ITC Impact on the Solar Industry in a Nutshell - Cowen (SUNE) (FSLR) (CSIQ) (SCTY)

Cowen analyst, Jeffrey Osborne, published a lengthy discussion on the impact that the Solar ITC changes will have on the overall industry and how benefits flow to the participant's bottom line. The analyst sees SunEdison (NYSE: SUNE) and Solaredge (NASDAQ: SEDG) as the big winners but the lower equity valuation for SUNE's yieldco's actually causes a reduction to the price target rather than an increase.

On December 18, President Obama signed legislation passed by Congress to extend the solar Investment Tax Credit (ITC) at the current level of 30% through 2019, before stepping down to 26% in 2020, 21% in 2021, and 10% beyond that, with timing directly coinciding with the Clean Power Plan (CPP) enacted by the Obama administration on August 3rd.

As a result of the ITC extension, they predict that the US DG market will grow rapidly with residential solar players expected to profit from continued access to lowcost tax equity, a key metric in SolarCity's (NASDAQ: SCTY) long-term growth model.

As a second derivative observation, a dip in residential PV installation volume was expected in a post-ITC environment as the economics in many states outside of CA and the Northeast didn't pencil out. Now that this is no longer the case, increased demand across the residential PV space should bode well for companies active in the residential PV supply chain, namely Enphase and SolarEdge, and the elevated competition is an issue worth monitoring for SolarCity.

The proposal should also help Solar3D (NASDAQ: STLD) as well which does cash sales of commercial and residential systems. The extension of the ITC should also enhance volume growth relative to previous estimates and pricing pressure may be more benign than expected. However, companies should still adhere to their cost reduction roadmaps outlined during the year.

The analyst's top ideas in the space are SunEdison and SolarEdge due to the likely project sales and closure of acquisitions to rebuild investor confidence at SunEdison and product cycle/Tesla storage launch at SolarEdge. He raised price targets at several companies on higher anticipated earnings but reduced the PT at Sunedison due to a lower equity value for the yieldcos.

New Old

Canadian Solar Inc $35.00 $28.50

First Solar Inc $75.00 $70.00

Solarcity Corp $55.00 $42.00

Sunedison Inc A $19.00 $20.00

Other stocks noted in the report:

• Amtech Systems (NASDAQ: ASYS)
• Enphase Energy (NASDAQ: ENPH)
• SunPower (NASDAQ: SPWR)
• Trina Solar (NYSE: TSL)
  

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