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Merrill Lynch Identifies Solar Stock Winners

Over the next several days and into next week, a number of solar energy companies will be reporting quarterly results. While the growth of solar energy is impressive as costs fall, the industry has yet to solve once and for all how to finance further growth, particularly in the residential rooftop business.

Analysts at Merrill Lynch characterize the state of the market for solar as lingering pessimism, along with a bright outlook. The analysts forecast a 19% rise in global demand for solar and a similarly sized rise in U.S. demand for residential solar installations for 2016. They frame the drag on the sector this way:

[N]egative sentiment has continued to surround the overall solar market as the ability to finance solar and the sustainability of current business models have come into question. Some debt-heavy companies may need additional financial assistance in the short-term in order to provide their long-term value prospects.

Merrill Lynch’s top pick in the sector is SunPower Corp. (NASDAQ: SPWR), now trading at nine times the firm’s fiscal year 2017 estimated earnings. The analysts wrote:

We base our $31 [price objective] on the average of a 9x multiple on 2017E EBITDA (appropriate in our view given that 9x is the implied multiple on our 2017 estimates for peer company First Solar, and is in-line with yieldco valuation differentials), and an analysis of SunPower’s project pipeline comprised of utility-scale, commercial, and residential solar assets. We value...


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