One of the sneaky tricks that politicians and lawmakers pull when crafting legislation is sticking in other items, some of which are pet projects for constituents, into large pieces of legislation. One of those items was in the new broader tax bill. Tax credits for wind and solar clean energy were extended another five years, an item that is big for some of the top companies in the industry.
A new research report from Deutsche Bank notes that while the top stocks in the industry were discounting some of this news over the past few days, many were still skeptical that such an extension would go through. As such, they view this five-year extension as a significant positive catalyst for the solar sector.
We screened the Deutsche Bank list of stocks to Buy and found four that look very attractive now.
8point3 Energy Partners
This summer IPO sputtered out of the gate and may be offering investors an outstanding opportunity and entry point. 8point3 Energy Partners L.P. (NASDAQ: CAFD) was formed by First Solar and SunPower to own and operate a portfolio of selected solar energy generation assets. While initial Wall Street reaction was less than enthusiastic, some analysts believe that there could be solid upside to the value of First Solar’s stake in 8Point3 Energy. The cost of capital benefits from the launch of the limited partnership likely will add value to First Solar’s fully developed project backlog, with the monetization of the photovoltaic plants.
Initially analysts liked the deal, and they think the company differentiates itself from other yieldcos with an outstanding portfolio of high-quality operating assets with strong creditworthy off-takers in the U.S. utility scale market. Many also believe that the company has strong growth visibility for more than three years and a solid business model that doesn’t depend on acquisitions. They also cite the strong backing from First Solar and SunPower as another good reason for investors to buy shares.
The company has a very lean balance sheet, with no project-level debt and a very lean operating expense structure that may offer investors increased downside protection for the future. Some analysts point to a conservative CAFD calculation approach, and a back-end loaded incentive distribution rights structure that they feel will result in low dilution to current unit holders.
The current 8point3 Energy Partners distribution is 4.32%. The Deutsche Bank price target for the stock is $18. The Thomson/First Call consensus price target is $18.25. The shares closed trading most recently at $14.55.
This stock has been on a roll and could continue to spike higher. SolarCity Corp. (NASDAQ: SCTY) is a pure-play leader in the fast growth, roof-top solar as a service market, and analysts feel it has a balance sheet that will support growth in 2015 and beyond. With many long-term contracts providing visibility into future cash flows, SolarCity is a top name for risk-tolerant investors to own.
While some on Wall Street feel that the company’s cost of funding may be higher going forward, it will remain below the 6% residual value calculations considered key, and Deutsche Bank feels that current valuations are a compelling reason to own the stock.
While the stock was up big on the tax credit extension news, SolarCity is still trading well below the highs that the stock printed in 2014. Others on Wall Street have noted that SolarCity has given up on its goal of having a million customers by mid-2018, owing to the maturing solar industry, and is now focusing on cash-flow growth.
The $64 Deutsche Bank price target is higher than the consensus target of $57.59. The shares closed Wednesday at $53.69.
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