Here comes the sun: 7 solar stocks set to shine

 Feb. 7, 2013, 5:46 a.m. EST

 http://www.marketwatch.com/story/here-comes-the-sun-7-solar-stocks-set-to-shine-2013-02-07?siteid=bigcharts&dist=bigcharts

The future looks sunnier for solar power firms. That’s the bright and shiny message from Citigroup, anyway. This week, the brokerage firm started coverage of seven U.S. solar companies, four of them at a “buy.”

The solar sector has seen an impressive expansion in recent years, with a compounded annual growth rate in installations of 59% from 2007 to 2012. As oil and gas prices rise alongside political calls for clean energy, analysts at Citigroup predict sun-generated energy will be in high demand.

The solid growth and strong demand potential have, however, not been reflected in shares prices in recent years. In fact, it’s been ugly. But that only helps support the case that now is the time to take a closer look.

“Key point, many of the U.S. utilities we have surveyed over the past several weeks have highlighted the need to diversity into other generation sources — it is well understood that gas prices won’t stay depressed forever,” they said in a report Wednesday.

The analysts said they prefer companies in the downstream business, such as project development, distribution and installation, over firms in the upstream market, including panel manufacturers and electrical components suppliers.

“We surveyed over 20 electric utilities in the U.S., [and] one key theme emerged: it has become very difficult to distinguish one panel manufacturer from the other — they all look the same, per respondents. This was not the case in the past,” they said.

Read on for Citigroup’s stock picks. 

1. First Solar Inc.

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Rating: Initiated with buy

Price target: $41

Current price: $31.13

The pluses: First Solar FSLR +4.26% is considered the bellwether in the downstream market, and with the downstream names poised for stronger growth than upstream counterparts, this is a company to watch. Additionally, management has made strong restructuring progress and has won several projects in key growth regions, the Citigroup analysts said.

“FSLR’s balance sheet strength and bankability premium should allow it to continue to capture large scale projects in key growth regions globally—we see a robust pipeline outlook for the next several years,” they said.

The negatives: The Tempe, Ariz.-based company is largely exposed to the California region, which has already met its Renewable Portfolio Standard levels through 2016. On top of that, the panel manufacturing arm of First Solar remains a drag on the company and could partially offset the strong performance in its downstream units. 

3. SunPower Corp.

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Rating: Initiated with buy and added to the U.S. high conviction buy list

Price target: $12

Current price: $8.37

The plusses: Citigroup characterizes SunPower SPWR +2.86%  as the perfect solar package, highlighting the company’s exposure to growth in Japan through its partnership with Toshiba Corp. JP:6502 -2.61%  and Sharp Corp. JP:6753 -1.50% . Additionally, it is 66% owned by French oil giant Total SA TOT +0.33% , creating an effective backstop.

“With a global recognized brand and distribution channel, we believe SPWR is best positioned to capture growth in the residential and commercial scale market — early growth segments,” the analysts said.

The negatives: The San Jose, Calif.-based firm suffers from a higher cost structure than the broader industry and still has a sizable exposure to the weak Western European market.