10%). We
came into the year thinking both the market and cleantech stocks were due for a
bounce within the context of a secular bear market. Instead, the market headed
straight south, not rallying until March. Given that scenario, cleantech did well to
match the market. Similarly, we figured Solar (-12%) could outperform given its
high beta, which didn’t happen on worse than expected fundamentals. Our
overweights on Efficiency (+9%) and Geothermal (0%) and underweights on
Fuels (-24%) and Storage (-11) worked better.
Looking forward, we are downgrading Cleantech to equal weight. We continue to
believe consistent outperformance is more likely in 2010-11 as the sector matures
and the IPO market opens. We also are downgrading solar to equal weight. We
are concerned that the oversupply situation is acute and that the US stimulus
impact will come later rather than sooner. We continue to like Efficiency and
Geothermal with Storage upgraded on increasing interest in electric cars.