These companies are leading in renewable energy

Falling prices, growing adoption and newer technologies are expected to support continued growth for solar and wind energy.

Vikram Barhat 14 June, 2017 | 5:00PM
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U.S. President Donald Trump's decision to pull out of the the Paris climate accord was environmentalists' worst nightmare. Widely regarded as a setback to global efforts for cleaner earth, the move drew sharp reaction from across the world.

While the United States still remains by far the largest contributor to global greenhouse pollution, Trump's withdrawal is unlikely to stop the renewable revolution sweeping across the U.S and elsewhere.

A report from the International Energy Agency (IEA) forecasts that 37% of power generation will be from renewable sources by 2040, compared to 23% today. In fact, over the next five years, renewable, particularly solar and wind, is going to be the fastest-growing source of electricity generation worldwide, says another IEA report.

The U.S. saw its solar market grow a whopping 97% in 2016, accounting for 39% of new electric capacity added to the U.S. grid that year, according to a Solar Energy Industries Association (SEIA) report. Wind supplied more than 5.5% of the country's electricity for the same period, as per the American Wind Energy Association. The U.S. Department of Energy forecasts the U.S. may be able to meet 10% of its electricity demand through wind power by 2020, 20% by 2030 and 35% by 2050.

Falling prices, growing adoption and newer technologies will continue to support the growth of the renewable industry. Select solar and wind energy producers are well positioned to benefit from the trend and enjoy long-term growth both locally and in other parts of the world, according to Morningstar equity research.

First Solar Inc.
Ticker FSLR
Current yield -
Forward P/E 49.6
Price US$36.48
Fair value US$40
Data as of June 12, 2017

 First Solar (FSLR) makes electricity-producing solar modules and develops turnkey solar systems. The company has production lines in Malaysia and Ohio.

"We have little doubt that First Solar will remain a significant player in the worldwide solar energy boom," says a Morningstar report, noting that "government energy policies worldwide will support rapidly growing demand for at least the next five to 10 years."

At one point, one of the biggest risks to the solar industry was considered to be government's withdrawal of support. That risk has now subsided. "In the U.S., renewable energy tax credits and state portfolio standards have become a policy certainty," says Morningstar strategist Travis Miller.

Further, as prices fall and technology improves, demand from corporate and industrial customers, is growing rapidly, a trend that isn't likely to slow or stop.

As the tide of renewables' popularity swells, one of the biggest challenges for First Solar is to stay ahead of the competition, particularly from China, one of the largest contributors to the growth of the global market. These competitive pressures will require First Solar to make new investments, which could impact shareholder returns on capital at times, cautions Miller, but he maintains that "First Solar will benefit from an overall rapidly growing market for solar."

The strength of its balance sheet and operational flexibility enable the energy company to make the necessary investments to keep reducing costs during choppy economic times, adds Miller, who puts stock's fair value at US$40.

Tesla Inc.
Ticker TSLA
Current yield -
Forward P/E -
Price US$358.50
Fair value US$197
Data as of June 12, 2017

Palo Alto, California-based  Tesla (TSLA) is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility on the back of electric vehicles (EVs). It sells solar panels and solar roofs for energy generation and batteries for stationary storage for residential and commercial properties, including utilities.

"Tesla has the potential to change the world with long-range EV technology and battery technology that can store solar energy that its products generate," says a Morningstar report.

Earlier this year, Tesla overtook  General Motors (GM) to become the largest U.S. auto maker by market value. And while it's considered by some as a tech start-up that makes automobiles, CEO Elon Musk's long-term vision is to transform Tesla to a clean-energy company. To that end, he last year acquired SolarCity, the solar installer run by his cousins.

This year, the company started selling its solar roof tiles, the linchpin of Musk's strategy to promote a green lifestyle. Tesla also started production at its US$5 billion gigafactory, a battery factory that's making lithium-iron car batteries to fuel car production, as well as build battery packs to power homes, and deliver power to the electric grid.

Morningstar strategist David Whiston recently raised the stock's fair value estimate from US$176 to US$197, but concedes there is some risk in investing in Tesla "given the company's relatively young age, its large future capital needs, and higher debt levels." Whiston does, however, remain optimistic about "the disruptive potential of Tesla on the auto and utilities industry" and about what the company can achieve in 10 years.

General Electric Co.
Ticker GE
Current yield 3.36%
Forward P/E 15.2
Price US$29.00
Fair value US$32
Data as of June 12, 2017

 General Electric (GE) owns diversified businesses including power, oil and gas, renewable energy, aviation, healthcare and transportation.

The firm is amongst the world's leading wind turbine suppliers with over 30,000 onshore and offshore turbines globally. While the U.S. constitutes the largest portion of its global installed base, the company has been expanding its geographic footprint, ramping up supply to emerging markets like Turkey, China and Vietnam. GE also accounts for more than 33% of all energy produced in Brazil.

"Expansion of GE's established product categories, such as turbines, aircraft engines, locomotives and medical imaging, should continue tracking economic growth," says Morningstar equity analyst Barbara Noverini.

The company's aviation, power, healthcare and renewable energy businesses are on course for robust growth in the near term, supported by late-cycle capital spending, new product launches and regulatory change, adds Noverini, who assesses the stock's fair value to be US$32. "With services generating attractive 30%-plus margins on average, upselling customers with long-term maintenance agreements is also a key driver of future profitability," she says.

GE's wide economic moat, or sustainable competitive advantage, stems from patents, customer relationships, brand and switching costs that help generate economic profit.

Morningstar forecasts a 4.5% five-year compound annual revenue growth rate, reaching nearly US$152 billion in sales by 2021. GE is targeting 2017 industrial operating profit of at least US$17.2 billion, with plans to slash costs by US$1 billion this year and next.

Siemens AG ADR
Ticker SIEGY
Current yield 2.66%
Forward P/E 18.6
Price US$70.87
Fair value US$68
Data as of June 12, 2017

German engineering behemoth  Siemens (SIEGY) operates in power and gas (20% of 2016 sales), wind power and renewables (7%), energy management (15%), building technologies (8%) and mobility (10%), among others.

In a deal that recently got the EU nod, Siemens merged its wind business with that of Spain's Gamesa Corp. to form the world's largest wind farm business.

"Siemens has strong positions in renewable energy as the number-one provider of offshore wind turbines and the only major company to offer deep-sea wind turbine solutions," says a Morningstar equity report. "On the strength of its gas turbine machinery portfolio, Siemens will benefit from demand for new power-generation capacity in emerging markets and a push for more renewable sources in the U.S. and Europe."

The company is a dominant force in the market for offshore wind turbine equipment and services. "This market is less competitive than the onshore market because of barriers to entry," says Morningstar equity analyst Jeffrey Vonk in a report.

The company has strengthened its oil and gas portfolio through several acquisitions, a key part of its operational strategy, adds Vonk, who recently raised the stock's fair value from US$60 to US$68 per American Depositary Receipt (ADR).

He forecasts double-digit revenue growth in the wind power and renewables division, and projects operating margin of Siemens' industrial business to grow from 12.1% this year to 13.2% in 2021, along with ROIC of 15.4% for the same period.

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About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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