Several renewable energy stocks are in the spotlight on Monday after the Inflation Reduction Act of 2022, or IRA, passed the Senate on Sunday, with Needham analyst Vikram Bagri calling the reconciliation deal “the biggest climate-related win for the current administration” and noting that the bill is “very positive” for his entire renewables coverage. In solar, the analyst views First Solar (FSLR) and Sunrun (RUN) as the biggest beneficiaries in the near-term. Also more bullish on First Solar, both JPMorgan and Guggenheim upgraded the stock to Buy, with the latter citing confidence in the passage of the IRA act.
IRA ACT: On Sunday, the Senate passed a sweeping health care, climate and tax bill, which now goes to the House, where it is expected to pass by the end of the week. After over a year of negotiations, Democrats agreed to a narrow bill to reduce the deficit, curb drug prices and invest in energy initiatives, all paid for by new corporate taxes. The Inflation Reduction Act of 2022 aims to raise $739B in revenue through a 15% corporate alternative minimum tax, prescription drug pricing reform, better tax enforcement, and closing a carried interest loophole. Needham analyst Vikram Bagri highlighted in a research note to investors that of the total revenue, $369B will be spent on energy security and climate change, with the bill putting the U.S. on a path to roughly 40% emissions reduction by 2030.
The bill offers $7,500 credit for buying clean energy vehicles, $4,000 consumer credit for lower/middle income individuals to buy pre-owned CEVs, $7,500/$40,000 credit for commercial CEVs and an extension of section 30C by 11 years with the inclusion of EV charging in the definition. The 200,000 unit threshold has been removed, so Tesla (TSLA) and General Motors (GM) buyers are again eligible for incentives, Bagri added.
The bill also introduces section 45X related to Advanced Manufacturing Production credit benefits for domestic solar manufacturing. This includes manufacturing credits for wafers, cells, polymeric backsheets, polysilicon, solar cells, solar modules, and battery cells and modules. In addition, there are credits for installing heat pumps and other energy efficient appliances that increase self-consumption and can potentially increase the size of solar installations. The residential clean energy credits have been increased and extended through 2034. The credits for solar and wind facilities in low- income communities are higher as well.
Needham’s Bagri believes the bill is “very positive” for his entire renewables coverage. In solar, First Solar and Sunrun appear to be the biggest beneficiaries in the near-term. SolarEdge (SEDG) and Enphase (ENPH) should also benefit from higher government spending and more solar adoption, he argued. Though all EV charging companies benefit from higher EV sales and more government support, the analyst believes ChargePoint (CHPT) is best positioned to take advantage of provisions in the bill. Finally, Clean Energy Fuels (CLNE) should benefit from the AFTC extension, Bagri said.
BUY FIRST SOLAR: On Monday, Guggenheim analyst Joseph Osha upgraded First Solar to Buy from Neutral with a $135 price target. His confidence in the passage of the Inflation Reduction Act of 2022 has grown after the act passed the Senate on Sunday and of all the names in his coverage he believes First Solar appears positioned to benefit the most from the provisions of the IRA. Osha, who believes his price target is "one of the highest price targets on the street," argued that despite the stock's recent appreciation investors "have not fully digested how transformational the IRA could be" for First Solar's business. It is not clear to him when the contemplated manufacturing credits will become effective or how exactly the benefits could split between First Solar and its customers, but "to be conservative" he is using 2024 as the basis for his analysis and assumes that the company is able to capture approximately 6c per watt on its own P&L.
Also more bullish on First Solar, JPMorgan analyst Mark Strouse upgraded the stock to Overweight from Neutral with a price target of $126, up from $83. The analyst views the Inflation Reduction Act as “the largest policy change in U.S. history” to accelerate growth in an "already inevitable” energy transition to renewables. While changes are still possible as the bill proceeds to the House of Representatives, investor expectations for the industry will "appreciate materially” with the passage of the more evenly divided Senate, Strouse told investors in a research note. Although alternative energy stocks have risen since the initial news of the bill, there is further upside for most companies in the space, the analyst added. He views companies with existing domestic manufacturing as the most immediate beneficiaries.
PRICE ACTION: In Monday morning trading, shares of First Solar have gained over 10% to $112.49.