The Solar Industry is Setting Itself up for a Rebound
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing is a precarious venture. Investors look at yesterday to try and predict an uncertain tomorrow. The solar market has seen volatility and upheaval in the past years as many firms have gone bankrupt, Germany reduced subsidies, and the recent imposition of U.S. tariffs on Chinese panels. At the core of the upheaval is a supply demand imbalance worsened through a decrease in demand. Looking at the latest industry figures it appears that the imbalance is starting to rectify itself and over the next couple years a healthy supply and demand situation should help ensure profitability. By investing wisely right now, investors can position themselves for the return of the solar industry.
The Industry's Situation
Various solar observers have tried to predict the exact time when the solar industry will come out of the doldrums. In the second quarter of 2012, Solar Buzz predicted demand would overcome supply in the fourth quarter. Others see a recovery in manufacturers' profitability in the second half of 2013. Every prediction should be taken with a grain of salt, which makes a strong recovery in late 2013 the safer bet.
Who is Best Positioned to Take Advantage of These Changes?
First Solar (NASDAQ: FSLR) has the lowest debt to equity ratio at .15 and has already returned to operating profits. Their third quarter results are very encouraging and show that their average conversion efficiency is slowing increasing and has reached 12.7% in the last quarter. With the current stock price around $22 and EPS from continued operations of $1.26, FSLR has a PE ratio from continued operations around 17.5. The firm is restructuring their operations to ensure profitability and has a very low debt load. At the same time a degree of caution is necessary as their thin-film technology does not provide the same efficiency as crystalline cells. As the market recovers in the coming years First Solar will face increased competition, but they will also benefit from extra manufacturing capacity being taken off line.
SunPower (NASDAQ: SPWR) is a serious competitor in the solar industry. Its current debt to equity ratio of .74 is higher than FSLR's, but lower than highly indebted Chinese firms. One of the SPWR's main advantages is their high efficiency cells and strategic backing by Total. Countries like Japan, which are forced to import large amounts of energy and have little free space, are some of the first countries to reach solar parity. SunPower's high efficiency cells are a great fit for these markets. Their ROIC is currently at -14.7% and continues to recover from the lows set in the first quarter of 2012. The latest free cash flow yield comes in at 17.5%, which is very encouraging. In the long run this firm is one of the best solar manufacturers to watch, given their high efficiency technology and falling costs.
Canadian Solar (NASDAQ: CSIQ) is not an encouraging story. With gross margins of only 7.4%, they are at a serious disadvantage when compared to FSLR's gross margin of 26.8%. These low margins coupled with a total debt to equity ratio of 2.47 and a quick ratio of .4 are major red flags. The market is against the firm with a short interest ratio of 17.4. This is one company which is best ignored for the time being.
Yingli Green Energy (NYSE: YGE) and Trina Solar Limited (NYSE: TSL) are two Chinese manufactures which ought to be avoided. YGE has a very high debt to equity ratio of 2.07, a total debt to equity ratio of 3.79, and slim gross margins of 8%. America's import tariffs and the potential anti-dumping measures in the EU will only make their situation worse. TSL has a lower total debt to equity ratio of 1.27, but it is not in a significantly better position. Their gross margins of 8.6% and quick ratio of .8 are two red flags. They are subject to the same anti-Chinese tariffs as YGE and the market has taken notice with a short interest ratio of 11.5.
The solar industry is slowly coming out of their downturn. As capacity utilization continue to increase, margins are slowly starting to heal and U.S. imports tariffs help western manufacturers rebound. A healthy supply and demand situation will not occur overnight, but the stage is being set for growth. Smart investors are able to invest now and benefit latter. SPWR and FSLR are some of the strongest investments within the industry and deserve a place on the watch list.
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