Prepping for Grid Parity

By Joshua Bondy - September 3, 2012 | Tickers: CSIQ, FSLR, GTAT, SPWR, TSL | 0 Comments

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The solar energy market has posted very strong growth by leaps and bounds over the past decade. As competition and Chinese support continues to drive prices down grid parity will be reached quickly as shown in this interactive map. There are a number of ways which one can profit from solar energy and the unique geopolitical make up means that there is an interesting set of risks. The local and national branches of the Chinese government are famous for their backing of solar manufactures and their donation of cheap capital. U.S. competitors must face market forces as well as preferential governmental treatment by the the Chinese government. 

One technique for western firms to avoid such competition is to sell the capital equipment used in the production of solar cells like that of GT Advanced Technologies Inc. (NASDAQ: GTAT). This strategy is not without risks as the Chinese government specifically breeds industries to move up the value change (pages 12 and 13) and thus exposing such U.S. manufactures to competition from these powerful public-private entities. These public-private entities are able to benefit from preferential debt forgiveness by the public sector in order to maintain employment levels and domestic stability. The solar industry is expanding but investors need to examine the risks within a politicized international economy. 

GT Advanced Technologies Earnings by Business Category

GT Advanced Technologies offers capital goods for solar cell manufactures and other electronics manufactures.  The efforts to diversify their earnings can be seen in the above chart as their acquisition of Crystal Systems Inc in the middle of 2010 helped to increase revenue in the sapphire business category. The majority of their sales in the sapphire business are found in the LED industry. The specialization of the industries mean that this company does not have a very large customer base.  As of March 31, 2012 one customer is responsible for 23% of sales. This company is very much focused on China as 51% of its revenue for the 2011 fiscal year came from there. The company has a total debt to equity ratio of .42 and an average EPS over the past three years of $.93.  At $5.90 per share this works out to a PE ratio of 14 which is slightly below the S&P 500 average of 16. The solar industry is currently in a down slump and the $1 billion of the $1.8 billion represents only three customers. It is likely that the backlog will face more reductions over the coming 12 months. 

First Solar, Inc. (NASDAQ: FSLR) did post a profit for the majority of 2011 but a large loss in the 4th quarter made the year's EPS negative. They were forced to reduced capacity utilization and halt some new construction. They took some large one time charges which seriously impaired their EPS even though their normalized income was positive. With the stock having fallen almost 80% in the past year this is one solar stock which may be worth a second look. 

Not all solar manufactures are losing money but Canadian Solar, Inc. (NASDAQ: CSIQ), Trina Solar Limited (NYSE: TSL), and SUNPOWER CORP (NASDAQ: SPWR) have all lost money over the past 4 quarters.  Canadian solar has a high debt load relative to the industry with a total debt to equity ratio of 2.47 and some of the thinnest gross margins at 7.40%. Trina Solar is a Chinese company and with the Chinese economy coming in for a soft landing and U.S. import tariffs on Chinese solar cells the prospects for the company are not positive over the next couple years. Sunpower has a relatively strong balance sheet with a with total debt to equity ratio of .72 and $366 million in cash as of the 2nd quarter of 2011. Still, the low demand means that the company is posting losses.  As governments have pulled many of their tariffs and there is massive oversupply in the industry many of these firms are facing losses and should be avoided for the time being.  With grid parity not expected for a couple years it is not certain which manufactures will go bankrupt in the meantime. It would be wise to hold off directly investing in most manufactures until grid parity becomes a reality. 

Although there is definite risk, GT Advanced Technologies is a good way to get into the solar industry without buying a solar manufacturer. The demographic of the company's customer base is a double edge sword.  The fact that the majority of Chinese solar manufactures are supported by the government means that they have a lower possibility of going bankrupt which is a definite benefit for GTAT. At the same time, if these solar manufactures and their government sponsors decide to branch into other parts of the value chain, then GTAT will face competition from supra-market entities.

Given the need for solar manufactures to continually lower costs to compete means that there will be some level of demand for GTATs products.  Still, they are taking positive steps to help diversify themselves from the cyclical nature of the solar industry with the development of their sapphire business. Over the coming year a sharp reduction in the order backlog would not be surprising. The stock will most likely languish until the general economy snaps back. With solar parity expected to occur around 2015 in the U.S. GTAT will likely see increased demand for their services. 

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