Solar Power Comes of Age: Will Investors Benefit?
Is solar getting hot again?
Solar Power Comes of Age: Will Investors Benefit?
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Overall, this country obtains about 13% of its energy from renewable energy, including hydrological. Most developed nations obtain a far higher percentage of their energy from renewable sources. Denmark, for instance, is on track to obtain 50% of its electricity from off shore wind turbines by 2022.
Solar energy, in particular, is showing strong growth worldwide. First and foremost, prices have fallen substantially over the past few years. In addition, efficiency has increased. But, solar is also unique in that its output is best on the very sorts of hot and sunny days when electrical demand is at its typical peak. Australia, for instance, has seen home based solar installations increase from about 20,000 in 2008 to over 2 million.
In the United States, the solar industry has benefited from a combination of falling solar panel prices, rising efficiency, along with favorable policies such as third party financing and feed in tariffs now in the majority of states. The low entry price advantage of solar, along with it having already reached grid parity with average traditional energy sources in California, with other states to follow, has the traditional power industry on the edge.
Grid parity has also been reached in India, China, and other countries around the globe. Of course, grid parity pricing virtually ignores all external costs, which for coal and oil run into the tens of billions, or more, in health and environmental damage. The external costs for solar and wind are both virtually nil.
The leading solar panel maker in this country is Tempe, Arizona's First Solar (NASDAQ: FSLR). Its proprietary thin film modules led it to great profitability until a few years ago, when its prices were undercut by Chinese competition. In response, the company had abandoned the rooftop market, instead pursuing, with some success, utility scale projects.
It is important to realize the impact that solar, and wind as well, have had upon the bottom lines of utilities. While other issues come into play, distributed alternative energy generation is certainly taking an ever increasing toll on the health of some of the country's largest and best known utilities.
PG&E's (NYSE: PCG) profits have advanced at a paltry 3.5% average rate over the past five years, while the company's underfunded pension obligation have swelled to over $3 billion. However, PG&E has been praised as one of the best energy companies out there, and the market sees the company in the same light.
PG&E has soared 16% since the beginning of 2013 and currently boasts a P/E ratio of 24.5, compared to the S&P 500's P/E ratio of 17.7. Despite its pension setbacks, I view this company as one of the better plays in energy. Conversely, Eastern utility behemoth America Electric Power has faced a more challenging path over the past few years, with earnings advances averaging 1% annually, despite capital spending actually far below the levels recorded from 2006 to 2008.
The common thinking is that for the next several years, new energy supplies will come either from natural gas, wind, or solar energy. Solar itself is expected to be the nation's second largest source of new power in 2013. Let's look at some dominant players.
The big news for First Solar is its recent purchase of Japanese company TetraSun for two distinct reasons. TetraSun is bringing to market high efficiency rooftop systems and targeting Japan, a country whose limited land available makes rooftop solar a highly attractive energy source.
Even more intriguing is that TetraSun's technology is based upon the very common silicone system that First Solar rejected in its flat panel systems. As of this writing, TetraSun does not have a market presence. But, this could present a real sea change for First Solar. If the Japanese rooftop business proves successful for First Solar, it is likely the company would work to expand that business beyond Japan.
Otherwise, First Solar had a solid, though not spectacular 2012. Net sales of $3.4 billion were up 22% from 2011. Profits, excluding restructuring charges, came to $430 million, or $4.90 per share. At the company's April 9, 2013, analyst meeting, it pointed out that due to its modest debt level of just 12% of capitalization, it is the only large solar manufacturer with a “positive cash position.”
Well, that is nice, but that alone won't make a solar maker profitable in these days of cut-throat competition. In 2013, the company expects revenue of about $3.9 billion and earnings of about $4.25 per share. It sees income in 2015 reaching as high as $6 per share.
What I see is nothing special, until and unless the TetraSun purchase yields fruit. If First Solar can continue its high volume utility scale business, and also add a higher margin roof top business to the table, then the sky will be the limit. We are likely years from that happening, and First Solar's stock, which has jumped some 40% on the afterglow of the TetraSun deal, is now probably overvalued based on 2013 – 2014 earnings. I would look elsewhere.
Another big solar provider in this country is California-based SunPower (NASDAQ: SPWR). It boosts market leading performance of 21.5% efficiency, but at a cost of having its solar prices undercut by Chinese competition. As a result, the company has not been profitable since 2010, and losses since have reduced the company's book value by 50% over the past three years.
Frankly, things do not look any better this year or next, but SunPower has an “ace in the hole” as it is majority owned by French energy giant Total. The backing of the resources of one of the world's energy giants gives SunPower financial stability, but the question is, for how long is Total willing to withstand losses.
Solar panel prices will turn around when demand and supply come back into whack, but that won't be any sooner than late 2014 to 2015. Until then, I would avoid this issue along with other solar panel manufacturers.
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