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Solar Stocks: Too Many Players, Too Little Profit
Posted: Jul 14, 2008 08:11 AM by James Brumley
I love the idea of cheap, clean, and perpetual solar energy. As far as investment opportunities go, though, there may be too many names chasing too few dollars, and that's assuming solar power can be priced comparably to other forms of electricity production.
State of the Technology
Although we tend to do so as investors, lumping solar stocks into one group may be a mistake - there are actually two distinct solar technologies. The first is based on familiar photovoltaic panels that convert sunlight directly into electricity right inside the panel.
The second technology is less sophisticated. It uses the thermal heat generated by magnified sunlight to turn water into steam, which is then used to a turn a generator.
The difference is also monetary. According to the Energy Information Agency, solar thermal power costs about 15 cents per kilowatt hour to produce. Photovoltaic electricity costs about 20 cents per kilowatt hour to create. (Learn how to put your money in green stocks in Clean Or Green Technology Investing.)
Solar thermal the Way to Go, Right? Not so fast.
Photovoltaic panels can be installed anywhere close to the end user. Collecting the sun's thermal power, however, requires huge collection areas, measured in square miles. And, they have to be located where the sunlight is strongest to reach maximum efficiency. In America this is the Southwest. The big challenge is getting that electricity delivered to somewhere else; the required power transmission lines cost about $1.5 million per mile.
Also, the average cost per kilowatt hour using conventional means of electricity generation is less than 10 cents in most places. That's solar power's target. One positive thing is 10 cents is a moving target which increases when costs such as carbon taxes increase, but not by much. That's not the only challenge though. (For an overview of the industry and these targets, read Spotlight On The Solar Industry.)
Industry Outlook: Congestion Ahead
Here's a bitter irony: Despite being ‘clean and green', there may be too many solar power companies relative to current and projected demand. Last year, according to the Energy Information Administration, solar power made up only 1% of the United States' consumed electricity. Even if solar power production grows as expected through the year 2020, it will still make up only 6% of global capacity.
By my count there are 14 exchange-listed solar power stocks and ADRs, and at least as many pink sheet and bulletin board solar power stocks. The list doesn't include unlisted and/or foreign-listed companies either. In other words, there's no lack of capacity.
Although there are going to be critical technological differences from one company to the next, I suspect solar power production is close to becoming something of a commodity. When and if that happens, cost control, efficient management, and that "better mousetrap" really come into focus, as they would for any commodity. It'll be the difference between surviving or not.
This means being profitable right now isn't enough for a solar company. A solid solar investment with any longevity will soon need to be:
1. More profitable than other solar companies.
2. Able to keep solar power costs comparable to other energy sources.
3. Able to price its hardware attractively.
That's no small task. With those ideas in mind, here's a brief overview of the race's leaders and laggards, as I see them. Note that some of the laggards may be profitable. They're on the list based on other problems.
Out in Front
They're not categorically fault-free, but each of these stocks made my "approved" list based on their likelihood of meeting the three key criteria cited a moment ago.
| Company |
Market Cap. (billion) |
Energy Conversion
(Nasdaq:ENER) |
$2.59 |
|
First Solar
(Nasdaq:FSLR)
|
$22.2 |
JA Solar Holdings
(Nasdaq:JASO) |
$2.41 |
LDK Solar
(Nasdaq:LDK) |
$3.62 |
MEMC Electronic Materials
(NYSE:WFR) |
$11.6 |
Suntech Power Holding
(NYSE:STP) |
$5.29 |
Falling Behind
DayStar Technologies (Nasdaq:DSTI) - Bringing a new product to market can take time, but DayStar's CIGS "Thin Film" is taking quite awhile to research and develop. And, there's still no clarity on when it will be ready to sell, or how well it will sell. That's a lot of "unknown" to deal with.
Evergreen Solar (Nasdaq:ESLR) - Evergreen has no earnings, and inconsistent sales. For 2007, net income was -$25.6 million, which was better than -$29.9 million net income in 2006.
SunPower (Nasdaq:SPWR) - SunPower is barely profitable. From 2006 to 2007 yearly net income dropped 65% to 9.2 million. Revenue more than tripled to $775 million in the same time frame. The Florida Power & Light deal could help. Be skeptical.
Trina Solar (NYSE:TSL) - Trina is not a bad company, but rising materials cost, namely polysilicon, has spooked investors. The irony is the same cost increase applied to other solar companies, but didn't torpedo their stocks. Again, be skeptical.
Last Word
In some cases, a company's liabilities may not become symptoms for awhile. Or, perhaps the illness will be cured in the meantime. As it stands right now, though, there's little to no margin for error.
Discover how to analyze revenue and profit in Understanding The Income Statement.
By James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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