Are These 3 Solar Stocks Worth The Risk?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Government subsidies are the beginning and the end of solar companies. Spending on renewable energy projects (including solar) gets slashed when push comes to shove. Many countries around the world are forced into fiscal austerity, and are creating headwinds for the solar industry.

Trade barriers are another key political issue for solar stocks. U.S. trade barriers have been erected against Chinese solar manufacturers. In the long run they could benefit domestically-focused solar manufacturers, as long as they are maintained. They are also a hurdle to firms with significant Chinese operations. An industry-wide lack of profitability and political dependence should give pause to solar bulls.

Economics Crush European Environmentalism

The economic crisis in Europe has greatly affected the EU's (European Union) leading initiative to curb emissions from fossil fuel consumption and decrease pollution.  The EU leaders’ summits have focused more on the region’s double-digit unemployment rate and 10.8 trillion Euros worth of debt, relegating climate strategy lower in their agenda.  The EU established the biggest market for carbon emissions in an effort to promote use of renewable energy sources, which have greatly reduced harmful emissions.

Although the EU is expected to exceed its goal of reducing emissions by 20% in 2020, two factors reduce its member-nation’s zeal to go further: first, the need to shift focus on the economic slow-down, and second, their frustration that China and U.S., the first and second biggest emitters, are not keen on following Europe’s example with similar actions.  Polish diplomat Tomasz Chruszczow said, “We cannot be held liable for the inaction of others. We can’t accept the excuses of the biggest economies of the world that they can’t do something before the EU.”  Relying on coal to power 90% of its energy needs, Poland plans to oppose stricter climate policies in EU sans similar initiatives in other countries.

As part of austerity measures, Germany, France, Italy, Spain and the U.K., the EU’s five biggest economies, have either slashed or completely cut subsidies to renewable energy projects.  In an interview, the World Wildlife Fund’s global climate and energy program head Samantha Smith explained, “The financial crisis certainly is affecting how EU political leaders see their mandate.”

Participants from over 190 countries gathered for the UN Climate Change Conference in November and December 2012 in hopes that the European climate leaders could reaffirm their commitment and exert pressure on other nations to follow their example. The UN Conference plans to agree on talks and a timetable for a treaty by 2015 that could be effective by 2020. Faced with a challenge where all countries won’t be adopting binding emission targets until 2020, the International Energy Agency fears that the crucial 2 degrees target limit might be reached by 2017 if developed nations won’t cut emissions by 25% to 40% below 1990 levels. Even with EU promising to decrease carbon emission by 30%, Canada, Japan, New Zealand and Russia have all shied from giving commitments under the Kyoto protocol, leaving Australia and other European countries the burden for the second round of cuts.

Good News from Down Under

The U.S. based manufacturer of thin-film photovoltaic cells First Solar (NASDAQ: FSLR) plans to build solar farms through collaboration with General Electric in Australia. Australia is about four years behind the United States in terms of rolling out solar farms, and is trying to catch up.

First Solar’s Sydney-based business unit’s Vice-President of Business Development, Jack Curtis, said that the company’s 10 MW (megawatt) Greenough River project will build confidence in the execution of large solar projects. It would be the first large-scale solar plant in Australia. This project is in addition to a 159 MW project in New South Wales solar project First Solar won a in partnership with AGL Energy. The project is worth $129.7 million and is expected to be operational by December 2015.

By 2020 Australia plans to develop solar photovoltaic plants of 5,000 MW capacities as part of an overall initiative to generate 20% of its total power from renewable sources. The Australian government has taken several steps, including a $10.3 billion budget for in Clean Energy Finance, to ramp up renewable energy. The government also started charging for carbon emissions in an attempt to cut the country’s dependence on fossil fuels.

Australia is the exception and not the rule. Austerity at the national and municipal levels will curtail solar expenditures more frequently than it is expanded in today’s global recession.

Solar Industry Burns Investors

The solar industry can be treacherous for investors. Many firms in this sector are sucking in cash and generating net losses. Thin-film solar cell manufacturer Konarka filed for bankruptcy in June.  Many potential customers need some assurance that service and warranty contracts are made good in the future. Third-party insurance is now being bundled with systems to make multi-decade guarantees more credible.

This risk has translated into low price multiples for solar stocks:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Country</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> <td> <p><strong>D/E</strong></p> </td> </tr> <tr> <td> <p>CSIQ</p> </td> <td> <p>Canadian Solar</p> </td> <td> <p>Canada</p> </td> <td> <p>NA</p> </td> <td> <p>0.08</p> </td> <td> <p>0.26</p> </td> <td> <p>NA</p> </td> <td> <p>2.56</p> </td> </tr> <tr> <td> <p>FSLR</p> </td> <td> <p>First Solar</p> </td> <td> <p>USA</p> </td> <td> <p>NA</p> </td> <td> <p>0.8</p> </td> <td> <p>0.68</p> </td> <td> <p>NA</p> </td> <td> <p>0.15</p> </td> </tr> <tr> <td> <p>SPWR</p> </td> <td> <p>SunPower</p> </td> <td> <p>USA</p> </td> <td> <p>NA</p> </td> <td> <p>0.31</p> </td> <td> <p>0.49</p> </td> <td> <p>NA</p> </td> <td> <p>0.74</p> </td> </tr> <tr> <td> <p>STP</p> </td> <td> <p>Suntech Power</p> </td> <td> <p>China</p> </td> <td> <p>NA</p> </td> <td> <p>0.06</p> </td> <td> <p>0.21</p> </td> <td> <p>NA</p> </td> <td> <p>2.84</p> </td> </tr> <tr> <td> <p>TSL</p> </td> <td> <p>Trina Solar</p> </td> <td> <p>China</p> </td> <td> <p>NA</p> </td> <td> <p>0.16</p> </td> <td> <p>0.23</p> </td> <td> <p>NA</p> </td> <td> <p>1.25</p> </td> </tr> <tr> <td> <p>YGE</p> </td> <td> <p>Yingli Green Energy</p> </td> <td> <p>China</p> </td> <td> <p>NA</p> </td> <td> <p>0.13</p> </td> <td> <p>0.38</p> </td> <td> <p>NA</p> </td> <td> <p>3.79</p> </td> </tr> </tbody> </table>

Suntech Power (NYSE: STP) is the cheapest of these companies, and firm on this list based on its low price-to-sales and price-to-book ratios. It is precarious since its debt-to-equity ratio is high, and because its Chinese operations make it sensitive to protectionism.

SunPower (NASDAQ: SPWR) and First Solar are expensive relative to their peers, but are cheap relative to other stocks. As U.S. companies they could benefit from protectionism. Also, they are financially more stable than their peers, based on their lower debt-to-equity ratios.

First Solar is probably the most stable solar stock on this list. It is domiciled in the United States and has the lowest debt-to-equity ratio. However, it is also the most expensive stock on this list based on it price-to-book ratio and price-to-sales ratio.

Investors should shy away from this sector for the time being. Investors who can’t stop themselves from speculating should consider either SunPower or First Solar for solar industry exposure. Either would be speculative bets, SunPower being the more speculative of the two.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of First Solar. Motley Fool newsletter services recommend First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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