The Next Step In Solar Vertical Integration

On July 12, 2010, in Alternative Energy Stocks, Green Stocks, Solar, by Andreas Schreyer
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First Solar, Inc. (FSLR) announced today the completion of its acquisition of NextLight Renewable Power, LLC., which in our analysis opens a new era in the solar photovoltaic market structure, one full of rich rewards for the winners.

Sure, large photovoltaic manufacturers like First Solar and competitors such as SunPower Corp. (SPWRA) and Suntech Power Holdings Co. (STP) have all dabbled with utility-scale projects, but the recent moves by First Solar, the eight-hundred-pound gorilla in the solar sector, are bound to change the playing field.

Since 2007, the company has a history of acquiring solar project pipelines and this announcement brings First Solar’s North American utility-scale power purchase agreements to 2.2 gigawatts, nearly two years of production at their current worldwide capacity. Beyond the projects pipeline, First Solar gets the know-how that comes with NextLight’s brain trust and project developers.

First Solar has been one of our top solar favorites for various reasons, but in particular because they have continued to lead the industry in the most crucial measure, Cost per Watt, which gives them the highest gross margins, 48.85% in the trailing twelve months, more than twice that of the sector (See “Picking Solar Energy Winners” for details.) They have mercilessly cut costs at all levels of manufacturing solar panels, including the so-called BOS (Balance Of System) which includes items such as mounting hardware and power control and conversion systems needed to complete an installation.

With the economies of scale and vertical integration coming from the Utility Systems Business Group announced earlier this month, we can expect strong revenue growth and further margin improvement opportunities for the foreseeable future.

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Taming the “Solarcoaster”

On May 18, 2010, in Alternative Energy Stocks, Green Stocks, Solar, by Andreas Schreyer
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Individual investors who have dabbled with solar stocks know that they are not investments for the faint of heart.

With stock market volatility jumping sharply this month, the solar sector went from being the largest gainer last month to one of the biggest losers this month. In fact, the Chinese solar stock sub-segment was the worst of all stock market sectors we track, with a one month plunge of 26.9%.

Under the best of circumstances, the solar industry is still in its early commercial phase, and very immature. Demand fluctuations and geographic shifts, driven in large part by changes in energy policies by key governments, are compounded by self-induced cycles of under-capacity/over-capacity. Global installed solar capacity is increasing at record rates, but even faster price erosion has wreaked havoc with profitability and share prices of the more marginal manufacturers.

The largest solar market in the world, Germany, is slowing down due to reduced government subsidies and fears about the economic recovery of the Euro zone. With the Euro plunging nearly 20% in the last six months against other currencies (see Euro breaks support below), Chinese and American solar manufacturers have seen their costs increase in Chinese renminbi and U.S. dollars respectively, and their revenue fall in Euro, causing various analysts to slash earnings prospects of the industry group.

Euro breaks support


The same scenario repeats itself over and over, as new investors become aware of the sector after some highflying solar stocks hit the top of the charts, they get excited and start pilling in after the shares have already risen 100%, 200% or more. By then the entire sector is extremely overbought and overdue for a correction. That’s when the same investors panic and the bottom falls out.

There are two critical factors to remember when investing in solar energy:

1)     The global solar market will continue to grow rapidly for years to come

2)     As always, the companies with the highest margins and the best geographic diversification will do better than their peers

As the chart below shows, solar stock performance can vary widely within the group. Yes, the recent declines have been brutal, with many company shares down 50% or more since the highs. At the bottom of the chart below is SunPower (SPWRA) which is down some 66% from its 52-week high with no bottom in sight. The better positioned companies, as exemplified by Trina Solar (TSL), are still up close to 100% from their 52-week lows despite the recent losses. For a review of the key metrics we like when selecting photovoltaic stocks, read “Picking Solar Energy Winners”.

Solar stocks performance



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