GT Solar International Inc's initial public offering, expected to be the largest ever by a US solar company, is facing a surprisingly cloudy outlook. Despite red-hot industry growth, as the price of competing energy sources soars, investors have not shown a sunny disposition toward solar energy stocks lately.
The stocks of industry leaders Suntech Power Holdings Co Ltd and Applied Materials Inc, among others, have been cooling from March rally levels since late May. Suntech is down about 18 percent from its high in spring, while Applied Materials is down about 9 percent.
Those declines could cast a pall over GT Solar, a Merrimack, New Hampshire-based maker of the manufacturing equipment used by solar energy companies, whose IPO is scheduled for next week. "It'll hurt that solar stocks have been volatile," said Samuel Snyder, a senior research analyst with Greenwich, Connecticut-based advisory firm Renaissance Capital. "But investors will see unique aspects that make GT Solar attractive."
One of those advantages is GT Solar's position as one of only a few makers of the manufacturing equipment used by the solar companies, analysts say. "It's a less fragmented arena," said Pavel Molchanov, an alternative energy analyst with Raymond James & Associates. "The landscape is not quite as competitive."
GT Solar's regulatory filings also reveal a compound annual growth rate of 128 percent in the past two years that should comfort investors, with revenues of $244 million for the year ended in March.
That growth rate explains why GT Solar would trade at 66 times 2008 earnings if the IPO priced at the midpoint of its forecast range, a high multiple compared with those of other solar stocks, said Scott Sweet, an analyst with IPO Boutique.
GT Solar's IPO is forecast to price in a range of $15.50 to $17.50, with a midpoint of $16.50 a share. "Their growth is astronomical and they have a backlog, so it will support a higher price-earnings ratio," Sweet said. In its filing, the company said it has an order backlog of $1.3 billion.
Other solar companies have widely varying multiples based on 2007 earnings, from a price/earnings ratio of nearly 36 for Suntech and 15 for Applied Technologies. First Solar Inc, one of the few solar stocks doing well lately, is trading at a multiple of nearly 200, while SunPower Corp's multiple is 60 and LDK Solar Co Ltd's is 26.
Investors are skittish about cutbacks to subsidies in Spain, a major market, and the uncertainty during an election year around the renewal of a US federal tax credit set to expire in December that has spurred industry growth.
The tight market for silicon, a key component in the process of turning sunlight into power, might hurt solar energy's economics, as could a sustained fall in oil prices. While oil doesn't have a direct correlation to demand for solar power, since most electricity in the United States is generated from coal or natural gas, higher crude oil prices generally help boost investor interest in renewable energy.
Last year saw a spate of solar IPOs in the US, including Chinese manufacturers LDK Solar and Yingli Green Energy Holding Co Ltd. In 2008, there has been only one solar IPO so far, Real Goods Solar Inc's modest $55 million debut in May.
Should GT Solar raise $500 million as planned when it goes public, the offering will be the largest-ever US solar IPO and the sixth-largest US IPO of the year overall, according to data from Dealogic. The company plans to list on the Nasdaq under the ticker "SOLR".